Control premiums that firms pay to acquire listed companies cause losses for minority shareholders and only benefit the controlling stakeholders of the acquired firms, a research report said Wednesday.

To protect minority shareholders, South Korea should revive the mandatory bid rule, the report by the Economic Reform Research Institute said.

The mandatory bid rule obligates a company obtaining a controlling stake to extend the offer to all shareholders equally.

Critics claim the rule prevents value-increasing transactions, restricts M&As and makes restructuring more difficult.

The EU and some Asian countries employ the mandatory bid rule, with some exceptions, such as for companies in financial distress.

In South Korea, the rule was introduced in early 1997 but was abolished in the following year due to the need for speedy M&A during the Asian financial crisis.

To illustrate the need for the rule’s reintroduction, the think tank analyzed four major takeovers in recent years -- KB Financial Group’s acquisition of Hyundai Securities, Mirae Asset Financial Group’s takeover of KDB Daewoo Securities, Kumho Aiana Group’s buyback of Kumho Industrial and Hanwha Group’s acquisition of Samsung Techwin.

In the four takeovers, the combined opportunity loss of minority shareholders from the absence of the rule amounted to 5.4 trillion won ($4.7 billion), the report said.

For example, KB Financial paid 2.47 trillion won to acquire a 100 percent stake in Hyundai Securities from May to October in 2016. This makes the average price per share at 10,444 won.

This means that if the country had the mandatory bid rule, the shareholders of Hyundai Securities, regardless of controlling or minority shareholders, would have received 10,444 won per share.

However, KB Financial paid 23,182 won per share as a control premium to controlling shareholders. This led to additioinal benefits of 680 billion won for the brokerage’s former controlling stakeholder Hyundai Merchant Marine. Hyundai Group Chairwoman Hyun Jeong-eun and her family also received 3.9 billion won in additional income through the process, the report said.

KB Financial also swapped the shares of the financial group and the brokerage at 6,766 won and gave the appraisal rights at 6,737 won to minority shareholders who opposed the acquisition.

This also led to 612.5 billion won in opportunity losses for minority shareholders of Hyundai Securities, on the assumption that they would have sold their shares at 10,444 won, the report said.

“The largest merit of the mandatory bid rule is that minority shareholders can also benefit control premiums. In addition, it can restrict Korean conglomerates’ excessive expansion of subsidiaries because it will spur full takeovers rather than partial takeovers,” said Lee Eun-jung, author of the report and a research fellow at the ERRI.

“To protect minority shareholders and prevent conglomerates from dominating the economy, we should start discussing adopting this rule.”

By Kim Yoon-mi (yoonmi@heraldcorp.com)