The Financial Supervisory Service (FSS) is reviewing whether to demand corrections to the merger securities registration statement between SK Innovation and SK IE Technology (SKIET). Although formal procedures such as forming a special committee and conducting an external expert review were carried out, the key issue has emerged that efforts to persuade on the necessity of the merger and its impact on shareholder value were lacking.
According to financial authorities and the investment industry on the 2nd, the Financial Supervisory Service (FSS) is closely examining whether directors fulfilled their duty of loyalty to shareholders and the process of communicating with shareholders while reviewing the securities registration statement related to SK Innovation's absorption-type merger of SKIET, which was recently submitted by SK Innovation. In particular, as this is a large-scale transaction being pursued amid SK Group's groupwide business restructuring, the FSS is said to be scrutinizing this merger case with a stricter yardstick.
An FSS official said, "Inside the FSS, we are treating this merger case as a strict matter as SK Group's business structure reorganization continues," and "There is a definitive atmosphere within the FSS to issue a demand for corrections to the merger securities registration statement of SK Innovation and SK IE Technology."
Behind this review is last year's amendment to the Commercial Act, which expanded directors' duty of loyalty from the company to the company and shareholders, followed by the Ministry of Justice's "guidelines on directors' conduct standards in corporate reorganizations," released in Feb. this year. The Ministry of Justice guidelines presented as key considerations in mergers between affiliates or comprehensive share swaps the following: ▲ establishment and operation of a special committee ▲ review by independent external experts ▲ sufficient provision of information to shareholders.
SK Innovation and SKIET formed a special committee and went through an external expert review ahead of the merger. However, the two companies held an online merger briefing on Aug. 26 and plan to hold a shareholder meeting on the 14th. Since full-fledged face-to-face shareholder communication is only beginning after the merger agreement was signed and the securities registration statement submitted, the timing and method of communication are becoming contentious.
◇ "The forms were in place, but there was no persuasion"
In the securities industry, the view is that the FSS does not judge whether there was "faithful provision of information to shareholders" based on formal procedures such as merely holding a briefing or fulfilling disclosure requirements. The analysis is that the core criterion is how clearly the necessity and rationale of the transaction were presented and, based on that, how effectively shareholders were substantively persuaded.
Lee Sang-heon, an iM Securities analyst, said, "While the special committee was set up and an external expert review was conducted for this SK Innovation–SKIET merger, the process of sufficiently explaining and persuading shareholders of the rationale for the merger appears to have been lacking," adding, "The FSS is highly likely to take issue with this and demand corrections."
There is also no shortage of shareholder objections over the merger consideration. SKIET's merger consideration is 14,783 won per share, 85.9% lower than the 105,000-won offering price at its 2021 listing. It is also about half the 28,600-won issue price in the third-party allotment capital increase in Aug. last year.
However, the merger consideration this time was not an arbitrary price set by the company but was calculated according to the benchmark stock price formula under the Financial Investment Services and Capital Markets Act, which applies to mergers between listed companies. No separate discounts or premiums were applied in the merger consideration calculation process.
SK Innovation cites the deterioration in profitability of the separator business and SKIET's limited ability to raise funds on its own as reasons for the merger. It said that consolidating the two companies' organizations and functions and using SK Innovation's credit rating to lower financing costs could yield an annual improvement of about 60 billion won in EBITDA. It also set a goal of turning the separator business's EBITDA to a surplus within two years after the merger.
◇ Procedures alone are not enough… FSS-style review standards spread
There are also differences in shareholders' recourse. SK Innovation is pursuing a small-scale merger, which in principle does not grant its shareholders appraisal rights. However, if 20% or more of the total number of issued shares oppose the merger, the small-scale merger requirements will not be met. In contrast, SKIET shareholders can exercise appraisal rights, and if the related purchase amount exceeds 350 billion won, the merger agreement can be terminated or its terms changed.
The yardstick by which the FSS views major capital transactions has become even stricter this year. In the organizational restructuring among affiliates such as Hyundai G.F Holdings and E-MART and Shinsegae Food, the FSS demanded that securities registration statements specifically explain whether directors fulfilled their duty of loyalty to shareholders and whether sufficient information was provided to shareholders. In Hanwha Solutions' large-scale capital increase, explanations of the purpose of the fundraising, plans for the use of proceeds, and the impact on shareholder value became key targets of correction demands.
The common thread in these cases is that formal procedures such as setting up a special committee or conducting an external expert review alone are not enough to clear the authorities' bar. The analysis is that the FSS's core review yardstick has become whether the necessity of the transaction and its impact on shareholder value were demonstrated in concrete terms and whether shareholders were substantively persuaded.
If the FSS issues a demand for corrections, the effectiveness of the securities registration statement will be suspended, creating variables for the merger schedule. SK Innovation plans to hold a shareholder meeting on the 14th to further explain the purpose of the merger and its expected effects.