New Squeeze-Out Devices as a Part of Corporate Law Reform in Korea: What Type of Device is Required for a Developing Economy?
38 Pages Posted: 17 Feb 2013
Date Written: January 31, 2011
A squeeze-out is a mechanism used by a majority shareholder in a corporation to force out those in the minority. This article begins with a discussion of whether a squeeze-out should be allowed under the fundamental corporate law principle of majority rule. In spite of concerns for minority shareholders, it is reasonable to seek legislation to minimize the negative aspects of squeeze-outs rather than to simply deny the mechanism altogether. To reduce the risk of the majority’s exploiting minority shareholders through squeeze-outs, any squeeze-out legislation should be carefully designed, thereby guaranteeing fair compensation for minority shareholders.
For comparative research, this article reviews squeeze-out devices available in the United States, the United Kingdom, and Germany and classifies the devices into three categories: (1) tender offer squeeze-outs, as in compulsory acquisitions in the U.K.; (2) cash-out merger squeeze-outs, as in the long-form mergers in the U.S.; and (3) supermajority type squeeze-outs, as stipulated in the German Stock Law. Alternatively, a squeeze-out may be characterized in one of two conditions by either: (1) controlling shareholder or incumbent management (control-maintained type); or (2) outside investors (control-transferred type). This article attempts to demonstrate the way each condition affects the risk of the majority shareholder’s exploiting the minority shareholders. For example, tender offer squeeze-outs, whether combined with control-maintained or control-transferred situations, are likely to provide fair compensation. However, cash-out merger squeeze-outs and supermajority type squeeze-outs, when combined with control-maintained situations, might fail to provide sufficient protection in the process of forcing out the minority.
The Korean government announced its plan to introduce cash-out merger squeeze-outs and supermajority type squeeze-outs in its KCC Reform Bill of 2008. This article supports the decision by the Korean government to move in the direction of creating more flexible squeeze-out mechanisms. The government, however, should take into consideration some of the unique features of Korean business practice. The government should also account for the fact that Korea’s corporate governance system is still based on a developing economy. Specifically, many Korean companies have dominant or controlling shareholders, and the level of general protection for minority shareholders is still limited in Korea. If the Korean government, as suggested in the Reform Bill of 2008, was to adopt cash-out mergers and supermajority type squeeze-outs, it needs to be cognizant of the risk of expropriation of minority shareholders and appropriately address the risk in its legislation.
Keywords: squeeze-out, Korean Commercial Code, Cash-out merger, compulsory acquisition
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