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Poison pill introduced to Korea

On March 10 2010, the Korean government submitted a revised bill of the Commercial Code to the National Assembly that introduces poison pills in Korea. It does so by granting existing shareholders certain rights to acquire new securities. This so-called New Share Acquisition Option system allows the poison pill in Korea to be used as a defensive measure against hostile takeover threats. It is not a general allowance of warrants that can be used as a financing method, which is not allowed under Korean law. The main aim of the Korean government in introducing the poison pill in Korea is to foster fair competition between potential acquirors and targets by striking a fair balance between offensive and defensive measures available in the Korean market for corporate control. The hope is that this will prevent waste of corporate resources devoted to hostile takeover defenses (such as greenmail). These resources should instead be devoted to more productive uses such as investment and research and development spending.

The main outline of the bill for the New Share Acquisition Option is as follows. In accordance with its articles of incorporation (AOI) and with its board resolution, a company may issue the New Share Acquisition Option (without any new consideration from the shareholders). This grants the shareholders certain rights to acquire new shares, depending on the type and number of shares they hold, at a set exercise price and exercise period. If certain conditions exist such as the presence of shareholders who acquire a number of shares of the company above a set threshold level stipulated in the AOI for the purpose of influencing management decisions of the company, the company may issue the New Share Acquisition Option and include the following stipulations in its AOI: (i) the company may prohibit exercise of the New Share Acquisition Option by certain shareholders; (ii) the company may stipulate different terms for exercise of the New Share Acquisition Option for certain shareholders; (iii) part or all of the New Share Acquisition Option may be redeemed; or (iv) the company may stipulate different terms for redemption of the New Share Acquisition Option for certain shareholders. Once a company decides to use one of the options (i) through (iv), the company may issue the New Share Acquisition Option coupled with the chosen restriction from the AOI only if it is necessary to maintain or advance the company's value and the shareholders' interest in general.

The company's board of directors must pass a resolution to issue the New Share Acquisition Option with an affirmative vote of at least two-thirds of the board members. The board resolution would specify the type and number of the shares to be issued upon exercise, exercise price, exercise period, and exercise terms and any unequal treatment applicable to the New Share Acquisition Option. At the same time, any shareholder who may be disadvantaged by the issuance, redemption or restriction on exercise of the New Share Acquisition Option due to the company's violation of relevant laws or the AOI or the company's usage of unfair methods may ask a court to prohibit such conduct or issuance of the New Share Acquisition Option. If new shares are issued by exercise or redemption of the New Share Acquisition Option, shareholders, directors, or corporate auditors may file a lawsuit to invalidate the New Share Acquisition Option.

However, there are many criticisms of poison pill's introduction in Korea. There is a genuine question over whether hostile takeovers actually exist in Korea. The Korean government cites examples such as Sovereign Asset Management's challenge of SK Corp. in 2003 and American corporate raider Carl Icahn's challenge of KT&G in 2005, but it is not at all clear that these examples actually represented corporate value-destroying hostile takeover threats. And because the Korean law restricts many offensive options for hostile takeovers such as restrictions on offerings and operation of private equity funds for hostile takeovers and limitations on aggressive acquisition financing such as leveraged buyouts, it is unclear whether the Korean M&A market actually favours potential hostile acquirors. There are also unofficial but powerful anti-takeover features in the Korean corporate landscape such as share cross-holdings among chaebol affiliates and concentrated shareholding within chaebol groups that represent formidable hurdles to hostile takeovers in Korea. So is questionable whether the defensive measures against hostile takeovers in Korea are actually weak. Secondly, there are serious questions about whether corporate resources saved from protecting entrenched corporate managements are used for productive uses.

From the point of view of foreign investors looking at Korea, since the New Share Acquisition Option system is not a new measure of general applicability but is put into effect specifically as a defensive measure against hostile takeovers, it can encourage the perception that Korean government's industrial policy dictates the Korean M&A market – not market principles. Such perception can harm the Korean M&A market and become another cause for the so-called Korean discount in the Korean stock market. In light of these criticisms, it remains to be seen how the proposed poison pill legislation of the Korean government will be dealt within the National Assembly.

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