Closed-End Mutual Funds To Deal in Merger Targets

The Financial Supervisory Service on Monday set regulations for a new type of privately-offered mutual fund that invests in stocks of companies with a view to mergers and acquisitions.

Under the regulations, the so-called M&A mutual funds must be closed-end and not redeemable for at least one year. Closed-end funds accept no more investor contributions after a fixed amount of capital is invested.

The financial watchdog agency also allowed the M&A funds to buy stakes, including convertible bonds, even if they do not aim to acquire a company.

The funds are required to report to the financial authorities when they purchase more than a 5 percent stake in a given corporation and every time their investment changes by 1 percentage point.

They also have to make public disclosure as to whether their purpose is to simply make equity investments or to take over a firm's management control.

Once a fund secures more than a 5 percent stake with a view to taking over a company, it is not allowed to resell the shares within six months after the stock purchase.

Therefore, the service said, investors will be able to tell, at a point when it acquires a 5 percent stake, what a privately-placed M&A fund's purpose is.

An individual or a corporation can manage such a fund directly or trust its management to an asset management company.

In such a case, the individual or the head of the corporation is required to join the fund's management board.

Securities companies are not allowed to manage a fund.

The M&A mutual funds must be sold through a commission agent. The number of investors is limited to 50 when a fund is set up, and may not exceed 99 after the establishment.

The supervisory agency also has allowed an M&A fund to be closed after accomplishing or failing to achieve its goal by paying investors in cash or stocks.

"Privately-offered M&A funds are expected to boost the local stock markets and help enhance corporate transparency," said Shin Hae-yong, a capital market regulator at the Financial Supervisory Service.

by Chung Sun-gu