Why a Board's Duty Does Not End With the Statutory Formula Under the Capital Markets Act
In merger disclosures, the merger ratio is stated in a form such as "0.1234 common shares of surviving company A per one common share of dissolving company B." This ratio determines the number of surviving company shares delivered to shareholders of the dissolving company, and after the merger, the ownership stake and voting rights ratio of each shareholder change accordingly.
If the same controlling shareholder holds stakes in the two companies at different ratios, the merger ratio also affects the controlling shareholder's post-merger ownership stake. When the controlling shareholder's stake in company B is higher than the stake in company A, the higher company B is relatively valued, the more company A shares are delivered to the controlling shareholder. Ultimately, the merger ratio is a figure representing the exchange relationship of the merger price per share of each company, and at the same time a transaction condition that allocates merger consideration and post-merger voting rights among shareholders.
Therefore, in disputes over the merger ratio, the issue is not merely the result of the calculation. Also contested are the legal standards and materials on which each company's merger price was assessed, and whether the board substantively reviewed and approved that result.
When Merging With an Affiliate, the Statutory Formula Applies in Principle
Current capital markets legislation directly stipulates the method for calculating the merger price when a listed company merges with an affiliate. In a merger between listed companies with an affiliate relationship, the reference market price is calculated by taking the day before the earlier of the board resolution date for the merger and the merger agreement execution date as the base date, and taking the arithmetic average of the volume-weighted average closing price over the most recent one month, the volume-weighted average closing price over the most recent one week, and the most recent closing price. In principle, the merger price may be set at a price discounted or premiumed within a range of 10% from this reference market price (Article 176-5, Paragraph 1, Item 1 of the Enforcement Decree of the Capital Markets Act).
When a listed company merges with an unlisted affiliate, different methods apply to the two companies. The listed company in principle uses the above reference market price, but may use asset value if the reference market price falls below asset value. The unlisted company uses a price that is the weighted arithmetic average of asset value and profit value (Item 2 of the same paragraph).
The listed company reference market price formula enhances the reproducibility of price calculation and limits the discretion in selecting valuation methods. In particular, when the same controlling shareholder exercises influence over all parties to the merger, making it difficult to expect price negotiations between independent parties, the statutory formula functions as a minimum device to secure the objectivity of transaction conditions.
When Merging With a Non-Affiliate, the Parties Set the Merger Price but Must Obtain an External Valuation
From November 26, 2024, the above statutory formula no longer applies to mergers between a listed company and a non-affiliate. The parties to the merger became able to autonomously determine the merger price through negotiation. However, excluding exceptions concerning KONEX-listed companies, when a listed company merges with a non-affiliate, it must obtain a valuation from an external valuation institution regarding the appropriateness of the merger price (Article 176-5, Paragraph 8, Item 3 of the Enforcement Decree of the Capital Markets Act).
Legislative discussions are underway to introduce a fair value principle across transactions such as mergers by listed companies, and to apply it to mergers between affiliates as well. In May 2026, the National Assembly's National Policy Committee approved an alternative bill amending the Capital Markets Act to this effect. However, since it has not yet been promulgated as law, the statutory formula of Article 176-5, Paragraph 1 of the Enforcement Decree of the Capital Markets Act currently applies to mergers between affiliates as is.
The amendment discussion was raised not because the statutory formula is meaningless. It is because it is difficult to conclude that the price calculated according to the formula always coincides with the price that can be assessed as fair in an individual transaction.
Compliance With the Statutory Formula Alone Cannot Be Deemed Sufficient Board Review
Market price is important valuation material that is formed through actual transactions in the open market and can be objectively confirmed. However, when trading volume is insufficient or a temporary event has significantly affected the share price, it is necessary to examine whether the reference market price sufficiently reflects the company's long-term earning power and asset value. When information about the merger has become known to the market and is already reflected in the share price, the question of which point in time's price to use as the basis also arises.
In mergers between listed companies and unlisted affiliates, this problem appears even more clearly. The merger price of a listed company is in principle based on past market prices but may use asset value in certain cases, whereas the merger price of an unlisted company reflects both asset value and profit value based on future business plans. As a result, the extent to which a listed company is valued by actual share price and an unlisted company is valued reflecting future projections prepared by management may differ from each other.
The mere fact that valuation methods differ does not immediately render the merger ratio unfair. However, it is desirable for the board to check whether the unlisted company's business plan is consistent with the budget or plans actually used in management before the merger was considered, whether recent performance and contract and order records support that projection, and whether there is any material difference from materials previously submitted to financial institutions or investors. If projections were newly prepared or revised for the purpose of calculating the merger price, the time of preparation and the reasons for revision are also subject to confirmation.
Regarding listed companies as well, when specific doubts are raised about the representativeness or possibility of distortion of the market price, completing the review with the reference market price calculation alone may not be sufficient. If a claim is raised that the market price fails to properly reflect non-operating real estate, cash holdings, stakes in affiliated companies, or other material assets, the grounds for such claim must be confirmed. It must also be examined whether the net borrowings, contingent liabilities, and recoverability of assets of both companies are reflected on the same basis. If there are convertible bonds, bonds with warrants, or stock options, the impact on the number of potential shares and voting rights structure after the merger, depending on their specific terms, also needs to be reviewed.
The legislation does not enumerate each of these review items one by one. However, insofar as the board of a listed company must prepare an opinion on the appropriateness of the merger price and merger ratio, confirmation of the materials supporting that judgment is a natural premise. In a case concerning whether a director of a company that was a shareholder of the dissolving company should consent to the merger in a merger between unlisted corporations, the Supreme Court ruled that judgment must be based on reasonable information for deriving an appropriate merger ratio, including the purpose and necessity of the merger, the relationship between the unlisted corporations that are parties to the merger, the situation of each company at the time of the merger, the characteristics of the industry, and the results of valuing the share price by generally accepted valuation methods (Supreme Court ruling of July 23, 2015, Case No. 2013Da62278). The current Enforcement Decree also separately requires the board of a listed company to prepare an opinion on the appropriateness of transaction conditions such as the merger price and merger ratio (Article 176-5, Paragraph 6 of the Enforcement Decree of the Capital Markets Act).
Case Law Recognizes a Reasonable Range, Not a Single Figure
The Supreme Court holds that the merger ratio cannot be fixed as a single figure according to strict objective accuracy. This is because corporate value can vary according to several factors besides asset value, including market value, profit value, and relative value. The Supreme Court's position is that if the merger price was calculated according to the requirements, methods, and procedures set by the relevant legislation, the merger ratio cannot be deemed so remarkably unfair as to render the merger agreement void, absent special circumstances such as reliance on false materials or groundless projected figures (Supreme Court ruling of April 23, 2009, Case Nos. 2005Da22701, 22718).
That a reasonable valuation range is recognized does not mean that any merger ratio is permissible. The board must confirm the reasons why different valuation methods present different results, and examine how much the results change when key assumptions are altered. It must also be able to explain in what range of the valuation results the final merger ratio is located, and the reasons for selecting that ratio.
The aforementioned Supreme Court ruling No. 2013Da62278 is a case in which the responsibility of a director of a company that was a shareholder of the dissolving company for consenting to the merger, rather than a director of a company party to the merger, was at issue. Therefore, its holding cannot be directly applied to the responsibility of directors of companies party to the merger. However, the standard that a director consenting to the merger ratio should not merely confirm the conclusion of the external valuation but should base judgment on reasonable information about the purpose and necessity of the transaction and the valuation materials [text truncated in original]
