1. Introduction | Taehoon Youn

In recent years, the threat on the control right of domestic companies as well as the foreign capital as the source of such threats have become the center of public interest.
Even with the arrangement of institutional settings that provides the ground for hostile takeover in 1997, due to the lack of potential acquirer equipped with size and know-how, the realization of hostile takeover deals had been considered to be a rare possibility. After the financial crisis, however, foreign capital poured into the Korean economy in the process of economy-wide restructuring. In addition, a few takeover attempts were made by foreign funds toward some of the Chaebolrelated companies, which were considered to be takeover-safe. Since then, the potential of being the target of takeover attempts and the way to defend itself from such a threat suddenly
became (or at least appeared to be) one of the central concerns of managements and controlling shareholders of Korean listed companies. It then led the academia and
other stakeholders into hot debates on the issues of takeover and foreign capital. It seems, however, that the debates so far have been based on fragmentary information on
extreme examples, or on emotional responses without the considerations of practical constraints.

Fully understanding the importance of the matter, this study attempts to provide correct and comprehensive understanding on the problem at hand and thereby suggest policy recommendations through various empirical and institutional examinations on the central issues related to the market for corporate control in Korea. All in all, this
study aims to verify the on-going debates on the effect of foreign capital on the Korean economy as well as to examine the validity and efficacy of introducing additional defense

mechanisms against takeovers. While the themes dealt in this report is only part of the whole issues concerning the market for corporate control in Korea, it is hoped that this can be considered as a more comprehensive research result than other existing ones.

The study consists of three volumes and nine chapters. The first volume centers on the theme of the economic effect of foreign capital. It is required that the issues related to foreign capital need to be thoroughly examined before we explore the policy issues concerning the market for corporate control in Korea neutrally and objectively. The questions already raised need to be verified with the available data and empirical methodologies. It is due to the fact that the two separate issues of foreign capital and takeover are hardly distinguished in the on-going debates.

The second volume examines more direct issues concerning the defense mechanism of Korean companies against the threat of being taken over. It is necessary that the takeoverrelated issues are examined from a corporate governance standpoint, since the market for corporate control is considered to be one of the major external control mechanisms on a company. It is especially true when the corporate control system in Korea can be characterized with the Chaebol structure, which is known to shed additional complications among shareholders. This study, therefore, examines the issues that concern both the corporate governance and the market for corporate control in Korea with such peculiarities in mind.

The third volume considers potential future policy recommendations. Rather than dealing with the very specific details, it tries to provide basic theoretical and legal base to
view the policy-related issues. Topics such as disciplinary measures for business groups, mandatory bids, and poison pills are covered.


2. Corporate Governance and Firm Value of the Korean Firms: The Role of Foreign Investors’ Equity Ownership | Sungbin Cho

Background and Purpose
In 1992, the Korean government opened the capital markets in Korea. However, foreign ownership of Korean firms had remained small and gradually increased due
to the restrictions on the foreign shareholding of a firm. But, at the outbreak of the financial crisis in 1997, it was imperative to restructure the Korean corporate sector through mergers and acquisitions (M&A) and to attract foreign investors in order to keep the foreign reserve at a stable level. Hence, the Korean government lifted all the restrictions on the foreign investors’ ownership in 1998. Since then foreign investors have actively taken larger stakes at unprecedented speed.

According to the Korea Stock Exchange, the percentage of shares held by foreigners increases from 10.87% in 1999 to 16.68% in 2004. Moreover, market capitalization
owned by foreigners records 42.30% of total market capitalization in the year 2004 as compared to 18.47% in 1999. Except for Taiwan, the pace of increase in foreign shareholding is the fastest in the world.

As foreign investors’ equity ownership rapidly increases, the debate on the positive and negative impacts and the effect of foreign investors is ongoing. Some argue that foreign investors act as active monitors and implant advanced and transparent management practices so that they contribute to better corporate governance and better performance of firms. But others claim that due to the unstable management control rights, investments are hampered so that long-term growth opportunities are foregone.

The debate on the role of foreign investors, however, mostly is not based on careful investigations and systematic analyses. This paper tries to test the hypothesis with
regard to the role of foreign shareholders and to find scientific evidence. That is, this paper examines the relationship of foreign investors’ equity ownership, corporate governance, and firm value using observations of non-financial firms listed in the Korea Stock Exchange and KOSDAQ between 1999 and 2004.Considering the increasing share and importance of foreign investors, this study enhances our understanding of the effect and behavior of the foreign shareholders.

Main Results
For the empirical analyses, this study uses the KLCA (Korea Listed Company Association) database for firm characteristics reported in financial statements and proxy
statements. Since financial firms have different accounting standards, they are excluded from the analysis. The data are then supplemented with the KFTC (Korea Fair
Trade Commission) database that contains intragroup shareholding of large business groups, the socalled Chaebols, which is used for construction of control-ownership disparity index.

