EXPLAINER Why Korea's mandatory tender offer plan is drawing global scrutiny
National Assembly in Seoul / Joint Press Corps
The proposed revival of Korea's mandatory tender offer system, abolished in 1998 following the Asian financial crisis, has reignited debate nearly three decades later.
The idea behind the system is simple: When someone buys a company, smaller shareholders should have a chance to sell their shares at the same price as the company's largest shareholder.
Under the bill pending in the National Assembly, a buyer taking control of a company would have to purchase enough shares through a public tender offer to raise its ownership to at least 50 percent plus one share.
The goal is to protect minority shareholders, particularly retail investors, who could otherwise miss out on the higher prices paid in corporate takeovers.
Here's why the rule matters: Imagine Company A wants to take over Company B. Company B's largest shareholder, Kim, owns 40 percent of its shares, while smaller shareholders own the remaining 60 percent.
Company A offers to buy Kim's entire stake at a price above the current market price. By acquiring Kim's 40 percent stake, Company A gains control of Company B.
Kim walks away with a premium, but the other shareholders, who collectively own a larger stake in the company, get no such deal. They are left holding shares that they can only sell at market price.
The mandatory tender offer system is intended to address this imbalance.
But ironically, critics say the proposed rule could still leave minority shareholders at a disadvantage.
Two prominent international corporate governance groups — the International Corporate Governance Network (ICGN) and the Asian Corporate Governance Association (ACGA) — recently sent letters to the National Assembly calling for changes to the proposal.
Their main concern is how many shares minority shareholders would actually be able to sell.
Consider the same example, but suppose Company B has just 100 shares in total.
Company A buys Kim's 40 shares. Under the proposed rule, it would then need to buy only 11 more shares from other shareholders to bring its ownership to 51 shares — just over half the company.
That means the remaining shareholders, who originally owned 60 shares between them, would get to sell only 11 shares in total through the mandatory offer. The other 49 shares would remain in their hands.
In other words, Kim still gets to sell all his shares at a premium, while minority shareholders get to sell only a fraction of theirs.
The ICGN and ACGA argue that this is unfair.
If a controlling shareholder can sell their entire stake at a higher price, they say, minority shareholders should have the same opportunity. They are calling for rules that would allow minority shareholders to sell all their shares, rather than just enough to bring the buyer's stake above 50 percent.