Legislative Comments on the Supplementary Assessment Methode for the better Taxation

on the Unlisted Stock / Sung Jai, Choi

In case of unlisted stock, it’'s almost impossible to get the fair and reasonable market price of the stock, because transactions are very rare and most of them are not arms length. By the same token, we have to use a set of assessment tools for the taxation purpose. Under this context, formula based approach as we now adopted in our gift and estate tax law or kinds of assessment techniques such as DCF can be used for the assessment purpose.

Our formula based system has been working smoothly before we encountered a number of derivative lawsuits and criminal cases as follows involving the valuation of unlisted stock. In these cases, Korean Supreme Court rendered its decision that formulae under the tax laws can never be applied to other cases without any modification and the Courts should think it twice for finding fair value of the stock at issue. Fairness now has become the maxim in dealing with the cases as far as derivative lawsuits and criminal cases are concerned.

However, current situation, that is, a single unlisted stock has several market prices, one for tax law purpose and the other for corporation law purpose, is not a efficient and desirable one for both of the regulators and other market participants. In this article by shaping the current formula as legislative alternatives, I try to narrow the gap between those tax and non-tax market price. A series of comments in this article will be helpful for the betterment of our current perplexing moment in the assessment of the unlisted stock at our hands.

The Valuation of the Closely Held Firms in Criminal Cases / Kee-Hwa CHUNG

In this study legal doctrines of Korean courts are reviewed in criminal cases of SK group, Dong-bu group and Samsung group. Some members of the Board of directors were charged with the breach of trust in those cases. Korean criminal law prohibits members of Board of directors to gain a benefit or to transfer a gain to the third party by the breach of trust, resulting a loss to the concerned corporation.
 

The Supreme Court ruled that SK C&C suffered a loss due to the over-valuation of the right of management. SK C&C paid 30% premium to get 40.7% of the stocks of Walker-Hill corporation, which is a subsidiary of SK group and closely held by the CEO of SK group. The ruling is based on the judgement that SK C&C need not get the stocks and the CEO urgently wants to sell the stocks. This judgement is not sufficient to prove the over-valuation of premium. The fact that SK C&C might sell the stocks at the higher premium in the future transaction means that SK C&C is likely to get a gain.

Dong-bu Construction Corporation sold Dong-bu World Corporation at the price of 1 Won per stock, still standing guarantee for the debt of Dong-bu World Corporation. The Supreme Court ruled that Dong-bu Construction Corporation suffered a loss due to the under-valuation of Dong-bu World Corporation. The ruling is based on the judgement that buyers are not taking any risk and future value of the firm may be positive if proper investment schedule is carried out. But the value of Dong-bu World Corporation may be negative when it is sold. If the value is negative, the terms of transaction mentioned above may be beneficial to the buyer as well as to the seller.

Samsung SDS Corporation issued convertible bond with warranty undertaken by third party. The Supreme Court ruled that the conversion price of the bond is under-valued, resulting the loss of the Corporation. The Higher Court had to calculate the fair price to set aside the judgement and ruled that the conversion price below more than 1/3 of the court calculated fair price must be under-valued of the bonds. The test is based on the normative judgement, not on the empirical judgement. It is not clear that the test is sufficient to prove the loss of the Corporation beyond reasonable doubt.

It is said that Korean Supreme Court is not rigorous to prove the loss of the corporation in criminal cases charged with the breach of trust. As a result members of board of directors suffers high risk of punishment. Some suggestion are followed to reduce social cost from criminal cases charged with the breach of trust.

(ⅰ) The civil remedy ⅰ is more efficient than criminal punishment in the case of the breach of trust.

(ⅱ) Court is well prepared to review the reasonableness of the procedure of valuation of closely held corporation, not the reasonableness of valuation itself. If the procedure of valuation of closely held corporation is reasonable, criminal punishment is not desirable.

(ⅲ) If the court has to make a judgement about the loss of the corporation, it has to demand the proof beyond the reasonable doubt.

Suggestions for DCF methode to value unlisted stock in Corporate Law / Sin Seuk Hun

This Article presents a normative analysis of DCF methode to value unlisted stock in Corporate Law. It is generally accepted that discounting the firm's free cash flows provides the best measure of value. The value of the stock is calculated to be the pro rata net present value of all future free cash flows. However, one might argue that control value must come out of minority stockholders and law must recognizes that there are some premium of value that belong to corporation. This represent an inappropriation of minority stockholders value. However, there is no formal mathematical relationship between a control premium and a minority discount. A controlling stockholder is free within the limits of the law of fiduciary duty to pursue policies that are in the best interest of the controlling stockholder as long as minority stockholders are not harmed. Judicial attention to protect minority stockholders where estimated future cash flows are found to be depressed as a result of fiduciary misconduct, or where such cash flows fail to include elements of value that belong to the corporation being valued, the best way to address the corresponding reduction in the determination of “"fair valu”" is badjusting those company cash flows upward. The courts must make such adjustments on a case-by-case basis by determining fair value using a DCF analysis. To courage value-enhancing transactions and discourage value-decreasing transactions, Korean Court seek for DCF methode to value unlisted stock in Corporate Law.