The empirical analysis consists of two parts. One is on the causality test on the relationship between foreign shareholding and corporate governance measures such as outside director ratio. The other is the relation between firm value and foreign shareholding.

In the first part, this paper uses outside director ratio and ownership disparity index as corporate governance measures. Using the dynamic panel autoregression framework, this paper examines the Granger causality and finds that there exists no causality between corporate governance measures and foreign shareholding in both directions. Also, GMM (Generalized Method of Moment) regression result applied to dynamic panel data model confirms the above-mentioned causality test result. These results suggest that it is hard to conclude that foreign shareholding contributes to the corporate governance reform in terms of outside director ratio and controlownership
disparity.

In the second part of the paper, for the analysis of the relations between firm value and foreign shareholding, Tobin’s Q is used as a proxy for firm value. This paper finds evidence supporting the view that, to some extent, foreign investors in Korea are longterm investors.

Conclusion
The paper finds that there exists no causality between foreign shareholding and corporate governance. In addition, the evidence is found that foreign investors act as long-term investors. These results that do not support common views suggest that it is necessary to verify common views through systematic analysis.

To fully understand the impact of foreign shareholding on corporate governance and firm value, it will be necessary to consider broader range of corporate control mechanisms such as market for corporate control, financial leverage, compensation scheme, and so on. Moreover, there may be many ways in which foreign investors can affect firms’ behavior. Therefore the empirical results of this paper can be viewed as a tentative one and further research will be needed.


3. Expansion of Foreign Owned Banks in Korean Banking Industry | Hyeon-Wook Kim

Background and Purpose
Recently in Korea, there is a rising criticism on the foreign capital entrance in the Korean banking industry. This criticism originated from the cognizance that the foreign
entrants do not have a positive influence on the financial system, or further on developing the economy as a whole through the transmission of their advanced techniques, rather, they are probably weakening the social responsibility of banks and hampering the stability of financial system since they primarily pursue the owners’ benefits. Some of these critics insist that it is a better solution to give a takeover opportunity to conglomerates than to sell the banks to foreign capital, thus the regulations on the ownership of financial institutions should be eased now. On the other hand, there is another criticism that those critics are generalizing some of the negative cases biased against nationalism, rather than logically analyzing the role and the influence of foreign capital on banking industry. This paper rearranges the meaning of expan-sion of foreign banks in Korea’s banking industry, and finds the necessity of regulations and the right direction for the improvement of financial system.

Main Results
Contrast to cases in other countries, expansion of foreign banks in the Korean banking industry after the financial crisis is characterized by the fact that foreign investment
funds entered through acquiring the ownership of domestic banks. This factor might have caused the effect of foreign bank expansion on domestic banking industry to appear different from those found in other studies that primarily analyzed pros and cons of foreign bank entry.

The result of comparative analysis on foreign and domestic nationwide commercial banks of Korea shows that, though the difference is not so significant, foreign capital
entrants concentrated on improving financial stability of acquired banks in the early stage of entry and, thereafter, have managed their portfolio with conservative strategy of ‘low risk, low return.’ Also, the result does not present the positive effects that were expected during the rapid increase in the proportion of banks acquired by foreign capital after the crisis.

However, it is not appropriate to negatively assess the effect of foreign capital entry focusing on the fact that foreign banks rapidly increased loans to households. Especially, the circumstances that household loans ratio has increased due to the foreign banks’ liquidation of the bad loans to faltering enterprises should be considered. In addition, not only foreign-owned banks but also domestic banks have increased household loans instead of corporate loans and this kind of trend might have originated from the instability of financial system or the changes of domestic financial circumstances. Therefore, it is concluded that more active approach to the solution is necessary for
adequate policy against foreign capital entry, rather than passive attitude emphasizing the negative effects of foreign capital.

This paper primarily discusses validity and feasibility of suggested policy alternatives, such as the revision of the Banking Act, which includes a proposal to restrict the
number of foreigners in the board of directors, since those alternatives are based on the assumptions that (ⅰ) foreign board of directors lacks specialties in the Korean banking industry and other financial circumstances, and (ⅱ) the foreign entrants possibly do not have enough advanced financial techniques to improve domestic banks.

First, we researched on the ways to intensify the standard of directors’ qualification, and from foreign case studies, found that some of the countries that have directors’ residency requirements, particularly the United States, have continuously attempted to moderate the requirements. We also found that, from a different point of view, there was a possibility that the residency and citizenship requirements would conflict with the opendoor policy basis of the Korean government, and in terms of liberalization agreement of service trading, it is impossible to adopt a new regulation that explicitly requires residency or citizenship to the board of directors.

