"Do They Really Have the Money to Buy?"...The First Hurdle for a Korean-Style Bear Hug Is a Bona Fide Offer [fn Market Watch]

[Financial News] As the introduction of a Korean-style bear hug approaches, corporate Korea and the investment banking (IB) industry are focusing on the bona fide offer—meaning a genuine acquisition offer. The proposed rules would require the boards of listed companies that receive acquisition offers to disclose and review them, but the bill does not specify what qualifies as an offer backed by a genuine intention to acquire. Concerns are growing that if even offers with unclear financing or acquisition intent can force companies to respond, a bear hug could become a tool for pressuring management rather than simply promoting mergers and acquisitions. This is why the bona fide standard to be included in a future enforcement decree is being viewed as a safeguard for the system.
According to a report released by Yulchon LLC on the 10th, the amendment to the Financial Investment Services and Capital Markets Act proposed by Oh Gi-hyoung of the Democratic Party of Korea does not directly include in its statutory provisions the criteria for determining a bona fide offer that had been discussed before the bill was introduced. Criteria for determining which companies would be subject to the rules, such as a price-to-book ratio below 0.5, were also omitted. Yulchon LLC expects these requirements, along with the scope of "tender offers that have a material impact on shareholders" and acquisition offers, to be specified in a future presidential decree.
If the amendment passes, the board of a listed company that receives an acquisition offer with a material impact on shareholder value must disclose the offer and its review plan. It must also disclose the results and reasons for a decision reached through an independent and professional process. Under certain conditions, boards will also be required to state their views on tender offers.
For companies, what happens before that stage is more important: where to distinguish an offer from an acquirer with actual financial capacity from one intended to pressure the share price or management. If the bona fide threshold is set too low, boards are more likely to have to initiate review and disclosure procedures even for offers lacking genuine acquisition intent.
Unlike companies in the United States, South Korean companies have limited takeover defenses, such as poison pills. An acquirer can pressure a board by publicly offering a high premium, while the target company has relatively few defensive tools at its disposal.
Yulchon LLC noted, "If the amendment passes, companies will need to establish not only internal procedures for deciding whether to accept and disclose acquisition offers, but also special committees led by independent directors and independent financial and legal advisory processes when conflicts of interest are a concern."
For companies with low price-to-book ratios, corporate value enhancement itself is expected to serve as a de facto takeover defense. If an outside acquirer offers a substantial premium when the share price is low, the board must explain to shareholders even why it rejected the offer. This will increase companies’ incentive to address undervaluation through capital allocation policies, such as share buybacks and dividends, as well as the disposal of noncore assets.
An investment banking industry official said, "Separate from the goal of using market discipline to address undervalued companies, there must be a mechanism to distinguish offers from parties with the actual ability to acquire a company from offers intended merely as pressure tactics." The official added, "Criteria for a bona fide offer, including financing capacity and the acquirer’s credibility, will effectively become the first line of defense for companies."
Another mergers and acquisitions industry official said, "South Korea is not a market where various takeover defenses are permitted as they are in the United States." The official continued, "If offensive tools are strengthened, the threshold for filtering out hollow acquisition offers must also be designed carefully in the enforcement decree." The official added, "Ultimately, the next issue surrounding a Korean-style bear hug could narrow down to ‘who is qualified to demand an answer from a company?’ Since boards are being given an obligation to respond, acquirers should also be required to demonstrate a corresponding level of genuine intent." The official concluded, "That is why ‘bona fide’ has emerged as the company’s first line of defense."


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