Friday, September 08, 2006

South Korean Companies to Fend Against Hostile Foreign Takeovers


Under the current system in South Korea, companies must defend themselves against hostile takeovers by foreign investors. The new finance minister, Kwon O-Kyu made statements to this effect and declared that such takeovers are permissible under the financial system of South Korea and that it is up to the companies' at risk management and major shareholders to take up the defense on their own. These statements were made in the midst of calls from the business community in Korea for a helping hand from the government in the form of protective policy.

The reach of foreign investors into its once family-run Chaebol and state-operated companies has pushed the ruling Uri party into considering alternative measures such as the "golden share" rule, which, among other things, introduces a nominal share that has the power of veto over decisions such as takeovers. However, Minister Kwon has called such a provision "out of step with global standards" and expressed doubt that it would be adopted due to Korea's current adherence to free-market principles.

The defense strategies suggested thus far have been met with mixed responses in both the government and business sectors. Some, like Minister Kwon, believe that there are ample measures in place to protect management and that excessive protection can have a negative effect on corporate performance. Others, including many busines groups, recall the popular outcry that followed the takeovers after the 1997 financial crisis, where foreign investors who picked up the distressed companies for cheap made out hugely on profits, leaving many Koreans feeling shortchanged. And still others believe that such defensive measures would diminish the effectiveness of corporate governance rather than improve it - asserting that good performance is the best defense to takeovers.

South Korea is Asia's fourth largest economy, but there are signs that its growth has been slowing. Will a turn away from the current free-market policy towards a more protectionist approach help the country's economic development or hinder it?

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