The Financial Services Commission announced that a revision bill for the Financial Investment Services and Capital Markets Act (FSCMA) making changes to the standards for calculating merger price was passed by the National Assembly at the plenary session held on August 20.

Under the current regulatory framework, a merger price of listed companies between affiliated corporate entities is determined based on a market value approach, and this has led to the conditions whereby controlling shareholders could intentionally choose to pursue a merger process at a time when the market value of the affiliated company stays below its fair value to seek more favorable merger conditions, thereby suppressing the stock price of the affiliated company.

In this regard, the revised FSCMA will make changes to the standards for calculating merger price from the current market value approach to a fair value approach, while bolstering the procedural mechanisms intended to ensure fairness in corporate restructuring activities.

Key Revision Details

Introducing fair value approach

First, the rules change will require a fair value approach in arriving at a merger price in mergers and acquisitions (including spin-off mergers), business or asset transfers, and stock swaps transactions, taking into account comprehensive factors including the market value, net asset value, and future profit value of the company.

This fair value approach taking into account comprehensive factors including the market value, net asset value, and future profit value of the company will also apply when an acquiring company makes a mandatory bid to buy out shares from dissenting shareholders.

Strengthening procedural mechanisms

Second, the rules change will require the board of directors of the acquiring company to prepare and disclose a statement demonstrating the purpose and expected impact of merger and the appropriateness of merger price and have a third-party evaluation on the appropriateness of merger price and conditions for disclosure.

Corporate mergers taking place between affiliated companies will require an additional disclosure of information demonstrating the presence of any special relationship and any involvement of specially associated interests.

This will help to resolve the presence of information asymmetry existing between controlling shareholders and ordinary shareholders and allow the latter to more easily access disclosed information on the appropriateness of the merger process. Along with expanded fiduciary duty to all shareholders prescribed under the recently updated Commercial Act, this will help to further strengthen protections for ordinary shareholders.

Further Plan

The revised FSCMA is expected to take effect three months after promulgation after going through an internal approval process. In the meantime, the FSC plans to make updates to subordinate statutes in time for the implementation of the changed rules.

The FSC will continue to work to promote corporate mergers and acquisitions 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 ordinary shareholders.

* Please refer to the attached PDF for details.