Therefore, in order not only to maximize stockholders’ profits by assigning experts who are familiar with domestic financial circumstances but also to pursue managerial duty against unspecified individual depositors, it is more desirable to reinforce the supervision with the aspect of governance structure, for instance, by intensifying the
qualification screening test and requiring prior approval of supervisory authority, rather than to adopt the residency and citizenship requirement.

Next, it is also desirable to provide the evidence and process that verify the eligibility of holding companies, aside from the bank share holding limits that is currently presented in the Banking Act. Admittedly, the qualification screening of directors should be equally applied to domestic capital as well as foreign capital.

Conclusion
The foreign capital that recently enters the Korean banking industry is foreign banks rather than foreign investment funds and, contrast to foreign investment funds, foreign
banks are expected to contribute to the development of the Korean financial industry through permeating advanced financial techniques and practices. Despite the recent
changes in the characteristics of foreign capital, the reinforcement of qualification screening test against bank directors and shareholders is still necessary in order to
induce the foreign bank entry to contribute to improving the domestic bank industry. However, it is difficult to expect a positive contribution from the foreign entrants under
the current circumstances considering the fact that proper infrastructure is not built in domestic financial markets. Therefore, it is necessary to actively incite the competition
of foreign banks and generate positive externality by promoting standardization and systemization in the information of financial market, rather than depending passively on
regulations.


4. The Role of Equity Investment in Corporate Control of the Large Business Conglomerates in Korea | Kyung-Mook Lim.Sungbin Cho

Background and Purpose
It is well known that controlling minority shareholders of large business conglomerates in Korea, the so-called Chaebols, exercise control right over affiliated firms through
cross shareholding and/or pyramidal shareholding. This makes the ownership structure of business groups so complicated that markets have difficulty in monitoring and disciplining controlling minority shareholders.

The previous studies on the Chaebols’ control structure can be roughly categorized into two groups. Some of previous researches on Korean Chaebols have given a descriptive look at the ownership structure. Others have focused on controlownership disparity in examining the resulting effect of business conglomerates. Unlike previous works, this paper develops an index that measures the importance and magnitude of an affiliated firm in terms of control right. Based on the index, this paper analyzes the evolution of inter-firm equity investment within a group and the effect of total equity investment regulation on the control structure of business groups.

Main Results
Contrast to the previous studies, which have utilized mainly qualitative methodology, this paper proposes ‘control contribution index’ that measures control right loss when
an affiliate could not use equity shares of other affiliates for voting.

The analysis utilizing this control contribution index shows the followings. The indices within a large business conglomerate are very unequal. That is, only a very small
number of firms play a crucial role through holding equities of other group affiliates.

Moreover it is noteworthy that the ranks of affiliates in terms of the control contribution index have changed actively in a very short period of time. For example, the affiliates that ranked number one in 2005 in terms of the control contribution index ranked between number four and five on average in 1997. In other words, some of affiliates’ shareholding structure which were not crucial for controlling a large business conglomerates have changed drastically. These drastic changes occurred mainly during
1998~2001 when the government removed the regulation ‘restriction on total amount of share holding of other companies’ to help the process of corporate restructuring.
During this period, the total amount of shareholding of other companies by large business conglomerates increased dramatically. In 1998, the total amount of shareholding
of other companies was 18 trillion won, but this increased to the level of 51 trillion won in 2001. The removal of the regulation, the drastic increase of total amount of shareholding of other companies, and the change of control contribution indices of several companies do not seem to be a coincidence. The controlling minority shareholders wisely utilized the opportunity, which allowed them to secure their position through changing the shareholding structures of affiliates.

Conclusion
Through the analysis, we found that the shareholding structure that enables controlling minority shareholders to control large business conglomerates in Korea had been
established during 1998~2001 when the regulations on the shareholding within a business conglomerate were removed.

If this regulation, which is currently imposed on large Korean business conglomerates, would be removed, the past behavior that attempted to strengthen the shareholding
structure might be pursued again. That is, the controlling status of minority shareholders would be secured from a potential hostile M&A threat. Given the fact that the market discipline is still not well functioning in Korea, any changes regarding large business conglomerates should be sufficiently examined before making a formal decision.


5. Analysis on the Takeover Defense and Treasury Stock Holdings | Taehoon Youn

Background and Purpose
Throughout the 1990s, the regulations on stock repurchase have been alleviated. In addition, through the partial amendment of the Commercial Act and the Korea Securities and Futures Exchange Act in 1997, the possibility of hostile takeover has increased. These led to an increase in the amount of treasury stock holdings by domestic companies. While stock repurchasing can be executed for many reasons, it is the stock repurchasing in pursuit of defending the control right of controlling shareholder from hostile takeover attempts by foreign capital that has gained the most public interest.

