Nam Hyun-woo has worked as a staff writer at The Korea Times since 2013, mostly covering business and politics. He currently belongs to the Business Desk where he covers topics such as emerging tech, AI, ICT and Korea's chaebol community. Prior to joining the team, he was the paper's correspondent for the presidential office of Korea during the Yoon Suk Yeol and Moon Jae-in administrations.
President's idea to mandate treasury stock cancellation frightens firms
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By Nam Hyun-woo
President Lee Jae-myung’s idea of obliging listed firms to cancel their own treasury shares is raising concerns among firms with high holdings, prompting some smaller companies to delist themselves.
Companies including LS Corp and Hanssem have been using their high holdings of their own shares to protect their managing rights from hostile investors, but the new government’s initiative is adding greater uncertainties, fueling worries that such strategies may no longer be viable.
Throughout his campaign, Lee pledged to institutionalize a rule requiring listed companies to cancel treasury shares “in principle,” so that they can be returned to shareholders as benefits and ultimately buoy the domestic stock market.
“There are some cases of companies purchasing their own shares with their own capital and selling them to friendly parties to serve the private interests of the largest shareholders,” Lee said. “Considering such issues, the government will move quickly to establish new rules.”
President Lee Jae-myung speaks during a Cabinet meeting at the presidential office in Yongsan District, Seoul, Thursday. Joint Press Corps
Though the meaning of “in principle” and other details remain under wraps, industry officials are estimating a certain cap on treasury share holdings.
Unlike the U.S. and other advanced economies, there are many cases here of listed companies holding their own shares without canceling them. Treasury share cancellation refers to a company retiring its own shares, whether already held or repurchased, to reduce the number of shares in circulation and potentially boost its stock price.
Despite those advantages, a number of Korean firms have preferred to hold their treasury shares as a way to safeguard the control of their largest shareholders, as such shares typically do not carry voting rights and can be transferred later to friendly stakeholders when needed.
LS Corp., the holding company of cable giant LS Group, currently holds 13.87 percent of its treasury shares. Although the largest shareholder and related parties together own 32.11 percent of the company, market watchers note that control could be at risk at any time, because Chairman Koo Ja-eun and more than 40 of his family members each hold only small stakes.
Due to this structure, LS Corp. has maintained a high level of treasury share holdings and recently formed what the market described as a “strategic alliance” with Korean Air.
LS Corp. issued 65 billion won worth of exchangeable bonds backed by its own shares on May 16, allowing Korean Air to obtain LS Corp. shares with restored voting rights. If Korean Air exercises those rights in favor of LS Corp., it would effectively help block a hostile investment attempt by Hoban Group.
The move drew criticisms for undermining shareholder interests, but was also seen as a strategy to defend the company’s management control. However, if the Lee government mandates the cancellation of treasury shares, such a strategy will not likely be viable.
LS Corp. CEO and Vice Chairman Myung Roe-hyun speaks during the company's annual general meeting of shareholders at the company's headquarters in Yongsan District, Seoul, March 27. Courtesy of LS Group
Furniture maker Hanssem also holds approximately 29 percent of treasury shares. The company’s largest shareholder is a special purpose company led by IMM Private Equity, with 35 percent.
Despite analysts’ calls for the company to cancel its treasury shares to boost its stock price, the company has retained them in an apparent consideration for maintaining an upper hand in the event of the private equity’s potential exit.
Similarly, Telcoware, a network solutions firm on the benchmark KOSPI, recently decided to delist itself by buying back all of its shares in the market.
The move was widely seen as a preemptive response to the possibility of a mandatory treasury share cancellation. Telcoware holds 44.11 percent of its own shares, while the largest shareholder owns only 30.64 percent. If the company were to cancel all of its treasury shares, it could face difficulties in maintaining stable control.
“Firms with low ownership by the largest shareholder and a high proportion of treasury shares could become targets for activist funds,” Daishin Securities analyst Lee Kyung-yeon said.
Against this backdrop, attention is growing over whether the holding firms of some of Korea’s top conglomerates, such as SK and Lotte, will cancel their treasury shares.
SK Inc., the holding company of SK Group, holds 25 percent of its own shares, while the largest shareholder entity owns a combined 25.5 percent, which includes Chairman Chey Tae-won's 17.9 percent stake. The company has stated that it has no plans to cancel its treasury shares.
Lotte Corp., the holding company of Lotte Group, holds a 32.5 percent in treasury shares. In a regulatory filing on March 18, the company said it is considering selling up to 15 percent of its own shares to its largest shareholders but is only “reviewing” the possibility of canceling a portion, without providing further details.