Controlling Even Merger Prices?...The Structural Risks of Mandating Fair Value

The ruling party and the government’s move to revise the Capital Markets Act to require listed company merger prices to be based not on the market but on a “fair value” is highly likely to seriously undermine market autonomy and the flexibility of corporate restructuring, despite the stated goal of protecting minority shareholders.

The ruling party and the government argue that fixing a new valuation model in law—one that reflects assets, earnings, and future value—can prevent unfair low-price mergers. But this approach misunderstands the essence of price formation. Prices are naturally formed in the market through the information and expectations of countless participants; they cannot be reduced to a value uniformly determined by the government through a formula.

It must not be overlooked that trust in the capital market begins precisely here. The concept of “fair value” may appear objective on the surface, but in reality it is an inherently complex value judgment that cannot avoid the evaluator’s subjectivity. There is no single correct answer as to what weight should be assigned to asset value, earnings value, and future value, or which variables should be discounted and by what method.

If such uncertain standards of judgment are made mandatory by law, companies will face greater costs and delays in every valuation process and will also bear legal liability for the valuation results. When the standards of regulatory authorities are placed ahead of the market’s own judgment, the capital market begins to be distorted.

In particular, when combined with the recently introduced duty of directors to act faithfully for shareholders, the fair value system could effectively become a tool for regulating corporate merger and spinoff decisions after the fact. The duty of loyalty was originally intended as a minimum standard to prevent unlawful conduct, but the current trend is moving toward ex post evaluation of a substantial portion of managerial judgment.

If the appropriateness of merger price calculations is added to this as well, companies will find themselves in a situation where, even after complying with the required procedures, they must undergo legal scrutiny once again. In form, mergers may still be permitted, but in practice an environment will emerge in which companies refrain from pursuing them out of concern over legal risk.

The consequences are clear: reduced M&A activity, delayed restructuring, and weakened industrial competitiveness. When companies seek to streamline overlapping businesses or integrate affiliates, the speed of decision-making is a core element of competitiveness. But if mandatory fair value rules and procedures such as external valuations and disclosure of opinion letters are introduced, even ordinary mergers will inevitably be blocked by unnecessary review. The market is changing rapidly, yet the abstract legal standard of “appropriateness” will only make companies slower, and the resulting harm will ultimately fall on consumers and investors.

An even bigger problem is that these regulations may actually entrench the “Korea discount” rather than resolve it. Foreign investors do not assign a lower value to the Korean market simply because of a lack of transparency. Risk factors in the Korean market have been heightened by unexpected regulatory changes, the government’s excessive intervention in corporate decision-making, and the lack of consistency in the legal and institutional framework. A price-regulatory approach such as mandatory fair value could further deepen the capital market’s existing structural trust problem. It is worth recalling that market confidence stems not from the quantity of regulation but from the predictability of regulation and the autonomy allowed within the market.

In the end, while the stated goal of strengthening shareholder protection is understandable, the moment the government starts setting market prices in place of the market itself, the damage will immediately be borne by investors. The value of a stock is not a formula set by the government, but the result of the expectations and information of market participants. Once that natural process is undermined, price signals are distorted, and companies are left with no choice but to make inefficient decisions. There is a significant risk of creating the paradox that regulations introduced in the name of shareholder protection will instead reduce shareholder value.

What the government should do is not control prices, but improve transparency so that companies and investors can make rational judgments, minimize unnecessary regulations, and create a predictable institutional environment. When market autonomy and competition are guaranteed, protection for minority shareholders, corporate innovation, and trust in the capital market can all be strengthened together.

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Original title: 합병가액까지 통제?...공정가액 의무화의 구조적 위험

Author: Gwang yong Go

Date: 2025-12-18

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=28416