Capital Markets Rules Change on Merger Value Expected to Boost Fairness and Prevent Price Distortion

The Financial Services Commission (the “FSC”) announced that the National Assembly passed a proposed amendment to the Financial Investment Services and Capital Markets Act (the “FSCMA”) at the plenary session held on August 20, which alters the method for calculating merger value of listed companies.

Under the current FSCMA and its subordinate statutes, the merger price between listed companies and their affiliates is determined based on the market value approach which has led controlling shareholders who want to set more favorable merger conditions to intentionally choose the time of merger process when the market value of the affiliates stays below its fair value, thereby suppressing the stock price of the affiliates.

In this regard, the Proposed Amendment will make changes to the valuation standard for mergers from the market share price to a fair value evaluation, bolstering the procedural mechanisms intended to ensure fairness in corporate restructuring activities.

Firstly, under the Proposed Amendment, when a listed company enters into a merger, a spin-off or split and merger, an acquisition or transfer of a significant business or asset, and a comprehensive share exchange or transfer (each, a “Subject M&A Transaction”), it must calculate the transaction value based on a fair value calculated by comprehensively taking into account the share price, asset value, earning values, etc. This fair value approach also applies into the purchase price for dissenting shareholders’ appraisal rights.