News and developments
Legislative Insights: Recent Developments in Corporate Governance Regulations to Enhance Shareholder-Oriented Corporate Governance
Recently, in the context of corporations restructuring their business and governance structures, active legislative discussions regarding changes to related laws and regulations are taking place. These include (i) discussions in relation to the reintroduction of the mandatory tender offer rule, and (ii) amendments to the Korean Commercial Code (the “KCC”) to encompass shareholders within the scope of directors’ duty of loyalty, which are aimed at establishing shareholder-oriented corporate governance schemes and protecting ordinary investors.
The mandatory tender offer rule is designed to protect minority shareholders during the acquisition of a controlling stake in a company by requiring an acquirer who obtains a controlling interest from the primary shareholder to extend an offer to buy shares from other shareholders at a price comparable to what was paid for the controlling stake. Initially established with the amended Securities Exchange Act of 1997, the mandatory tender offer rule was abolished in 1998. However, discussions about its reintroduction have been underway since late 2022, through amendment bills to the Financial Investment Services and Capital Markets Act (the “FSCMA”). On December 21, 2022, the Financial Services Commission (the “FSC”) issued a press release at the “Seminar on How to Protect Ordinary Investors During Changes in Management Control via Stock Acquisitions,” underscoring the need for the mandatory tender offer rule to be reintroduced. On May 30, 2023, a group of 11 members, led by Changhyun Yoon, proposed a partial amendment bill to the FSCMA that included provisions for reintroducing the mandatory tender offer rule in the 21st National Assembly. However, the bill was ultimately shelved, and no revisions to the FSCMA were made. Currently, in the 22nd National Assembly, legislative efforts to amend the FSCMA – including proposals for the reintroduction of the mandatory tender offer rule aimed at enhancing the protection of ordinary shareholders – are ongoing.
Meanwhile, active discussions focused on explicitly incorporating the protection of shareholder interests within directors’ duty of loyalty under the KCC are also underway. In August 2024, the Financial Supervisory Service (the “FSS”) convened a meeting with representatives from academia and research institutions to explore ways to broaden the scope of directors’ duty of loyalty while alleviating associated liabilities. During the meeting, participants offered diverse perspectives on enhancing governance structures, bolstering the protection of shareholder interests and ensuring fairness in the corporate decision-making process. Based on these discussions, it is anticipated that the FSC will soon formulate and announce the Government’s stance on making an amendment to the KCC to explicitly include shareholders within the scope of directors’ duty of loyalty.
The details on the aforementioned discussions are as follows:
1. FSC Prepares Amendment Bill to FSCMA to Reintroduce Mandatory Tender Offer Rule and Proposes Partial Amendment Bill to FSCMA for Its Implementation
During the 2024 Comprehensive National Audit by the National Policy Committee on October 24, 2024, the FSC emphasized the need to introduce the mandatory tender offer rule, stipulating a threshold of “50%+1 share,” which aims to protect minority shareholders during the acquisition of shares to gain control over listed companies. Based on the disclosed information, it appears that the FSC began drafting an amendment bill to the FSCMA around October 28, 2024.
Among the amendment bills currently proposed to the 22nd National Assembly, those concerning the reintroduction of the mandatory tender offer rule and their specific provisions are summarized below.
| Category | Bill No. 2204873 (Proposal Led by Myounggu Kang) | Bill No. 2200692 (Proposal Led by Hoonsik Kang) |
|---|---|---|
| Applicability of Mandatory Tender Offer | When a person/entity becomes the largest shareholder by acquiring 25% or more of the shares in a listed corporation, it is required to make a tender offer to purchase a certain number of additional shares from other shareholders. However, exceptions to this requirement may be allowed to prevent potential infringement on the rights of other shareholders. | When a person/entity becomes the owner of 25% or more of a listed corporation (including cases where the combined ownership of the entity and its related parties reaches or exceeds 25% of the total shares), it is required to make a tender offer for all remaining shares, excluding the shares it already owns, based on the total issued shares of the listed corporation after the acquisition. However, exceptions to this requirement may be allowed in consideration of preventing potential infringement on the rights of other shareholders. |
| Public Notice of Mandatory Tender Offer and Submission of Tender Offer Statement | Any person/entity intending to initiate a mandatory tender offer within 15 days following stock acquisition must publicly disclose the issuer of the stocks it intends to acquire, the purpose of the acquisition, the specific types and quantities of stocks it plans to acquire, and all relevant terms and conditions of the contemplated mandatory tender offer. | - |
| Terms and Methods of Mandatory Tender Offer | A person/entity that initiates a mandatory tender offer shall purchase shares at a price that meets or exceeds the threshold established by the Presidential Decree. | The price of the mandatory tender offer shall be equal to or greater than the price specified by Presidential Decree, taking into consideration the prior acquisition price. |
