The Financial Services Commission (the “FSC”) announced that the National Assembly passed a proposed amendment to the Financial Investment Services and Capital Markets Act (the “FSCMA”) at the plenary session held on August 20, which alters the method for calculating merger value of listed companies.
Under the current FSCMA and its subordinate statutes, the merger price between listed companies and their affiliates is determined based on the market value approach which has led controlling shareholders who want to set more favorable merger conditions to intentionally choose the time of merger process when the market value of the affiliates stays below its fair value, thereby suppressing the stock price of the affiliates.
In this regard, the Proposed Amendment will make changes to the valuation standard for mergers from the market share price to a fair value evaluation, bolstering the procedural mechanisms intended to ensure fairness in corporate restructuring activities.
Key Revision Details
Introducing fair value approach
Firstly, under the Proposed Amendment, when a listed company enters into a merger, a spin-off or split and merger, an acquisition or transfer of a significant business or asset, and a comprehensive share exchange or transfer (each, a “Subject M&A Transaction”), it must calculate the transaction value based on a fair value calculated by comprehensively taking into account the share price, asset value, earning values, etc. This fair value approach also applies into the purchase price for dissenting shareholders’ appraisal rights.
Strengthening procedural mechanisms
Secondly, the board of directors of a listed company must prepare and disclose the aforementioned written opinion for the purpose and expected effect of a Subject M&A Transaction, and the appropriateness of the merger price. Also, the company must undergo an evaluation by an external appraiser regarding matters such as the value of a Subject M&A Transaction, the appropriateness of conditions of the transaction. Furthermore, a listed company which wants to conduct an affiliate M&A transaction must disclose any conflicts of interest or specific relationships between its specially-related parties and the counterparty to the affiliate M&A transaction.
These measures will mitigate information asymmetry between majority shareholders and minority shareholders, and allow the latter to more easily access disclosures and examine the appropriateness of the merger process. Along with an expanded director’s fiduciary duty to include the company and its shareholders under the recently updated Commercial Act, these will also help to strengthen protections for public shareholders.
Further Plan
Following the required internal approval processes, the Proposed Amendment will be promulgated and take effect three months later. In the meantime, the FSC plans to update the subordinate statutes in time for the institutional changes following the Amendment.
The FSC will continue to work to promote corporate M&A activities to help boost dynamism in industries and the capital markets. In the process, the FSC will also seek to make regulatory improvements intended to make sure that there are adequate protections for public shareholders.
* Please refer to the attached PDF for details.