Since the treasury stock holding is considered to be one of the few available defensive measures against hostile takeover in Korea along with equity investment among affiliates of large business groups, it is considered to be a necessary step to study the treasury stock holding as a takeover defense in Korea before

discussing the introduction of any additional defense measures. In addition, thorough understanding of the motivation behind stock repurchase and sales should precede any attempts to revise the existing regulations on the repurchases, holdings, and sales of own stock.

Main Results
This study performs empirical analysis on the treasury stock holding intended as the defensive mechanism against the takeover threat on corporate control right. This study adopts different methodology and data from existing literature to examine the relationship between companies’ ownership structure and treasury stock holdings, thereby verifying the argument that companies increase treasury stock holding as a defensive measure against hostile takeovers.

While the existing studies deal with either the number of repurchase or repurchase volume per year, we use the ratio of treasury stock to the total stocks issued at the year end as the dependent variable. We focus on the relationship between the ratio and ownership and control structure, using the fixed effect panel Tobit model based on Honore (1992).

The final data used are balanced panel constructed with 458 listed companies from 2002 to 2004. We also utilize a subset of the original data comprised only with companies that are subject to the KFTC’s business group regulations for additional analysis. According to the first analysis based on the whole set of data on listed firms, none of the ownership structure variables affects the level of treasury stock holding ratio. This confirms the result of the existing literature saying that the takeover defense motivation does not hold in Korea. In addition, this study examines the relationship between the share of major foreign shareholders and the ratio of treasury stock, and finds no evidence to reject the null hypothesis that there is no relationship between the two.

A rather surprising result is that the regulatory dummy variable appears to be in a positive and statistically significant relationship with the ratio of treasury stock holdings. The dummy variable shows whether the firm is under the regulation by KFTC on large business groups. This finding led us to the next analysis which only deals with the firms subject to the regulation.

According to this additional analysis for the companies subject to the regulation, the ownership structure appears to be in a close relationship with the ratio of treasury stock holding. This confirms that the takeover defense motivation is effective for at least the firms under the restriction on its shareholding structure. More specifically, the firms that are more important in the group-wide ownership structure, and the firms with higher ratio of shares that are owned by domestic major shareholders (other than the controlling shareholder and its affiliates) tend to maintain higher ratio of treasury stock. Once again, the study examines the relationship between the share of major foreign shareholders and the ratio of treasury stock, and finds no evidence of any significant relationship between them even for the firms that belong to large business
groups.

Conclusion
While there are voices requesting further alleviations of the regulations concerning stock repurchases, considering the fact that the agency problem in Korea is more prominent among the shareholders unlike other countries where the agency problem lies between the management and shareholders, and that there is hardly any mega hostile takeover deals, it seems little too early to consider regulatory mitigations on stock repurchases, sales, and treasury stock holdings. It is always better to have a higher standard on disclosure requirements concerning own stock deals. If stock repurchase is intended to raise the firm value, there would be no problem in attaining approval by the shareholder meeting. It should not, therefore, be a problem even if it is required to have stock repurchase proposition be approved at the general meeting of the shareholders.

According to the analysis, the relationship between the ownership structure and treasury stock is only valid in the cases of Chaebolrelated companies. Therefore, it can be
argued that stricter regulation should only be applied to Chaebol-related companies. It would, however, be a difficult task to introduce another Chaebol-specific regulation,
considering the current movement of mitigating Chaebol-related regulations. Basically, it is recommended to introduce a stricter standard in disclosure and require approval at the general meeting of the shareholders on stock repurchase for all companies, along with ways to allow decision-making at the board of directors in case of emergency, conditional on the ex post approval at the shareholder meeting. It should also be arranged that any damage caused by stock repurchasing decision made by board members should be subject to tort liability litigation.


6. Market Discipline and Regulatory Discipline in the Case of Business Group: Theory and Policy Implications | Sung-In Jun

Background and Purpose
Regulating business groups is not only theoretically interesting because they have distinguished characteristics not observed in a single company setup, but also practically important because Chaebols, dominant players in the Korean economy, have exploited the characteristics extensively, for good or for bad. Business groups come in many forms and colors in terms of the nature of controlling shareholders, the characteristics of the controlled, and the means of control.

Due to their diversity, it is not easy to regulate these groups under a coherent framework. For example, while Germany has adopted an explicit approach of regulating
business groups (Konzernrecht) with a law that is designed specifically to address matters of these business groups, common law countries such as England and the U.S. prefer a standard approach emphasizing the duty of directors only stretched to deal with the business group issues as the situation dictates. In Korea, the Monopoly Regulation and Fair Trade Act regulates a certain class of business groups and holding companies, while the Financial Holding Company Act regulates holding companies whose subsidiaries are financial institutions.

Devices of market discipline are equally diverse. While trading shares and bringing derivative suit against ill-behaved directors are the two typical weapons in the arsenal of
ordinary minority shareholders, there are other issues specific to the settings of business group structure. It becomes increasingly important to control directors of parent or subsidiary company by extending the boundaries of their fiduciary duty. Also, protecting creditors and maintaining the fairness of organic changes of a company have distinct features in a business group.