| Prohibition on Purchase of Shares Through Ways Other Than Mandatory Tender Offer | Any person/entity that initiates a mandatory tender offer is prevented from purchasing shares other than through the tender offer from the date it acquires the controlling shareholder’s shares until the end of the tender offer period. | - |
| Restrictions on Revocation of Mandatory Tender Offer | A mandatory tender offer is irrevocable. However, it may be withdrawn under exceptional circumstances, such as the presence of a counteroffer, or if the person/entity making the mandatory tender offer dies or is dissolved, or becomes bankrupt. | - |
| Restrictions on Voting Rights in Case of Violation of Tender Offer Obligation | If a person/entity that has acquired shares from the aforementioned controlling shareholder fails to issue the required tender offer announcement or provides false statements regarding material facts, its voting rights may be restricted. | - |
| Investigation With Respect to Mandatory Tender Offer and Related Measures | The FSC may require the submission of materials or have the Governor of the FSS conduct an investigation if necessary for investor protection and may order the correction of the mandatory tender offer statement or suspend or prohibit the mandatory tender offer on an as-required basis. | - |
To our understanding, the FSC has been opposing the bill proposed by a group of assemblymen led by Hoonsik Kang, which mandates that any person acquiring 25% or more of a company’s stock shall also acquire all (100%) of the remaining shares, irrespective of whether they become the largest shareholder. The foregoing position has taken into consideration criticisms from the business community regarding potential adverse impacts on the M&A market.
If the amendment bill to the FSCMA, which reinstates the mandatory tender offer rule, is passed and implemented by the National Assembly, it is anticipated to positively impact minority shareholders. Since mandatory tender offers include a control premium in the offer price, minority shareholders can gain the opportunity to exit the company on terms similar to those offered to the majority shareholder, thereby allowing them to recover their investment in the relevant company. However, it is important to recognize the following criticisms raised in the business and academic communities:
2. Discussions on Expansion of Scope of Directors’ Duty of Loyalty Under KCC
There seems to be a growing debate on whether directors’ duty of loyalty under the KCC should encompass the protection of shareholders’ interests. On August 21, 2024, the FSS held the “Academic Conference on the Enhancement of Corporate Governance” to explore ways to enhance corporate governance systems. The conference aimed to gather insights from the academic community regarding potential legislative amendments, specifically focusing on expanding the scope of directors’ duty of loyalty under the KCC and implementing measures to limit excessive liability.
Here are some highlights of the thoughts raised by the academia at the conference:
On August 28, 2024, the FSS held a meeting with research institutes to discuss enhancements to corporate governance. The meeting focused on gathering and deliberating upon the opinions of participating institutes regarding the proposed introduction of directors’ duty of loyalty to shareholders.
Key takeaways from the research institutes’ opinions were as follows:
During the “Major Policy Progress and Future Plans for the Capital Market” meeting with foreign journalists held on November 11, 2024, the FSC announced its plan to present the Government’s stance on the proposed amendment to the KCC, which includes the proposed introduction of directors’ duty of loyalty to shareholders.
Meanwhile, the opposition party has recently adopted the proposed amendment to the KCC, which includes an expansion of directors’ duty of loyalty to shareholders, as part of its official platform. The amendment has been submitted to the subcommittee of the Legislation and Judiciary Committee. This indicates that discussions regarding the proposed amendment, including the directors’ duty of loyalty to shareholders, are actively taking place in the National Assembly.
The reintroduction of the mandatory tender offer rule and the expansion of directors’ duty of loyalty are likely to have a significant impact on the corporations’ business activities, particularly in the area of corporate restructuring transactions.
Although the proposed amendment to the FSCMA, which involves the reintroduction of the mandatory tender offer rule, has been submitted to the relevant committee, there is a possibility that the details of the bill may be altered during the subcommittee and plenary sessions of the National Assembly. Therefore, it remains unclear how the proposed amendment will ultimately be implemented.
Furthermore, regarding the KCC, there may be proposed amendments in the future that stem from discussions with academic and research institutions during meetings organized by the financial authorities. Alongside the introduction of directors’ duty of loyalty to shareholders, there could also be additional discussions on advisory shareholder proposals aimed at improving shareholder returns and facilitating capital reallocation.
The proposed amendments to the FSCMA and the KCC seem to have been initiated by the Government with the dual objectives of revitalizing the M&A market and protecting minority shareholders. Given the specifics of these proposed amendments, it is highly likely that they will result in significant alterations to M&A transactions – impacting schedules, timelines and corporate governance restructuring transactions. Therefore, it is crucial to remain informed on legislative developments, as well as the key details and progress of the discussions regarding the enhancement of related systems.
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