The government, which is pushing to create a fund aimed at supporting the so-called "Korean-style bear hug M&A (Bear Hug M&A—pressuring negotiations by presenting disruptive takeover terms)," is reportedly reviewing a plan to use pension funds to commit capital to activist private equity funds (PEF). While forming a fund directly with policy money was also discussed, authorities are said to be reviewing an outsourced management approach in light of legal concerns. Corporations with persistently low share prices or weak governance are closely watching the policy direction.
◇ Not going with a Korea Development Bank (KDB) fund… reviewing public pension "outsourced investments in activist PEFs"
According to a compilation of ChosunBiz reporting on the 8th, the government recently discussed creating a "bear hug M&A support fund" at a closed-door Cabinet meeting as a measure to boost corporate and shareholder value by revitalizing the M&A market. A bear hug is a method in the M&A market in which a prospective acquirer publicly offers a price above the current share price and disruptive terms to the target corporation to pressure management to come to the table. The term is a metaphor for a bear holding the other party in an inescapable embrace.
Under current law, in Korea, even if a corporation receives an acquisition proposal, the board has no obligation to disclose it or express an opinion. Even if the proposal benefits shareholders, a controlling shareholder can reject it for "management control defense" and keep it hidden. Because there is no compulsion to disclose, it is difficult for it to affect the stock price upward. In some cases, corporations even leave share prices low to reduce inheritance and gift tax burdens.
The government and the ruling party are reviewing measures such as "legal revision" and "outsourced management by private equity funds (PEF)" to block this institutionally. If the law is changed to require corporations to disclose acquisition proposals they receive and grounds for rejection to shareholders, the corporation's true value would be revealed, preventing "intentional share-price suppression."
There was also discussion of a plan to have public pension funds entrust capital to PEFs to participate indirectly in bear hug M&A. At the initial closed-door meeting, a proposal emerged to have the Korea Development Bank take the lead in creating a fund to support M&A financing. But the Financial Services Commission, the higher authority, reportedly expressed reservations. This is because the basis is unclear for KDB, a policy bank, to create a fund for the purpose of activating the stock market. Instead, the alternatives reportedly discussed were ▲ creating private PEFs that acquire undervalued corporations and ▲ having the National Pension Service entrust investments to and have activist PEFs manage them.
◇ Ruling party speeds legislation to prevent "price suppression"… "Considering bundling funds into support measures"
In the United States, under the Securities and Exchange Commission (SEC) rule Schedule 14D-9, when there is a tender offer from outside, the board must express its opinion to shareholders and disclose it within 10 business days. In the United Kingdom, under the UK Takeover Code, when a corporation receives an M&A proposal, the board must disclose it immediately and leave the final decision to shareholders. A representative example is last Dec., when the Warner Bros. board posted on its website a shareholder letter saying it would be more favorable to "carry out the merger agreement concluded with Netflix" than to accept Paramount's tender offer.
Although the specific method and targets have not yet been finalized, the business community believes a large number of major corporations could be affected. Analyses suggest potential targets could include ownerless, dispersed-ownership corporations; corporations whose substantial real estate asset holdings are not reflected in share prices and whose PBR is below 0.5; and corporations whose share prices are undervalued due to subsidiary mergers or fundraising for new businesses. Even if an actual acquisition does not take place, legislation and fund creation alone could pressure a change in corporate behavior. The Blue House is said to be placing emphasis on "enhancing shareholder value" and, following the Cabinet meeting, will further discuss related policies.
The ruling party is also pushing legislation to support bear hug M&A, including codifying the tender offer system. Recently, it brought in former lawmaker Lee Yong-woo, a former KakaoBank CEO, as Director General of the "Task Force for Improving Financial Market and Economic Systems" to overhaul disclosure systems to enhance corporate value. A key ruling bloc official said, "Looking at foreign cases, there are studies showing that the more aggressive M&A is activated, the more share-price suppression decreases, so we are reviewing various cases." The official also said, "The government is not directly creating funds with policy money," and, "Since the ruling bloc and the government have discussed bear hugs as part of strengthening the capital market's fundamentals, we are considering a range of options by bundling funds as well."