"Bear Hug M&A Disclosure a Starting Point for Addressing Korea's Stock Market Undervaluation"

Bear Hugs Could Reform Deal Practices Favoring Controlling Shareholders
Call to Specify Proposal Criteria, Response Deadlines and Grounds for Rejection

It has been argued that a “bear hug” regime, under which a board reviews a takeover proposal by weighing the interests of all shareholders and explains the reasons behind its decision, could address the chronic undervaluation of Korean listed companies. The analysis said that simply introducing the regime would not be enough; procedures for disclosing takeover proposals and stating the board’s position must also be specified in detail.

On October 29, the Korea Corporate Governance Forum held a seminar in Yeouido, Yeongdeungpo-gu, Seoul, titled “Requirements for Bear Hugs to Address the Korea Discount,” where participants discussed these issues.

Seminar participants stressed that simply making a takeover proposal public could pressure management to take steps to enhance corporate value. If the board rejects a proposal, it must explain the grounds for how it plans to increase the company’s value.

Choi Juncheol, CEO of VIP Asset Management, emphasized that the regime is essential not only for revaluing individual stocks but also for addressing the chronic undervaluation of the domestic stock market, known as the “Korea Discount.” “Under the current system, controlling shareholders can receive a different price from the market through private agreements. This means they have little incentive to manage the share price and may even want it to remain low to reduce inheritance and gift taxes,” Choi said. “Rather than raising concerns about undervaluation, boards—which are supposed to represent all shareholders—neglect their responsibilities to protect the interests of controlling shareholders.”

Choi said bear hugs could bring undisclosed deals between controlling shareholders into public discussion and compel boards to fulfill their fundamental role of protecting the rights and interests of all shareholders. He added that companies should also pay attention to managing their share prices in the ordinary course of business so that the gap between their share prices and corporate value does not become too wide, reducing the likelihood of becoming a bear hug target.

“I have seen quite a few cases involving small- and mid-cap stocks whose market capitalization is lower than the cash they hold—a situation that defies common sense and would not occur in advanced overseas markets,” he said. “If bear hugs restore the price-discovery function, more investors will participate in the stock market as investors rather than speculators.”

"Specify Proposal Criteria, Response Deadlines and Grounds for Rejection"

Seminar participants agreed that detailed standards must be established alongside the introduction of the regime. They said the key to designing the system is determining how boards should actually act after a proposal is disclosed. Shim Hyesup, an attorney and auditor of the Korea Corporate Governance Forum, proposed incorporating “delivery of a proposal → diligent review → explanation of the decision and its reasons” into law. The intent, she said, is to separate a controlling shareholder’s willingness to sell from the board’s decision and require the board to independently assess a proposal from the perspectives of the company and all shareholders. Disclosing only the existence of a proposal makes it difficult for shareholders to assess whether the board responded appropriately.

Japan’s experience was also cited as an example of why the standards for board decisions need to be made more specific. Kim Jeongnam, former head of APG’s Asia-Pacific developed markets team, who gave a presentation at the seminar, highlighted Japan’s Ministry of Economy, Trade and Industry guidelines issued in 2023. The guidelines require takeover proposals to be promptly reported to the board and specific, credible proposals to be carefully considered. They were seen as changing the practice of dismissing proposals simply because management disagreed and encouraging competitive takeover bids.

However, Kim criticized an interpretation issued in July 2026, saying it expanded board discretion and represented a retreat from the guidelines’ original intent. Japan has not formally adopted the U.S. “Revlon principle,” which requires a company, in certain circumstances involving its sale, to seek the best value reasonably available for its shareholders. “There is room to reject a higher-priced proposal on grounds such as protecting employees and business partners, safeguarding supply chains and technology, preserving post-acquisition synergies, or pursuing an independent growth plan,” Kim said. “Synergies that are difficult to quantify or internal business plans could be used as management’s defense without independent verification.”

Establishing mechanisms to hold directors accountable for failing to fulfill their obligations was also identified as an outstanding issue. Park Juhong, an attorney at Life Asset Management, proposed additional legislation to restrict defensive measures during the review period and presume that directors had neglected their duties if they rejected a proposal without following the required procedures. Shim also stressed that obtaining an external assessment or setting up a committee would not, in itself, exempt directors from liability; what matters is what the board actually reviewed and why it reached its decision.

The scope of disclosure and explanation obligations was also identified as an area requiring improvement. “If an acquirer proposes a sale to a listed company that holds a stake in the target, rather than approaching the target company itself, the proposal may fall outside the disclosure requirements in the current bill,” said Kim Suhyeon, head of the research center at DS Investment & Securities. “The rules should be revised to require the stake-holding company that receives the proposal to disclose it and state its position on whether to sell.” This would require the company to explain to its own shareholders why it intends to continue holding the friendly stake and whether doing so represents a sound use of capital.

This content was produced with the assistance of AI translation services.