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South Korea

Crest Securities' recent investment in SK Corp - perhaps spelling control of SK Telecom - has underscored the vulnerability of public companies to outside bids for control.

Few companies, as yet, have special takeover defences in place. In part this reflects practice: there have been few hostile takeover bids, and still fewer successful ones. One reason for this is that, until the recent financial crisis, there was a 10% ceiling on investments in listed companies, and a 50% + 1 share minimum for public tender offers. Negative public perception has had a role too.

In the meantime, there remain legal restrictions on conglomerate chaebol cross-shareholding, leaving affiliates more vulnerable to hostile bids. Among the top 30 chaebol, for example, companies with over W5 trillion ($4.2 billion) in assets are subject to a cap (tied to net assets) on voting of shares in affiliates.

From the potential acquiror's point of view, there are several important rules still in place that limit the way a hostile acquisition of a public company can proceed.

Under the Securities Transaction Act (STA), if Raider (with its cohorts) acquires 5% of the voting equity of Publico, or later buys or sells 1% or more, Raider must file a public report. This impedes gradual, or creeping, acquisitions.

For a public tender offer, there are restrictions on timing and duration (minimum 20 days) under the STA. If Publico meanwhile adopts an anti-takeover measure, generally this does not entitle Raider to withdraw the offer or adversely modify the offer. (However, certain anti-takeover tactics are barred in this context, as noted below.)

Raider may explore off-market stock purchases. However, if Raider plans to acquire 5% or more of Publico's voting equity from numerous (10 or more) people within six months or less, Raider must make a public tender offer.

For a leveraged bid, issues of fiduciary duty generally preclude collateralization of Publico's assets for Raider's debt.

Strategic takeover bids raise issues under Korean antitrust laws. This was one difficulty - along with the image problems - that beset Microsoft's unsuccessful bid for Haansoft, a maker of Korean wordprocessing software, in 1999.

If defensive tactics occasion a legal challenge by the bidder, there may be some cause for misgivings about the judicial reception. In some cases, courts have been slow to act, or have treated controversial corporate decisions as so much water under the bridge.

The target, Publico, meanwhile has a choice of defensive tactics to weigh. Greenmail, poison pills and shark repellants may be possible in various forms, subject to restrictions under the Commercial Code and other statutes.

Practically speaking, tactics entailing special provisions of organizational documents cannot be implemented within the period of a short tender offer. Some tactics, such as shark repellants involving heightened conditions for director replacement, may involve considerable inconvenience. In the case of SK Corp, there has already been speculation about possible white knights.

If necessary, the controlling shareholders, and confederates, can boost their stake - subject to the cap noted above in the case of the top 30 chaebol. Management can go so far as to try a management buyout, although leveraging of company assets for this purpose is unfeasible.

Affiliates can come to the company's aid, but again this is subject to restrictions. For example, a 40% subsidiary of Publico cannot exercise voting rights on its shares in Publico shares (Commercial Code).

As an overarching consideration, target management is generally obliged to act prudently in the best interests of the company (which is not strictly synonymous with the best interests of shareholders). Normally, managerial decisions are entitled to the benefit of the doubt - the so-called business judgment rule.

In the hostile takeover context, the question becomes, should this rule insulate takeover tactics generally, or if not, what types of tactics in what types of circumstances? This question has been posed in commentaries on the few instances of hostile takeover litigation. So far, there is no statute or judicial pronouncement, but this may emerge as a central issue as takeover interest rises in Korea.

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