Overseas Experts Also Criticize Korea's Mandatory Tender Offer: "Pre-Bid Purchases Must Not Be Allowed"

ACGA, a Group of Institutional Investors, Publicly Voices Concerns
Urges South Korea's National Assembly to Remove Pre-Bid Purchase Provision
"Risk of Undermining Market Reform Gains, Including Commercial Act Amendments"

The Asian Corporate Governance Association (ACGA), an organization of overseas corporate governance experts, has expressed concern about South Korea's proposal to introduce mandatory tender offers and urged the National Assembly to revise the bill. It warned that allowing acquirers to buy only a controlling shareholder's stake first in a merger or acquisition (M&A) could undermine even the capital market reforms the government has pursued, including amendments to the Commercial Act. Domestic institutions and individual investors have already raised concerns about the bill, and now a specialized international organization has done so as well.

Institutional Investor Group Managing $40 Trillion Raises Concerns About Mandatory Tender Offers in Korea

According to the financial investment industry on November 9, the ACGA sent an open letter containing these concerns to the National Assembly on November 7. It said the proposal violates the fundamental principle of equal treatment for shareholders. Headquartered in Hong Kong, the ACGA is a nonprofit organization specializing in corporate governance. It has more than 100 member institutions with combined assets under management exceeding $40 trillion (approximately 55 quadrillion won). Many of its members are institutional investors with long-term investments in Korean companies.

In its letter, the ACGA welcomed the three amendments to the Commercial Act pursued by South Korea, but said the mandatory tender offer bill could conflict with the direction of the capital market reforms undertaken so far. "The amended Commercial Act requires directors to protect the interests of all shareholders and treat them fairly," the ACGA said. "Investors expect ordinary shareholders to be offered the same price as controlling shareholders in a tender offer," it added, expressing concern.

The issue is that the amendment to the Capital Markets Act, approved by the National Assembly's Political Affairs Committee and now awaiting a plenary vote, would allow an acquirer to first purchase a controlling shareholder's stake and then make a tender offer only for the remaining shares. Under the amendment, anyone acquiring at least 25% of a listed company's shares and becoming its largest shareholder would be required to 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 the initial purchase.

Despite criticism from various quarters, the bill retains a provision allowing an acquirer to first buy the controlling shareholder's stake, a practice known as a "pre-bid purchase." This has prompted criticism that the proposal would leave the "control premium," a chronic problem behind the Korea discount, unresolved while allowing the majority of ordinary shareholders to be treated unfairly.

Shareholders Must Not Be Discriminated Against... "Pre-Bid Purchases Should Be Prohibited"

The ACGA questioned whether this structure serves the legislative goal of protecting ordinary shareholders. A change in control can alter a company's future strategy and management direction, yet ordinary shareholders may be left bearing the uncertainty created by the new controlling shareholder without receiving the same opportunity as the previous controlling shareholder to recover their investment.

The ACGA also pointed to differences between South Korea's proposal and overseas systems. It cited the United Kingdom's Takeover Code as an internationally recognized standard. In principle, the UK requires an offer to purchase all remaining shares when an acquirer obtains at least 30% of the voting rights. It also requires the offer price to be no lower than the highest price paid by the acquirer during the preceding 12 months. Hong Kong and Singapore likewise require offers for all remaining shares when specified conditions for acquiring control are met.

The ACGA stressed that protecting the interests of ordinary shareholders should be the top priority in all situations covered by mandatory tender offer rules. It also proposed specific revisions to the bill. An acquirer who obtains at least 30% of a listed company's shares and becomes its new controlling shareholder should be required to make a tender offer for all remaining shares, with the price offered to ordinary shareholders guaranteed to be at least as high as the price paid to the previous controlling shareholder.

The ACGA also emphasized the need for thorough consultation during the legislative process. Given that a change in control is a major decision that directly affects the interests of all shareholders, it urged the government to hold a public hearing involving domestic and international institutional investors and companies, and to solicit written comments. The ACGA and its member institutions said they were willing to participate in the process.

The letter was made public shortly after the Financial Services Commission (FSC) touted the results of a recent ACGA assessment of the Korean market as an achievement. On November 4, the FSC promoted South Korea's fifth-place ranking in the ACGA's corporate governance assessment as "unprecedented." In June, FSC Chairman Lee Eog-won also welcomed the ACGA's open letter of thanks to the South Korean government and the National Assembly. In effect, the ruling party and the government are pursuing a bill that could undermine an achievement recognized by the financial authorities.

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