Korea Nears Deal on Mandatory Tender Offers, With 5-Year Prison Terms

South Korea's rival parties have moved close to agreement on a mandatory tender offer system that would give ordinary shareholders the chance to sell their shares at the same price as controlling shareholders during a change of corporate control. The requirement would apply when a buyer secures a stake of 25% or more and becomes the largest shareholder, or when an existing largest shareholder buys additional shares, and lawmakers have settled on covering "50% plus one share" of outstanding stock. Criminal penalties for non-compliance would be strengthened, while voting-rights restrictions and disposal orders would be eased. A majority-of-minority mechanism, which had been considered as grounds for exemption, will be excluded from the bill.

According to bill review documents on the introduction of mandatory tender offers obtained by Seoul Economic Daily on the 14th, the National Assembly's National Policy Committee held a small subcommittee meeting that day and agreed on drafting provisions along these lines. "We are reaching agreement on most provisions, including the trigger requirements, exemptions and pricing," a committee official said. "We plan to conclude the remaining unresolved provisions soon." The committee plans to convene a bill review subcommittee on the 15th to vote on the amendment.

The mandatory tender offer system has been pursued to change a practice in which controlling shareholders monopolized control premiums. The aim is to guarantee, through law, the property rights and exit options of minority shareholders who have been sidelined during changes of control. Still, market disruption appears unavoidable, as mergers and acquisitions that previously required only the acquisition of the largest shareholder's stake would now have to reach a majority by including shares held by ordinary shareholders.

The only remaining point of contention is the scope of shares subject to a tender offer. The parties have agreed on a baseline of 50% plus one share of total outstanding stock, but they differ over whether to delegate authority to a presidential decree. The Democratic Party argues that some authority should be delegated so the scope can be expanded beyond 50% plus one share depending on circumstances, saying small shareholders need comprehensive protection and the law needs flexibility. The People Power Party counters that leaving room to change the provision through a presidential decree could increase market uncertainty. Further discussions could produce a bill that sets an upper limit on the purchase scope that may be changed by decree.

The parties reached agreement on the remaining provisions. The trigger requirement was refined to combine a 25% stake with largest-shareholder status. It would apply not only to share purchases but also to the exercise of convertible bond rights. After discussions, the purchase price was set as "an amount determined by presidential decree, taking into account past purchase prices and other factors." As a result, the formula currently proposed by the Financial Services Commission — the higher of the highest purchase price over the past year or the closing price on the day before the mandatory tender offer filing — is expected to be reflected in the enforcement decree.

Provisions on punishment and sanctions have also taken shape. Failing to carry out a mandatory tender offer, or acquiring shares indirectly through other means, would carry up to five years in prison or a fine of up to 200 million won ($144,000). That is heavier than the existing penalty for violations of general tender offer rules, which carries up to three years in prison or a fine of up to 100 million won. By contrast, the disposal order in the previous version of the amendment, which had covered the entire acquired stake including prior purchases, was narrowed to shares "acquired in excess of 25%" in violation of the law.

The majority-of-minority mechanism, which had been discussed as grounds for exemption, was dropped from the bill. Under that mechanism, a buyer would be relieved of the tender offer obligation if ordinary shareholders approved the deal by majority vote, excluding stakes held by controlling shareholders and other interested parties. Lawmakers reflected concerns that acquirers or controlling shareholders could abuse it as a workaround by mobilizing friendly stakes. Instead, the committee recognized explicit exemptions for additional purchases by holders who already own 50% or more, and for purchases of shares in companies showing signs of insolvency or undergoing rehabilitation proceedings. It also left open the possibility of adding further exemptions by presidential decree, taking into account factors such as the potential infringement of minority shareholder rights.