This paper examines when the regulation of business group is needed and if it is, indeed, needed, how the two typical measures, regulatory discipline and market discipline, perform in other major countries. Specifically, the paper first examines the difference in terms of economic incentives between a stand-alone firm and a business group consisting of many firms, and examines the effectiveness of regulatory disciplines and market disciplines, emphasizing the role of directors in preserving both fairness and efficiency.

Main Results
Business groups have several characteristics that distinguish them from stand-alone companies. First of all, they can pursue joint profit maximization by transferring resources among affiliated companies at non-market prices (insider trading). Inside transactions may or may not be socially efficient, making the essence of regulation the art of distinguishing the two qualitatively different transactions and regulating only the inefficient ones. Socially, inefficient inside transactions come in several forms.

It can increase the joint profit of the group but the source of the increase is not due to efficiency but due to deterioration of compe-tition. Also, it can decrease the joint profit of the group, hence the profit of at least one affiliated company, but still be pursued by the controlling shareholder in order to squeeze out private gains. Even the potentially
Pareto-superior transactions need fine-tuning to turn the potential superiority into a genuine one (no affiliated company is worse off due to the inside transaction).

When the situations which need regulation is arranged vis-a-vis the means to correct them, it is easy to see that joint profit increase due to the deterioration of competition is to be regulated by antitrust laws, while preventing controlling shareholders from pursuing opportunistic gains and protecting creditors and minority shareholders of affiliated companies are to be achieved by devices of corporate laws and related lawsuits. It is worth noting that antitrust regulation almost always takes the form of regulatory discipline, whereas measures related to corporate laws are usually examples of market discipline.

As for the regulatory discipline, the paper examines the legal measures of regulating inside transactions adopted by the Monopoly Regulation and Fair Trade Act of Korea and criticizes the view that regulating inside transactions between affiliated firms are not likely to be necessary since regulating the subsidized firm for its monopolistic behavior is sufficient. The paper emphasizes that regulating only one end of the transaction is bound to be imperfect and it is always prudent to have enough means of regulation to apply as situation dictates. Corporate law issues are difficult to regulate using regulatory discipline since it is essentially impossible to state every illintended
behavior of controlling shareholders. The paper, hence, argues that market discipline is better suited for the situation. As a bridge that connects regulatory discipline
and market discipline, the paper somewhat thoroughly analyzes the German Stock Corporation Act, especially Part 3 (Konzernrecht). Both contract-based business
group and de facto business group are introduced and the prominent features of German system such as domination agreement and indemnification clauses are presented.

The ultimate means, however, to force a company and its directors to compensate for the harm done to shareholders and creditors is the lawsuit brought by parties who are the victims of such negligence. In order to facilitate this ultimate means, it is important to extend the duty of directors and the liability of controlling firm/shareholders. More specifically, such issues as de facto directors, liability and duty of controlling shareholders, restricting the limited liability rule and piercing the corporate veil, regulating the incentives of controlling shareholders to pursue private gains, multiple derivative suit, fidu-ciary duty of directors towards creditors in the vicinity of bankruptcy, and duty of controlling shareholders during merger and acquisition are important.

This paper also criticizes the view that directors shall not be liable for the damage of the individual company to which they belong if they can prove that the business group as a whole enjoys higher joint profits. It is easy to show that when Coase Theorem holds, the traditional rule which makes directors liable whenever damage is caused due to the misdeed of directors also guarantees efficient outcomes, and in the real world where the Theorem does not hold, the traditional rule can be deemed to be closer to an efficient rule since it typically involves less transaction cost.

Conclusion
The paper examines the two discipline devices, regulatory discipline devices and market discipline devices. It confirms that inside transactions within the boundary of a
business group are very likely to cause many issues in antitrust and corporate law areas. The new possibility of carrying out inside transactions can boost the joint profit of business group and even socially be efficient, but it also strengthens the incentive to pursue private gains by providing many new channels to tunnel the resources into the hands of the controllers. The paper emphasizes that while the antitrust issues need to be regulated by regulatory discipline devices, opportunistic incentives are better left to market discipline once the duty of directors and liability of controlling shareholders are extended properly and corporate veil is pierced when necessary.


