South Korea: Tender Offers In Korea - New Shares Issued By Purchaser As Consideration

By Moon Sung Lee, Partner, Lee & Ko

1. Introduction

In principle, the consideration for a tender offer under the Securities and Exchange Act ("SEA") is cash. However, it is not clear whether a tender offer in exchange for other securities, i.e. an "exchange offer", is also permitted under the SEA. If a tender offer in exchange for new shares of the purchaser is permitted as a form of exchange offer, then such structure would be very favorable to the purchaser in that he is relieved of the burden of procuring cash, while the tender offeror also has nothing to lose in that he has a wider range of alternatives. There has been a recent case represented by Lee & Ko in which the holding company of a Korean Chaebol group has successfully purchased the shares of its subsidiary through a tender offer, with its newly issued shares as consideration. This, however, was premised on certain restrictive conditions, and therefore the question still remains as to whether tender offers in exchange for new shares are permissible in general.

The SEA does not specifically provide as to whether tender offers with new shares as consideration are permitted (although Article 21, Section 3 generally states "including in exchange for other securities" in the definition of tender offer). However, the prevailing view of Korean scholars is that such form of tender offer is permitted.

Nevertheless, a tender offer with new shares as consideration may not be possible in practice, due to an absence of specific provisions on the procedures thereof. In fact, the Enforcement Decree under the SEA which was in effect before July 2001 required "documents to show possession of the securities to be delivered as consideration in case of tender offer by exchange with other securities". Since the new shares are not in possession (and not even in existence) as of the time of submitting the tender offer, it was not possible to submit "documents to show possession of the securities to be delivered in consideration".

However, the said procedural obstacle was partially resolved by an amendment on July 7, 2001. With the amendment, it became possible to purchase shares through a tender offer in exchange for new shares, by submitting with the tender offer report, for instance, a board resolution for issuance of the new shares, where the purpose of the tender offer is to satisfy the shareholding requirement of a holding company in its subsidiary (if the subsidiary is a listed corporation, the holding company must hold at least 30% of the subsidiary’s shares).

By nature, a tender offer with new shares as consideration involves several legal issues, and therefore various statutory provisions governing such issues are simultaneously applicable thereto. First, it is of course subject to the SEA provisions on tender offer. Next, such form of tender offer involves issuance of new shares by the tender offeror, and thus the SEA provisions on public offering apply. Further, the transaction constitutes an in-kind investment, so that the Commercial Code provisions on in-kind investment apply. Thus, the SEA provisions on tender offer, the SEA provisions on public offering, and the Commercial Code provisions on in-kind investment are simultaneously applicable with respect to a tender offer with new shares as consideration.

(a) Sequence of the Tender Offer Procedure and the In-kind Investment Review Procedure

Under the Commercial Code, an in-kind investment is subject to review by court-appointed inspectors. As such, a review on in-kind investment must take place in case of a tender offer with new shares as consideration, and there is an issue as to the stage in the tender offer procedure at which the review on in-kind investment must take place.

In this regard, it is realistically impossible under the SEA for the review of in-kind investment to take place after completion of the tender offer procedure. Rather, it appears that the in-kind investment review can only take place before commencement of the tender offer procedure, for the following reasons: Under the SEA, the tender offer price cannot be reduced, and the terms of the tender offer may not otherwise be changed in a manner unfavorable to the purchaser, after commencement of the tender offer procedure. Meanwhile, the basic purpose of the court’s review of in-kind investment is to secure the sufficiency of funds, and thus the understanding is that the court may only order changes that are favorable to the company issuing the new shares and unfavorable to the in-kind investor, such as reduction of the assessed value of the assets to be invested or the number of shares to be issued in exchange for the investment. To the purchaser (the in-kind investor), such change would be an unfavorable change of the terms of purchase from the perspective of the tender offer, which is not permitted under the SEA. Thus, in case where the review of in-kind investment takes place after commencement of the tender offer procedure, and a court order for change is issued, the court order for change would be in conflict with the above prohibition on change of tender offer terms, so that it would not be possible to avoid violating one or the other. To prevent such a problem, one would have to obtain a review of in-kind investment before commencement of the tender offer procedure, and to commence the tender offer procedure upon reflecting the results of such review. That, however, leads to a problem discussed in subsection (b) below.

(b) Board Resolution on Issuance of New Shares and Review of In-kind Investment

A new problem arises where the court’s review of in-kind investment takes place before the tender offer process, so as to resolve the above contradiction between the court order and the SEA prohibition on change of tender offer terms. That is, according to the Commercial Code, the board of directors must resolve on "the name of the in-kind investor, the type, quantity and value of asset to be invested, and the class and number of shares to be issued in consideration therefor" in case of an in-kind investment, and such matters must be confirmed before the court’s review on in-kind investment. In case of a tender offer with new shares as consideration, however, the identity of the in-kind investor can be confirmed only after completion of the tender offer procedure, and therefore the in-kind investor can only be described as "a shareholder of XYZ Corporation who accepts the tender offer". Also, the number of shares to be issued (new shares) in consideration for the in-kind investment can only be confirmed after completion of the procedure for allocation of new shares. Therefore, if such matters must be specified in advance even in case of a review of in-kind investment relating to a tender offer with new shares as consideration, then it would not be possible to obtain the review on in-kind investment in advance.

As such, a literal interpretation of the Commercial Code provisions would result in a conflict between the Commercial Code and the SEA, so that a tender offer by issuance of new shares would be impossible. However, the said Commercial Code provisions anticipate certain specified assets as the form of in-kind investment, and therefore it would not be appropriate to apply those provisions to the case where unspecified assets with objective market values are invested, such as a tender offer by issuance of new shares. Accordingly, it would be necessary and reasonable to interpret such provisions flexibly. In any event, obtaining the review of in-kind investment by persuading the court, before commencement of the tender offer procedure, is a very important matter for the success of a tender offer by issuance of new shares.

The foregoing discussions show that a tender offer with new shares as consideration should be permitted upon interpretation of the SEA. It has also been verified that certain related provisions which previously posed an obstacle to such method of tender offer have been revised or dealt with through interpretation. However, at present, a tender offer with new shares as consideration is permissible only in case where the purpose thereof is to satisfy the shareholding requirement of a holding company to hold shares in its subsidiary.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.