There is increasing criticism regarding the government’s initiative to implement a fair value system, aiming to stop companies from artificially lowering stock prices during mergers, which could negatively affect general shareholders. It has been raised that if the fair value is established below the market price, stock values might drop, unintentionally harming individual investors. Some believe that strict oversight and management by financial regulators are more essential than standardized pricing rules to avoid undervalued mergers.
◇ Samsung, Doosan, and Other Large Companies Are Involved in Controversy Regarding Ongoing Manipulative Mergers
As reported by the financial sector on the 13th, the National Policy Committee of the National Assembly convened a subcommittee meeting on the 2nd to review changes to the Capital Markets Act. These changes would mandate the use of fair value rather than market price when assessing merger valuations. During mergers, the acquisition price is determined by comparing the stock values of the merging companies. In the past, the market price was the main factor, calculated as a weighted average of the one-month average closing price, one-week average closing price, and the previous day’s closing price, all based on the contract date.
Critics have frequently claimed that companies deliberately reduce stock prices during mergers to favor owner families or achieve lower acquisition costs. For example, during the 2015 merger of Samsung C&T and Cheil Industries, critics suggested that Samsung C&T’s stock was kept low while Cheil Industries’—which had a larger stake held by the family—was artificially boosted, negatively impacting small shareholders of Samsung C&T. Similar allegations emerged in 2024 during the restructuring involving Doosan Bobcat, Doosan Enerbility, and Doosan Robotics, with claims that Doosan Bobcat’s stock was undervalued to support a cheaper merger.
In reply, political groups are advocating for the application of fair value rather than market price when assessing mergers. Fair value considers not just market price but also assets and earnings. When merging affiliated entities, independent appraisers are required to establish the fair value. Businesses would also face the responsibility of proving the fairness of the valuation in legal conflicts.
◇ What Occurs When Fair Value Is Less Than Market Price?
A major concern is that fair value might serve as a limiting factor. Rep. Yoo Dong-soo from the Democratic Party of Korea raised this issue during a subcommittee meeting, asking, “The current problem is that stock prices are being arbitrarily reduced, but what if the fair value turns out to be lower than the market price?” If fair value is less than the market price, it suggests the company is overvalued, which could lead to a drop in stock prices. Rep. Yoo cautioned, “The market would quickly respond with a ‘lower closing price,’ and this wouldn’t benefit small shareholders.”
Critics further claim that legally specifying fair value diverges from international norms. Although the U.S., Japan, and the European Union (EU) also utilize fair value as a reference point, they effectively rely on market price in reality. A representative from the financial industry stated, “Market prices not only indicate current performance but also future potential. As shareholders’ views on a company are reflected in the price, the market price itself serves as the fair value.”
Some highlight the need for financial regulators to closely watch over stock price suppression and undervalued mergers. The Financial Supervisory Service (FSS) must examine securities reports related to mergers to identify any deliberate attempts to manipulate stock prices or valuations that benefit owner families. Indeed, the FSS had previously denied the securities report submitted by Doosan Bobcat and Doosan Enerbility during their 2024 merger and split process.
Concerns are also raised regarding the accuracy of fair value calculations. In cases involving affiliate mergers, independent appraisers—typically accounting firms—would assess the fair value. Nevertheless, these accounting firms, which frequently conduct merger evaluations, are often accused of being biased towards companies and not offering objective reviews. There is worry that fair value assessments could also suffer from a lack of impartiality. Last month, the FSS convened a meeting with accounting firms to explore ways to enhance merger evaluations, considering these critiques.
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