SK, Hanwha, LS face heightened risks amid controversial revision of Commercial Act

SK, Hanwha and LS have come under greater litigation risks, as the passage of a controversial amendment to the Commercial Act grants minority shareholders more leeway to accuse the firms’ board members of breach of trust if their stock value plunges after multiple listings of their subsidiaries, according to experts and industry officials.

The three conglomerates are particularly exposed to the risk, at a time when they push for listings of key affiliates over the next couple of years. Under the amended act, shareholders are capable of holding a firm’s board of directors accountable for any stock fall of the mother firm, if its stock price plummets following the listing of affiliates.

The main opposition Democratic Party of Korea made a strong push to pass the amendment, citing the need to protect shareholders. Corporate boards of directors had been obliged to perform their duties only for the companies, but the scope has been expanded to include shareholders after the revision.

This has drawn a strong backlash from business circles, as the amendment of the act will end up delaying most firms’ key decision-making processes at the protest of shareholders or activist funds.

Those in favor of the latest amendment argue that there should never be a recurrence of the case from LG Chem. The company’s stock value hovered around 1 million won ($690) until January 2021. But it has since displayed a steep downward curve, after the company split off its cash-cow battery unit and pushed for its listing. At the time, LG Chem shareholders, who incurred serious losses, cried foul over the firm’s decision.

Legal experts said companies will go through hardships by defending against sequential lawsuits from minority shareholder groups and activist funds here and abroad.

“More shareholders are expected to file lawsuits against companies in case of stock fall, but stock prices are affected by diverse factors, not the listings of their subsidiaries,” Choi June-sun, professor emeritus at Sungkyunkwan University Law School, said.

SK Group headquarters in Seoul / Korea Times file

For now, companies have no choice but to defend themselves against such lawsuits, rather than taking any preemptive actions due to the lack of relevant legal basis, according to the professor.

“Any laws should be balanced for both sides, but this is not the case for the latest commercial act revision, which is unfair,” Choi said. “In Korea, there is no institutional system for companies to counteract any excessive demands from activist investors.”

Officials from the conglomerates said they are watching closely the status quo to minimize any possible repercussions from the passage of the amendment.

LS Group plans to list five subsidiaries in the near future for aggressive capital expansion. Koc Electric, an affiliate of LS Electric, is speeding up its planned initial public offering possibly around May 2027. The group is gearing up to list a total of five affiliates.

“It became more complex for us to set out a plan for the future (due to the passage of the amendment),” an official from LS Group said. “Our listing plans are somewhat different from others, as we will list acquired entities unlike spin-offs of existing firms. We will have to deepen more communication with our shareholders.”

SK Group is also set to list some of its key affiliates for the next couple of years. SK On, the battery unit, is scheduled to go public as late as 2028. The group also pushes for the listing of two other affiliates, SK ecoplant and SK Enmove, to attract more capital.

Officials from Hanwha Group pass through its lobby at its headquarters in Seoul in this undated file photo. Korea Times file

Hanwha Group has also initiated a legal procedure for the listing of Hanwha Energy. The company is considered a key affiliate for smooth management control succession from the group’s incumbent Chairman Kim Seung-youn to his three sons. Hanwha Energy is fully owned by the three sons.

Officials from SK and Hanwha declined to comment on the commercial act revision, citing the sensitivity of the issue.

Industry officials said major conglomerates will push ahead with their plans for the listing of their subsidiaries, regardless of the commercial act revision.

“It leaves much to be desired that conglomerates here have to bear the burden of litigation in their major decision-making, but they will not delay their key decisions amid escalating trade uncertainties in an era of U.S. President Donald Trump,” an official from a manufacturing firm said.

Overseas shareholders and activist groups are also feared to make ill use of the revised act by excessively intervening in local firms’ management, which will hold back their sustainable growth at this crucial time when Trump steps up pressure on the trade-reliant Korean economy, according to the official.

Amid escalating concerns over the issue, Korea’s major business lobbies — such as the Korea Chamber of Commerce and Industry and the Federation of Korean Industries — released joint statements Wednesday, urging Acting President Choi Sang-mok to exercise a right to refuse the latest amendment.

“A number of scholars and the nation’s business circle have pointed out juridical problems on the amendment, and it goes completely against the global standard,” they said in the statement.

In most developed nations, including the United States, Germany, Canada and Japan, corporate board of directors are obliged to fulfill their roles for the company, not the shareholders, according to the business groups.

“The biggest problem is that the amendment thwarts most firms’ spirit for innovation and weakens competitiveness of local firms in the global market, which will come as a downside risk to the Korean economy,” it said.