The Direction to Amend Capital Markets Act Related to the Determination of Exchange Ratio : Case of Samsung C&T and Cheil Industries Merger
Hyung-Chan Jung
This paper examines how to amend Capital Markets Act related to the determination of an appropriate stock exchange ratios in mergers between listed companies in Korea focusing on the case of Samsung C&T and Cheil Industries merger in order to protect the right of minority shareholders. According to the exchange ratio determination model of Larson and Gonedes(1969), the particular exchange ratio which is finally agreed upon will be a function of the relative bargaining power of each party involved in the merger and the relative contribution which each party makes to the incremental value of the combined entity. In Korea, however, the exchange ratio is set by law such as Capital Markets Act, based on historical trading prices, not through negotiations between the acquirers and the target firms. In the case of Samsung C&T and Cheil Industries merger, the activist hedge fund Elliott and ISS argue that although the terms of the transaction including the exchange ratio are fully compliant with Capital Markets Act in Korea, the combination of Samsung C&T¡¯s undervaluation and Cheil Industries¡¯ overvaluation significantly disadvantages Samsung C&T shareholders. This paper, therefore, presents directions to amend Capital Markets Act in terms of exchange ratio determination and legal requirements for fairness opinions in order to protect the right of minority shareholders, especially in merges between listed companies affiliated to business groups in Korea.