"‘Loopholes’ abound, undermining equal treatment of shareholders"... The paradox of the mandatory tender offer bill’s ‘50% plus one share’ rule

Likely approval of advance purchases of major shareholders' stakes
Transaction structures could reduce additional tender offers to "zero shares"
Fears of widespread "loopholes," including treasury share cancellations and paid-in capital increases
Systems differ by country, but the fundamental principle is "equal treatment of shareholders"

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Concerns are growing that the mandatory tender offer system, set to be revived after 28 years, could instead widen the disparity between major shareholders and ordinary shareholders. The concern stems from limiting the number of shares to be purchased to "50% plus one share" to avoid dampening the M&A market, while also allowing buyers to acquire major shareholders' stakes in advance. Critics say various workarounds could emerge, undermining even the gains made through capital market reforms to protect shareholders, such as amendments to the Commercial Act.

According to the financial investment industry on November 6, an amendment to the Capital Markets Act incorporating the mandatory tender offer system is increasingly likely to pass the National Assembly plenary session with the provision allowing advance purchases intact.

Under the version approved by the National Assembly's National Policy Committee, anyone who becomes a controlling shareholder by acquiring at least 25% of a listed company's shares must make a tender offer for at least the number of shares needed to reach "50% plus one share" of all voting shares, minus the stake held immediately after any advance purchases.

Buy the major shareholder's stake first and you're "done"... Concerns over share cancellations and other loopholes

The problem is that the more of a major shareholder's stake an acquirer buys first, the fewer opportunities ordinary shareholders have to sell. Legal experts warn that transaction structures could reduce the additional tender offer requirement to zero shares.

For example, if an acquirer first secures 51% by combining the stakes of a controlling shareholder (40%), friendly shareholders (8%) and institutional investors (3%), the bill's formula would require no additional tender offer.

Another approach under discussion is to increase a major shareholder's ownership percentage by canceling treasury shares. If a company cancels about 6% of its issued shares, a major shareholder with a 48% stake would become the majority shareholder without making any additional purchases. If that shareholder then sells the entire stake, ordinary shareholders could lose their opportunity to sell. In effect, a treasury share cancellation, a standard means of returning value to shareholders, could be used to increase the major shareholder's sale proceeds.

Other possible workarounds include acquiring new shares through a third-party allotment of paid-in capital, then buying existing shares, or combining stakes through an agreement to jointly exercise voting rights. Indirect acquisitions through a company that holds the shares are also being cited as a "loophole."

Ahn Hee-cheol, managing partner and attorney at DLG, said, "There are so many possible loopholes that the result will be complete discrimination between major shareholders and ordinary shareholders." He added, "The duty of directors to act in the best interests of shareholders, as set out in the amendments to the Commercial Act, ultimately means that shareholders should not be discriminated against. Allowing advance purchases would undermine this fundamental principle of capital market reform entirely."

The fundamental principle behind overseas tender offers is "equal treatment of shareholders"

Mandatory tender offer systems have been introduced in various forms overseas, but they share one fundamental principle: equal treatment of shareholders, without discrimination between major shareholders and ordinary shareholders. A notable example is Z Holdings' acquisition of ZOZO in Japan in 2019. At the time, Z Holdings made a tender offer for a 50.1% stake at 2,620 yen per share, allowing ZOZO's founder, who held about 36.8%, and ordinary shareholders to participate under the same terms.

When the number of shares tendered exceeded the offer limit, approximately 62.2% of the shares tendered were accepted on a pro rata basis. The founder sold about 18.9% of the company's total issued shares and retained 17.9%. The acquirer secured control without giving the founder preferential treatment in selling shares.

LVMH's acquisition of Italian company Bulgari in 2011 is an example of ordinary shareholders being given an opportunity to sell even after an advance purchase. After agreeing to exchange newly issued shares for the founding family's approximately 50.4% stake, LVMH made a tender offer for all remaining shares at 12.25 euros per share. Although the transaction structure was different, ordinary shareholders were also given the opportunity to sell all their shares at a per-share price reflecting the control premium.

In the United Kingdom, anyone who meets certain criteria for acquiring control is generally required to make an offer to buy all the shares held by the remaining shareholders. Japan allows partial tender offers but requires shares tendered in excess of the offer limit to be accepted on a pro rata basis.

Would shareholder protections stifle M&A? Overseas deal activity is growing

The government is concerned that introducing a mandatory tender offer system could dampen M&A activity. Its concern is that major shareholders may be less willing to sell if they cannot dispose of their entire stake, while acquirers may find it harder to secure control. Industry players say this concern is unfounded, noting that many deals overseas have been completed even when major shareholders were not guaranteed the opportunity to sell all their shares.

In last year's tender offer for Japan's FDK by Taiwan's Silitech, existing major shareholder Fujitsu tendered its entire 58.82% stake, but retained 17.59% after the shares were accepted on a pro rata basis. The deal nevertheless went ahead. In contrast, when Teijin acquired J-TEC in 2021, major shareholder Fujifilm tendered its entire 50.13% stake and sold all of it.

Japan's M&A market is also growing. According to M&A research firm Recof Data, M&A transactions involving Japanese companies totaled 5,115 last year, a record high. The number also rose 5% year over year to 3,883 in the first nine months of this year.

No need to rush... "Thorough deliberation is needed"

Industry players also question why a system involving complex interests and foreseeable side effects is being pushed forward so quickly without sufficient review. Discussions on the mandatory tender offer system have continued since the Financial Services Commission announced plans to reintroduce it in 2022, but the National Assembly's review of the key design features of the current bill took place over a short period, they say.

The National Assembly's subcommittee on bill review under the National Policy Committee discussed the system twice, on September 2 and 15. However, discussions focused on the purchase ratio and whether details should be delegated to an enforcement decree, while the issue of discrimination against shareholders resulting from advance purchases was not adequately addressed, according to sources.

The bill subsequently passed the National Policy Committee on September 17 and the Legislation and Judiciary Committee on September 28, leaving only approval by the plenary session. However, after 18 domestic and foreign asset management firms objected, citing problems with advance purchases by major shareholders, its submission to the plenary session on October 1 was put on hold. In effect, an issue that had not been sufficiently discussed during the legislative process emerged as a central point of contention only just before the bill was to be processed.

Moreover, because the formula deducting shares acquired in advance is included in the body of the law, it would be difficult to address the issue later by revising the enforcement decree. Even if the system is amended after taking effect, ordinary shareholders who have already lost the opportunity to sell will not get it back. That is why critics say it is inappropriate to introduce the system first and make improvements later.

Lee Sang-hoon, a professor at Kyungpook National University's Law School and a Commercial Act expert formerly with Kim & Chang, said, "This would pour cold water on the trend toward 100% tender offers taking root organically." He added, "I don't understand why this is being rushed to this extent without proper public hearings or a process for gathering opinions. There is considerable potential for abuse, and the bill as it stands has glaring loopholes. It would be better not to introduce it at all."

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