A proposed amendment to the capital markets law that applies 'fair value' in mergers of listed companies is expected to reshape South Korea's mergers and acquisitions (M&A) market. The current system, which primarily relies on average stock prices for merger valuations, may shift to a model that incorporates asset value, earnings potential, and future growth prospects, leading to significant changes in restructuring and merger strategies for listed companies.
According to financial investment industry sources and lawmakers on May 29, the amendment related to 'fair merger valuation' passed the National Assembly's Political Affairs Committee on May 14 and is likely to be addressed in a plenary session after the fall assembly reconvenes. The committee views this bill as one of the key legislative tasks related to capital markets.
The amendment proposes moving away from the existing market price-based system for calculating merger ratios of listed companies, instead applying a 'fair value' that comprehensively reflects asset value, earnings potential, future cash flows, and growth prospects. It also includes provisions to strengthen the accountability of external valuation agencies and the obligation of boards to explain their decisions.
Under the current capital markets law, the merger ratios for listed companies are determined based on average stock prices over a certain period. While this approach aimed to enhance predictability by using an objective market indicator, there have been ongoing criticisms that it allows undervalued stock prices to be used to set merger ratios favorable to major shareholders.
The issue gained prominence following the merger of Samsung C&T and Cheil Industries, which sparked a broader awareness that market prices do not necessarily equate to fair prices. In 2024, the merger of Doosan Bobcat and Doosan Robotics also reignited criticism over the valuation methods used, amid controversies regarding the overvaluation and undervaluation of certain affiliates.
Recently, there has been a growing demand for the protection of minority shareholders' rights during merger processes. Shinsegae Food, which submitted a revised report on May 21, raised the buyout price by approximately 30% following controversy over the merger valuation. Market analysts suggest that simply applying the statutory market price is no longer sufficient to persuade shareholders.
The influence of activist funds and minority shareholder platforms is increasing, leading to more frequent debates over the legitimacy of pricing and procedural fairness in mergers. Industry experts believe that in the future, not only the price itself but also the independence and transparency of valuation agencies will become critical issues in the M&A market.
Business leaders express concerns about the increased burdens that may arise from these regulatory changes. Incorporating various valuation factors into the fair value assessment could complicate merger processes and extend timelines. There are also concerns about heightened litigation risks. Companies currently pursuing holding company transitions, restructuring, or succession plans may need to reassess their overall strategies.
Conversely, investors and academics view the amendment as a potential opportunity to enhance trust in South Korea's capital markets. By reducing controversies surrounding major shareholder-driven mergers and strengthening protections for minority shareholders, it could help alleviate the 'Korea Discount.'
A financial industry representative stated, "In the past, the focus was on calculating merger ratios according to legal formulas, but moving forward, the process of explaining why a price is fair will become crucial. If the bill is enacted, companies pursuing mergers will inevitably face greater challenges."
* This article has been translated by AI.
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