[Aftermath of the Commercial Act Amendment] M&A is expected to revitalize, but… Hostile investment concerns

We examine the impact of the Commercial Act amendments on corporate management.

The revised Commercial Act, aimed at improving corporate governance centered on major shareholders and strengthening shareholder rights, is predicting changes in the mergers and acquisitions (M&A) market. In the long term, increased trust and revitalization of the M&A market are expected, but there are also concerns that hostile M&A attempts may increase. The legal community advises that while designing a careful transaction structure, the legitimacy and procedural transparency of M&A must be secured.

According to the legal community on the 28th, the revised commercial law promulgated this month includes the expansion of directors' loyalty obligations to shareholders, the conversion of outside directors to independent directors, and the '3% rule' that limits the voting rights of major shareholders when appointing audit committee members. The key is to check the control of major shareholders and protect the interests and rights of all shareholders.

This sends a positive message, such as revitalizing the M&A market. Attorney Shin Jong-soo of Daeryun Law Firm said, "Clarifying directors' loyalty obligations to shareholders and strengthening the independent director system can lead to improved corporate governance, which can contribute to improving the trust of overseas investors and revitalizing the M&A market."

Lee Young-ju, an attorney at One Law Firm, predicted, “I think there will be an effect of strengthening minority shareholder rights in the M&A market, which will lead to more active transactions and an increase in various types of participants.”

There is also an opinion that due to the director's duty of loyalty to shareholders, the preference for initial public offering (IPO) among exit (investment recovery) methods will decrease, and the M&A method of acquiring 100% of stocks will be preferred. Seunggyu Byun, a lawyer at Seum Law Firm, explained, "Exiting through an IPO has the advantage of allowing the founder to maintain management rights, but since the stocks are distributed to multiple shareholders, there is a possibility that they may file a lawsuit for violation of the duty of loyalty by directors, including the founder." He continued, “Unlike an IPO, M&A-type exits do not disperse stocks or distribute them on a large scale, so they can maintain a closed shareholder structure and the risk of being sued by shareholders is relatively small,” and added, “Even among companies that are already listed, the number of cases of voluntarily delisting due to difficulties in shareholder management is expected to increase more than before.”

Careful transaction design and transaction fairness review required

There were many concerns about being exposed to hostile M&A attempts due to the impact of the revised Commercial Act. Attorney Shin said, "External investors may point out management problems of the controlling shareholder and attempt to propose a hostile M&A and appoint an audit committee member, claiming that it benefits all shareholders. In this case, the directors must be in the position of so-called auctioneers by fairly reviewing the interests of all shareholders, not the existing management and controlling shareholders, so the likelihood of hostile M&A attempts and success is expected to increase."

Kim Ji-ho, an attorney at Lin Law Firm (Lihan), pointed out, "In the short term, directors' responsibilities will increase and the unclear interpretation of their duty of loyalty will likely continue for some time, so there are concerns that companies may hesitate to pursue M&A or reduce its size. There is also a possibility that the M&A process may become murky, with the acquired company requesting more favorable transaction terms or delaying negotiations citing the possibility of violating directors' duties."

As changes in the M&A market following the revised Commercial Act become inevitable, some voices call for more careful design of transaction structures. Dong-Han Lim, an attorney at Dongin Law Firm, said, “In particular, the risk of directors violating their fiduciary duty must be carefully considered when designing a transaction structure where the interests of controlling shareholders and general shareholders may conflict,” and added, “This can increase the complexity of the transaction structure in major M&A transactions such as mergers, subsidiary listings, and physical spin-offs.”

In addition, some point out that it is important to review to ensure that there are no problems with procedural transparency and transaction fairness. This means that one must keep in mind the possibility that a shareholder lawsuit or a criminal lawsuit related to breach of trust by management may be filed during the transaction process.

Seok-Hyeon Yoo, an attorney at the law firm Mission, advised, "The interests of all shareholders were considered during the M&A process, but the management judgment criteria for whether the decision ultimately went against the will of some shareholders are still unclear. Accordingly, companies should prepare more objective data and fair procedures than before to prepare for the intervention of minority shareholders, and secure the legitimacy and transparency of M&A and use it as an opportunity to increase corporate value and reliability."

Reporter Park Seon-woo (closely@bloter.net)

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[Aftermath of the Commercial Act Amendment Bill] M&A activity is expected, but… Hostile investment concerns (link)