Latest Publictions
2023 Aug/17
Criteria for Computing Merger Prices of Listed Corporations: Problems and Proposed Improvements
Issue Papers 23-15
PDF
- Research Topic Capital Markets
- Page 22
Jung, Soomin
- Other Publications
-
No other publications.
- Summary
- Since 1997, Korea's Financial Investment Services and Capital Markets Act has clearly defined the method for calculating the price of mergers between listed corporations or between listed and unlisted corporations, with the aim of protecting investors and ensuring fair valuation of mergers. However, despite these legislative objectives, the current system for determining merger prices seems to have several side effects, as these prices are primarily determined by market prices.
Based on an analysis of merger cases involving listed corporations in the US and Japan over the past five years, it was observed that merger prices were determined by various methods. This was particularly notable in the cases of small-cap companies, where factors beyond market prices were considered. A close look at Korea's merger cases between listed corporations for the past five years revealed that the cumulative market-adjusted return from one year prior to the merger stood at -6% on average. This suggests possibilities that the selection of when to calculate the merger price was disadvantageous to minor shareholders. The fundamental issue lies in the fact that as long as the merger ratio is determined according to the formula prescribed by law, shareholders have no recourse to address unfair merger ratios.
It is advisable to promote self-regulation in the pricing of mergers, both among affiliated and non-affiliated entities, through indirect regulations that assist the management of merging and merged firms in establishing a fair merger ratio. To be more specific, the board of directors in the merging firm should be granted the authority to determine the price, provided that detailed data regarding the methodology and appropriateness of pricing are disclosed to help shareholders and market participants to make informed decisions about the merger. In cases where a merger could potentially harm the interests of shareholders, additional measures should be implemented to ensure fairness. These measures could include preliminary injunctions against the merger, the appointment of merger inspectors, and imposing liability for damages on those involved.