Domestic and international asset management firms are calling for a comprehensive reassessment of the mandatory tender offer system ahead of its scheduled vote in the National Assembly on October 1. They argue that the system's problematic provisions significantly undermine its original intent to protect the rights of common shareholders. The firms have expressed strong opposition, stating that the system effectively relegates common shareholders to a secondary status.
Eighteen asset management firms held a press conference on September 30, urging lawmakers to postpone the vote on the capital markets law amendment that includes the mandatory tender offer system. It is highly unusual for the asset management industry to react so strongly against a bill that has already passed through the National Assembly's committees.
The mandatory tender offer system requires acquirers in mergers and acquisitions to purchase shares from both controlling and common shareholders under the same conditions. While the asset managers support the introduction of the mandatory tender offer system, they believe the 'preemptive purchase' clause, which allows controlling shareholders to buy their shares first, needs to be revised.
Preemptive purchase allows acquirers to acquire shares from specific shareholders before making a public tender offer. Consequently, the acquirer can only make a public tender offer for the remaining shares if their total ownership, including the preemptively purchased shares, falls short of 50% plus one share. The amendment set to be presented in the National Assembly stipulates that any entity acquiring more than 25% of a listed company's shares must conduct a mandatory tender offer. The acquirer can first purchase the existing controlling shareholder's shares and then only make a public tender offer for the remaining shares if their total ownership is below 50% plus one share.
The asset management industry expressed surprise after the bill passed through the Political Affairs Committee, as they had expected discussions to focus on a full public tender offer for the remaining shares. They noted that the rapid agreement between the ruling and opposition parties allowed for the inclusion of both the 50% plus one share threshold and the preemptive purchase clause.
The firms pointed out that, given the actual ownership stakes of controlling shareholders in domestic companies, the opportunities for common shareholders to sell their shares would be severely limited. An analysis by Align Partners of KOSPI 200 companies revealed that 186 of these firms, or 93%, have controlling shareholders, with an average ownership stake of 44.3%. In a typical company, if an acquirer first buys the controlling shareholder's 44.3% stake, they would only need to make a public tender offer for an additional 5.7% plus one share to reach the 50% plus one share threshold. Assuming all common shareholders, who hold the remaining 55.7%, agree to the public tender offer, they would only be able to sell about 10.2% of their shares at the same price, effectively meaning they could sell only one share out of every ten.
As an alternative, the asset managers proposed a 'proportional mandatory tender offer' system. They suggested maintaining the total purchase limit at 50% plus one share, but allowing all shareholders to participate in the same public tender offer process without the preemptive purchase by controlling shareholders. If the total shares offered exceed the limit, both controlling and common shareholders would receive shares in proportion to their holdings.
Lee Chang-hwan, CEO of Align Partners Asset Management, stated, "When the mandatory tender offer system was introduced in Korea in 1997, preemptive purchases were not allowed. The system being proposed now is a regression compared to what was established 30 years ago." He added, "This system discriminates between controlling shareholders and common shareholders, treating them as first-class and second-class citizens, respectively."
* This article has been translated by AI.
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