7. Optimal Takeover Rules in Controlling Minority Structure: Defensive Tactics and Mandatory Bids | Ok-Rial Song

Background and Purpose
What the target shareholders or management can or should do has long been a central question in corporate takeover law literature. Notwithstanding the functional convergence in corporate governance over the world in recent years, significant divergence among major jurisdictions in the location and scope of decision-making power still remains. A well-established principle of the U.S. corporate law, on the one hand, has been labeled as ‘board supremacy.’ In Delaware, for instance, a target board may adopt a variety of defensive tactics-most notably, poison pill-if they believe a hostile bid to be inadequate, and the courts have adopted more and more favorable attitude toward such measures taken by a board. On the other hand, however, the directors in continental Europe are expected to lose such defensive power. Recently, the High Level Group of Company Experts led by Professor Jaap Winter proposed that a target board should be prevented from taking any defensive tactics unless they are approved by target shareholders, and such ‘board neutrality with enhanced shareholder choice’ approach was finally proposed by the EU’s 13th Company Law Directive. Under this neutrality doctrine, the board alone cannot resist to a hostile bid.

Why is there such a huge divergence in the attitudes toward control protection by current controllers? Is there any optimal takeover regime that can be universally applied to most countries? There might be. This paper, however, argues that such divergence has a lot to do with the ownership structure of each country, and thus takeover
rules-standard of review on defensive tactics, in particular-developed in a country with dispersed ownership should not be applied or implanted to the countries where the controlling shareholders are the dominant form of corporate ownership structure. In particular, this paper explores what is the optimal set of rules in countries where a controlling shareholder effectively exercises control over the firms while retaining only a small fraction of claims on firms’ cash-flow. The possibility and agency costs of such ‘controlling minority structure’-hereinafter the CM structure-is already widely acknowledged in law and finance literature, but specific legal policies in such countries have rarely been addressed.

Main Results
In terms of facilitating efficient transfer of corporate control, the critical features of the CM structure are two-folded. One is the relative importance of reducing private benefit
of the controlling minority shareholders. To be sure, it should be admitted that the CM structure might be socially efficient; it arises when the agency costs of dispersed ownership is so severe, or countervailing efficiency gains may be large enough to offset the agency costs in the CM structure. As current law and finance scholarship emphasize, however, the CM structure may exist and persist even when there are no or very small efficiency gains relative to large agency costs, if private benefits of control are large. The larger the private benefits associated with corporate control are, the more distorted the choice in ownership structure might be. Such large private benefits of control are empirically verified especially in emerging markets. In such case, therefore, reducing private benefits of control becomes relatively important not
only from fair distribution perspective but also from efficiency enhancement perspective, and thus corporate law theory should also take into account more seriously the
incentive of controlling shareholders to pursue the private benefits of control.

The other feature of the CM structure is that the agency problems are different in character from those of the dispersed ownership structure. While the agency costs in the
dispersed ownership countries involve the conflicts between the shareholders and management, those of the CM structure arise between controlling shareholders and other shareholders. Such difference seems to be critical because current corporate law provides a set of rules appropriate only for regulating the opportunistic behavior of directors or management. The legal techniques dealing with the opportunism of controlling shareholders have not yet been fully developed, and thus the agency costs on the controlling shareholder side are relatively hard to reduce. In such cases, the market for corporate control as a mechanism to reduce agency costs will be highly evaluated. Again, takeover laws in the CM countries should be more concerned about the controlling shareholder’s incentive to excessively pursue his or her own interests. As a result, the traditional economic rationales that permit shareholders to intervene in major corporate decisions should be also critically reexamined in the CM structure.

Against this backdrop, this paper tackles three issues in current takeover theories. First of all, the current notion of efficiency will be revisited. Suppose, for instance, that the firm value under the initial controller consists of cash flow value S1 = $80 and private benefit of control B1 = $20. Current legal academia explains that a transfer of control is efficient if and only if the firm value under the new controller becomes more than $100, whether the private benefits of new controller increase or not. Thus, if the new firm value is SN + BN = $85 + $10, such transfer is regarded as being inefficient. On the contrary, the transfer to a new controller that leads to the new firm value of SN + BN = $70 + $50, is efficient. Such theoretical conclusion leads to a normative argument that the current M&A rules should facilitate the transfer if a firm value under a new acquirer becomes bigger than that under the initial controller. We argue that such notion of efficiency might be misleading, especially in transfer of control in the CM
structure, since this type of rules may result in ex ante inefficiency of inducing excessive investment in private benefits of control and ex post undesirable effect of moving the corporate assets to the person whose private benefits of control is a highest among the competitors.

To be sure, the main point of the above seems to be merely an analogy of the notion of ‘market for corporate control’ developed in the early 60s. Since then, the commentators have suggested several economic rationales why allowing the management to adopt defensive measures does not hurt but sometimes help target shareholders, despite seemingly detrimental effect to the corporate control market. In this paper, however, we demonstrate that such arguments are flawed at least when there is a controlling shareholder. In the CM structure, there are few, if any, countervailing efficiency gains from allowing defensive tactics. It should be worth noting that permissive legal policy toward defensive tactics does not necessarily mean complete ban on efficient-by conventional usage-control transfer. Still, the potential acquirer is able to takeover the target company through private negotiation with the controlling shareholders, but in such case, he or she must pay for the private benefits of current controlling shareholders. Again, such compensation entails significant ex ante and ex post cost of excessive investment in private benefits of control.

