From now on, corporations must apply a fair value, not a market price, when calculating merger prices. The intent is to comprehensively evaluate corporate value by adding asset and revenue value to the market price–based method used so far, and to block incentives to depress stock prices to create merger terms favorable to controlling shareholders.
On the 20th, the Financial Services Commission said a bill to amend the Financial Investment Services and Capital Markets Act, which includes changes to the standards for calculating merger prices, passed the National Assembly's plenary session. The amendment cleared the National Policy Committee on May 14 and was approved by The National Assembly's Legislation and Judiciary Committee on the 29th of last month.
The core of the amendment is to change the standard for calculating merger prices from market prices to fair value. Going forward, in transactions such as mergers and partitioning mergers, the transfer or acquisition of significant business or assets, and comprehensive stock swaps or transfers, corporations must determine fair value by comprehensively considering not only market prices but also asset value and revenue value.
Previously, reliance on market prices for calculating merger prices prompted criticism that controlling shareholders intentionally suppressed stock prices to secure favorable transaction terms. Under the current Financial Investment Services and Capital Markets Act, the merger price is set as the arithmetic average of the closing prices for one month, one week, and the most recent day, based on the day before the earlier of the contract date or the board resolution date.
The method for calculating the price for dissenting shareholders' appraisal rights in mergers will also change. If the dissenting shareholders and the company cannot agree on a purchase price, it will be calculated based on fair value that comprehensively considers market prices, asset value, and revenue value. If they still cannot agree on a price, the court will decide.
Asymmetries that can arise in the merger process will also be addressed. Going forward, boards must prepare and disclose a written opinion on the purpose and expected effects of the merger and the appropriateness of the merger price. They must also obtain an evaluation from an objective third party on the appropriateness of the merger price or transaction terms and disclose the results.
In particular, disclosure requirements will be strengthened for transactions with a high potential for conflicts of interest, such as mergers among affiliates. The status of debt guarantees or collateral provision and concurrent executive positions will be disclosed.
The amendment is scheduled to take effect three months after promulgation, following subsequent procedures such as approval by the Cabinet meeting.