Concerns Mount Overseas... ICGN: "Ban Prior Acquisitions in Mandatory Tender Offers"

ICGN Sends Official Letter to National Assembly's Political Affairs Committee
Flags Erosion of Shareholder Equality
Emphasizes Offers for All Shares... "Pro Rata Allocation if 50%+1 Share Is Retained"
Global Investor Groups Raise Concerns in Succ

Global institutional investors are voicing growing concerns over South Korea's plan to introduce a mandatory tender offer system. They warn that an amendment to the Capital Markets Act, which passed the National Assembly's Political Affairs Committee, could undermine the legislation's goal of protecting ordinary shareholders by allowing acquirers to purchase controlling shareholders' stakes first. They recommend requiring offers for all remaining shares as a rule and, even if the compromise of "50% plus one share" is retained, guaranteeing controlling and ordinary shareholders the same opportunity to sell.

According to the financial investment industry on November 10, the International Corporate Governance Network (ICGN) sent an official letter to the National Assembly's Political Affairs Committee the previous day, urging improvements to the bill introducing the mandatory tender offer system. Headquartered in London, the ICGN is a global organization specializing in corporate governance, with participation from investors responsible for more than $100 trillion in assets under management (approximately KRW 134.52 quadrillion). Its members are based in more than 40 countries, and its corporate governance principles are used by global investors to evaluate companies and exercise voting rights.

In its letter, the ICGN said it welcomed the reintroduction of a mandatory tender offer system in South Korea. However, it expressed concern that the bill currently being pursued by the National Assembly may fail to fully uphold the fundamental principle of equal treatment of shareholders and achieve its original purpose.

Full tender offers as the rule... No prior purchases

The ICGN's main concern is the provision allowing acquirers to purchase controlling shareholders' stakes first. Under the Political Affairs Committee's proposal, an acquirer would first buy the controlling shareholder's stake and then make a tender offer for only enough additional shares to reach "50% plus one share" of all shares, including those it already holds.

The ICGN said, "Under this structure, controlling shareholders can sell all of their shares at a negotiated acquisition price, while minority shareholders' opportunity to participate is significantly limited."

For example, if an acquirer first purchases a 40% stake in a company, the additional shares available for purchase from ordinary shareholders would amount to only about 10% of the company's total shares. Even if all ordinary shareholders tender their shares, each could sell only about one-sixth of their holdings. If the controlling shareholder already owns a majority stake, ordinary shareholders might not be given any opportunity to sell at all.

The ICGN therefore recommended requiring acquirers to make a tender offer for all remaining shares when control of a company changes. It also highlighted its 2023 submission on Japan's Ministry of Economy, Trade and Industry (METI) Guidelines for Corporate Takeovers, in which it noted that partial acquisitions of only 51% of a company's shares could disadvantage ordinary shareholders.

If retaining 50% plus one share, apply pro rata allocation... "No discrimination among shareholders"

However, if the National Assembly retains "50% plus one share" as a practical compromise, the ICGN proposed applying the same pro rata allocation principle to both controlling and ordinary shareholders. Rather than purchasing the controlling shareholder's stake first and granting it priority, all shareholders should be allowed to participate in the tender offer at the same price and on the same terms, with shares allocated proportionally if the number tendered exceeds the limit.

The ICGN also called for measures to prevent regulatory circumvention. It said disclosures should be strengthened regarding acquisition terms, how the price is determined, prior share purchases, and the allocation of shares in the tender offer, and that transactions structured to bypass the mandatory tender offer rules should be blocked. It also urged the National Assembly to consult fully with domestic and international institutional investors before finalizing the bill.

The ICGN said, "It is essential that the mandatory tender offer system be administered transparently and provide meaningful protection to all shareholders in practice," and recommended that "the National Assembly engage further with domestic and international institutional investors before finalizing the bill."

Yonhap News Agency

Following ACGA, ICGN also voices concerns... A string of warnings from the international community

This is not the first time global investors have voiced concerns. On November 7, the Asian Corporate Governance Association (ACGA) also sent an official letter to the National Assembly and the government, warning that the Political Affairs Committee's proposal could conflict with the direction of South Korea's capital market reforms. The ACGA has more than 100 institutional members with combined assets under management exceeding $40 trillion.

The ACGA recommended requiring acquirers who secure at least a 30% stake and become new controlling shareholders to make a tender offer for all remaining shares, and guaranteeing ordinary shareholders an offer price no lower than the price paid to the existing controlling shareholder. It also called for formal consultation procedures, including public hearings and written submissions, before a vote in the plenary session.

Both the ICGN and the ACGA have viewed South Korea's amendments to the Commercial Act and its Corporate Value-up Program positively. Rather than opposing the introduction of a mandatory tender offer system, they argue that it should be designed to effectively protect ordinary shareholders.

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