Democratic Party of Korea to Introduce ‘Bear Hug’ in Second Half, Promote M&A of Undervalued Companies

[Financial News] The Democratic Party of Korea plans to pursue a Korean-style “Bear Hug” system in the National Assembly of the Republic of Korea during the second half of this year. The system would strengthen the board of directors’ disclosure obligations during mergers and acquisitions (M&A). If an undervalued company receives a tender offer, its board would be required to review the offer and notify shareholders, with the aim of promoting M&A and encouraging the normalization of corporate value.
Oh Gi-hyoung, chairman of the Democratic Party of Korea’s K-Capital Market Special Committee, said at a forum held at the National Assembly of the Republic of Korea on the 4th, "We are proposing within the party that this system should definitely be pursued as an amendment to the Financial Investment Services and Capital Markets Act in the second half of this year."
The amendment to the Financial Investment Services and Capital Markets Act would require the board of directors of a company targeted for acquisition to state its position on a tender offer during the M&A process. Under the current law, boards may choose whether to express an opinion. The amendment would make such an opinion mandatory, requiring boards to review the tender offer’s terms and its impact on shareholder value from the perspective of all shareholders. The bill was proposed by Oh Gi-hyoung and the special committee, based on the view that South Korea’s M&A market has not adequately served as a check on undervalued companies.
Oh Gi-hyoung noted that a considerable number of undervalued companies on South Korea’s stock market have a price-to-book ratio (PBR) below 1. "Low-PBR companies are viewed as value stocks, and various attempts—including tender offers and hostile M&A—are bound to arise involving those value stocks," he said, adding, "But such developments have not occurred in South Korea." He continued, "How should we address these low-PBR companies? When a tender offer is made, the board should review it and disclose the results of its review. The core of this system is to have the board serve as a fair mediator by determining whether the valuation is appropriate and whether the bidder has the financial capacity to proceed."
The Democratic Party of Korea views the Bear Hug system, together with tax and disclosure reforms, as a means of addressing the chronic undervaluation of low-PBR companies. The government and the ruling party have also pursued tax reforms to prevent so-called “stock-price suppression,” in which controlling shareholders avoid raising stock prices to reduce their inheritance and gift tax burden.
An amendment to the Inheritance and Gift Tax Act proposed by Soyoung Lee would require listed shares held by a controlling shareholder to be valued based on asset value rather than stock price, as with unlisted shares, if their appraised value is less than 80% of the company’s net asset value—that is, if the PBR is below 0.8. The Ministry of Finance and Economy also introduced a tax-law amendment in August to separately value inherited shares held by controlling shareholders of listed companies that have remained undervalued for an extended period. However, critics have pointed out that, because the proposal includes requirements such as being in the bottom 25% of PBRs within the industry—or the bottom 10% for KOSDAQ companies—and maintaining that status for six consecutive years, it could apply to only about 100 of all listed companies.
Kim Nam-geun, a member of the special committee, also said at the forum, "We have been considering various measures to address chronic stock-price suppression, and a law aimed at resolving it through the Inheritance and Gift Tax Act was introduced first." He emphasized, "That is not all; measures to improve stock-price suppression through the disclosure system and other means have also been announced. From this perspective as well, a system that addresses low PBRs needs to function."

[email protected] Song Ji-won Reporter