Comments on Korea Appraisal Right Cases Re Fair Price of Shares

Abstract

Korean Commercial Code would be changed to the effect that a merging company can cash out minority shares. Furthermore, 95% shareholders can freeze out the minority shareholders in cash at fair price. These upcoming changes would increase the importance of the standards for fair price of shares, especially non-listed companies. Based on the review of Korean court decisions on fair price in general, I argue the court should modify the criteria for determining the fair price of minority shares in appraisal proceedings. Two groups of Korean court decisions on fair price of shares are reviewed to find any consistent rules. The first group (Group 1) is relating to the fair price of the shares that the management disposed of in violation of fiduciary duty. The second group (Group 2) is relating to appraisal rights. Inconsistencies withtout any statutory or policy reaons exist between two groups of decisions. Group I sticks to the net asset value while Group 2 calculates the weighted average of net asset value, earnings value and market price. Group I delves into comps, EVA, EVIDTA and discounted cash flow, although completely discarded in the end, while Group 2 calculates the earnings value by applying the rules under the Inheritance and Gift Tax. Group 1 does not consider goodwill value while Group 2 stresses the need to include goodwill value. Management premium is counted upon in Group 2 while Group 1 is hesitant in accepting the concept. Based on the analysis of Groups 1 & 2 decisions, and US appraisal rights cases, first, I argue the net asset value approach in Group 1 should be abolished to make it consistent with Group 2. Second, Group 2 should consider incorporating the more sophisticated financial valuation methodologies such as comparable company value and discounted cash flow, which were discussed in Group 1 decisions. Finally, appraisal remedies and any other remedies in the case of, for example, a merger should be permitted non-exclusively and the end result should be the same to avoid any possible abuse by the minority shareholders or the company management of the inconsistencies in law.