The mandatory bid rule is closely examined in the following chapter, since, as stated above, the outside rival may privately negotiate with controlling shareholders. The economic impact of the mandatory bid rule has been already identified; it tends to prevent inefficient control transfer, but at the same time has a bad effect of discouraging efficient transfer. In other words, the mandatory bid is an appropriate tool if and only if the goal of legal policy is to prevent inefficient control transfer, but as far as facilitating efficient transfer is concerned, the theoretical recommendation is to abolish mandatory bid rule. In the CM structure, however, such established economic theory should be modified in two ways. First, under the modified notion of efficiency as explained above, the detrimental effect of mandatory bid rule might be insignificant. Second, more importantly, since mandatory bid rule do not fully compensate the private benefits of current controller, it is more desirable in terms of the ex ante effect associated with excessive investment to the private benefits.

Conclusion
This paper sheds light on the relationship between ownership structure and takeover rules. Takeover rule determines how much the initial owners or potential rivals are able to capture the private benefits they created. If they know that they are not fully compensated, they are likely to diminish their investment to the private benefits. This is not the only possibility, however. It is even more plausible that, if the private benefits are large, controlling shareholders will increase their shares and move to the concentrated ownership structure. Given that both the concentrated ownership structure and dispersed ownership structure have their own strengths and weaknesses, such movement is not necessarily undesirable. If the concentrated ownership is socially desirable, there is not a problem at all. Even if, on the contrary, the dispersed ownership is more desirable, still the agency costs associated with the concentrated ownership structure are smaller than those in the CM structure. The rule proposed in this
paper may achieve at least the second-best.


8. Hostile M&A and Corporate Defenses in Korea: Legal Perspective | Sunseop Jung

Background and Purpose
In Korea, as there arise more and more concerns on hostile M&A against domestic companies, the ‘legality’ and ‘necessity’ of corporate defenses are becoming an issue of hot debate. Hostile M&A provokes fundamental corporate law issues including the relationship between the shareholders and management. It grows more and more important to establish a proper legal infrastructure for hostile
M&A such as code of conduct to be complied by shareholders or directors, corporate value as a test for measuring the legitimacy of corporate defenses, the party to decide longterm corporate benefits, and tests for judicial review of such decisions. In Korea, most comments on this issue currently take a negative view on the legality of poison pills as a corporate defense measure. There only exist general principles on the directors’ duty of loyalty or fiduciary duty as a legal infrastructure on hostile M&A. Such lack of properly established legal regime leads hostile M&A to a way of ‘unexpected attack’ and ‘excessive defense,’ and exhorts the real function of M&A as a method to enhance corporate value. These conclusions, which are premised on the comprehensive defiance of the effects of corporate defenses that can be used under the current Korean law, could be taken into consideration for further discussion.

As a part of legal analysis, this study evaluates economic benefits of hostile M&A and corporate defenses, examines the laws and practices of hostile M&A and corporate defenses in several jurisdictions including the U.S., U.K., and Japan, and analyzes the necessity and legality of poison pills under the current Korean law.

Main Results
This paper consists of 6 sections: Section II sets the stage for further discussion of this paper. This section defines the boundary of hostile M&A and the role of corporate defenses. It also analyzes the structure and process of hostile M&A, and regulatory regime for poison pills in Korea. Section III examines the necessity and legitimacy to institutionalize corporate defenses in Korean law after the general evaluation of hostile M&A and the strategy of corporate defenses. It is of critical importance to see whether corporate control theory generally applied in the U.S. can also be applied to the Korean corporate
financial environment. Section IV analyzes the laws and practices of corporate defenses, and tests to measure their legitimacy in the U.S., U.K., and Japan. It should be noted that the U.S. and U.K., which are generally considered to have similar corporate legal regimes, take opposite positions on the use of corporate defenses including poison pills. Section V, on the basis of the above discussions, examines the legality of poison pills under the current Korean law and raises several legal issues. Section VI draws some conclusions. The final section summarizes the above discussions and points out several legal issues, which should be settled by legislation to ensure the possibility of poison pills in Korea.

Conclusion
There are two opposite views on hostile M&A and the use of corporate defenses like poison pills. One is to argue the value of hostile M&A and the use of poison pills as a core means to move assets to more productive purposes and thus to revitalize the economic potential of a country. The other is to emphasize the potential abuse of poison pills to expand socio-economic inefficiency under the current corporate structure in Korea. The value of corporate defenses such as the growth of shareholder value can be acquired by introducing mandatory tender offer. Therefore, it is a matter of legislative policy,
not of a necessity, to permit the use of corporate defenses including poison pills.

This study does not argue to expressly prohibit or permit the use of poison pills, which could have both functions and malfunctions as a corporate instrument. However, this study supports the necessity of
introducing a comprehensive concept of share options as a basis for diversification of financial products. Comprehensive share options, if permitted by the Korean company law, can be used for the purpose of corporate defenses. Such concept can settle the oftenmentioned problems of insufficient corporate instrument to be used as a poison pill. However, there still remains legislative policy
choice regarding the requirements for comprehensive share options to be used as a U.S.- style poison pill. Regarding the tests for measuring the legitimacy of poison pills, if permitted, this study argues that they should be left to the judiciary.

제１장 서 론(연 태 훈)
　1절 기업경영권이란 무엇인가?
　제2절 기업경영권 관련 논의의 대두와 외국자본
　제3절 기업경영권 관련 이슈
　제4절 본고의 구성 및 연구개요
　참고문헌


제Ⅰ부 해외자본의 역할에 대한 이해


　제２장 외국인투자자 비중 확대와 자본시장의 안정성(박 창 균)
　　제1절 서 론
　　제2절 외국인의 주식시장 진출 확대
　　제3절 실증분석
　　제4절 결 론
　　참고문헌
　　<부록 1> 기초통계량
　　<부록 2> L2와 L3에 대한 회귀분석결과

　제３장 외국인투자자 비중 확대와 배당 및 투자(박 창 균)
　　제1절 서 론
　　제2절 실증분석
　　제3절 결 론
　　참고문헌
　　<부 록> 기초통계량

　제４장 해외자본과 기업지배구조 및 기업가치에 대한 실증분석(조 성 빈)
　　제1절 서 론
　　제2절 해외자본의 역할에 대한 선행 연구
　　제3절 실증분석
　　제4절 외국인 지분율과 기업가치의 관계
　　제5절 분석의 종합 및 결론
　　참고문헌

　제５장 외국자본의 은행산업 진입 확대에 대한 이해와 규제(김 현 욱)
　　제1절 논의의 배경
　　제2절 외국자본의 은행산업 진입에 대한 이해
　　제3절 외국자본 진입과 관련한 은행 규제
　　제4절 요약 및 결론
　　참고문헌
　　<참 고> 국내 은행산업에 진입한 외국자본의 성과평가에 있어 주의할 사항들
　　<부 록> 은행 임원의 거주?국적 제한에 관한 외국의 사례


제Ⅱ부 경영권 방어 행태 및 관련 제도에 대한 분석


　제６장 기업경영권에 있어서 출자의 역할에 대한 분석(임경묵?조성빈)
　　제1절 서 론
　　제2절 지배권 기여지수의 도출
　　제3절 재벌의 출자구조 및 행태 분석
　　제4절 결 론
　　참고문헌
　
　제７장 기업경영권 방어와 자사주 보유에 대한 분석(연 태 훈)
　　제1절 서 론
　　제2절 우리나라의 자사주 보유 및 관련 제도 현황
　　제3절 기존 연구
　　제4절 실증분석
　　제5절 결 론
　　참고문헌
　　<부 록> 해외 각국의 자사주 관련 규제현황



제Ⅲ부 법·경제학적 관점에서 바라본 경영권 관련 제도의 개선방안



　제８장 기업집단에 대한 시장규율과 규제규율: 이론과 정책적 함의(전 성 인)
　　제1절 문제의 제기
　　제2절 기업집단 구조의 특이성
　　제3절 기업집단에 대한 규제규율
　　제4절 기업집단에 대한 시장규율
　　제5절 요약 및 결론
　　참고문헌
　　<부 록> 본문에서 인용된 독일 주식회사법의 주요 조문

　제９장 지배주주 소유구조와 경영권 방어법제(송 옥 렬)
　　제1절 문제의 제기
　　제2절 기업지배권 시장
　　제3절 경영권 방어와 주주이익: 일반이론
　　제4절 지배주주 소유구조와 경영권 방어
　　제5절 의무공개매수
　　제6절 결어: 지배주주 시스템에서의 경영권 방어
　
　제１０장 적대적 M&A와 기업방어전략 - 포이즌필의 현행법상 가능성과 타당성을 중심으로(정 순 섭)
　　제1절 서 론
　　제2절 적대적 M&A의 의의와 평가
　　제3절 적대적 M&A와 기업방어전략의 필요성
　　제4절 외국 입법례
　　제5절 현행법상 포이즌필의 타당성과 가능성
　　제6절 결 론
　　참고문헌
　　<참고자료 1>
　　<참고자료 2> 사채발행과 내용통제 필요성
　　<참고자료 3> 일본후생연금기금연합회, 기업매수방어수단에 관한 주주의결권행사의 판단기준
　　<참고자료 4> 미국 각주의 반기업매수법