Hanwha Solutions rights issue sparks shareholder backlash, regulatory scrutiny

Hanwha Solutions' factory in Ulsan is seen in this undated photo. Courtesy of Hanwha Solutions

Controversy is intensifying over Hanwha Solutions’ planned 2.4 trillion won ($1.6 billion) rights offering, as concerns mount over a potential breach of directors’ fiduciary duties under the revised Commercial Act, alongside coordinated resistance from minority shareholders and growing political criticism, market watchers said Thursday.

The Financial Supervisory Service (FSS), the country's financial watchdog, has launched a priority review to assess the legitimacy and appropriateness of the capital increase.

On March 26, Hanwha Solutions said its board approved a plan to issue 72 million new common shares, raising 2.4 trillion won. Some 1.5 trillion won of the proceeds will be used to repay short-term borrowings and corporate bonds, with the remainder allocated to facility investment.

The scale of the issuance, equivalent to about 42 percent of existing shares, and the fact that more than 60 percent of the funds will be used for debt repayment have heightened concerns about share dilution and the transfer of financial strain to shareholders. Reflecting these concerns, the stock fell 23 percent over March 26 and 27.

The firm’s management and outside directors said Monday that they would buy treasury shares in a bid to calm growing backlash. However, minority shareholders have continued to mobilize, arguing that the move puts management interests ahead of shareholder value and breaches directors’ fiduciary duties.

Act, an online retail investor platform, said Hanwha Solutions shareholders have formally requested access to and copies of the shareholder registry. Based on the list, they plan to contact institutional, foreign and other retail investors to build a coalition aimed at securing a 10 percent stake.

They are also calling on the National Pension Service to take a more active stance. “If the pension fund remains passive despite a sharp drop in the stock price that eroded the value of its holdings, it would represent a clear failure to fulfill its duty to the public,” an Act official said.

Earlier, Act also filed a petition with the FSS calling for a rigorous review of the deal, with more than 300 participants supporting the submission.

Criticism has focused heavily on the structure of the offering. Because it is being conducted through a shareholder allocation, existing investors are effectively required to bear the burden of subscribing to new shares. Unlike third-party placements, the deal does not bring in external capital that could ease the pressure on current shareholders.

Compounding concerns, the issue price has been set at a steep discount to the market price, making a significant decline in shareholder value.

Hanwha Solutions' exhibition booth for the WIRE 2024 cable exhibition in Germany in April 2024 / Courtesy of Hanwha Solutions

The Korean Corporate Governance Forum argued that the company's abrupt decision is likely to constitute a breach of independent directors’ fiduciary duties. In particular, it criticized the timing of the board resolution, which came just two days after the general shareholders’ meeting, suggesting that newly appointed directors had insufficient time to conduct a thorough review.

"Under the revised Commercial Act, directors must consider not only the company’s financing needs but also the impact of major decisions on all shareholders," the forum said in a statement.

It questioned whether the independent directors, particularly those appointed shortly before the board meeting, were able to deliberate adequately based on proper financial analysis and mid- to long-term projections. It also pointed to broader concerns about investor protection at key Hanwha Group affiliates, placing responsibility in part on Hanwha Group Vice Chairman Kim Dong-kwan.

Political criticism has also intensified. Rep. Ahn Cheol-soo of the main opposition People Power Party said the company pushed ahead with the capital increase even as the KOSPI had already fallen 12.5 percent amid fallout from the Middle East crisis, further eroding shareholder value.

“By allocating more than 60 percent of the proceeds to debt repayment, the company is effectively passing the consequences of management decisions onto investors, reducing shareholders to little more than a source of cash,” he wrote on Facebook.

Attention is now focused on financial authorities. The FSS has classified the case as a priority review, a designation typically used when the size of an offering is large relative to capital, exceeds 1 trillion won or involves a significant share of funds allocated to debt repayment.

"The review will assess whether the use of proceeds is justified, whether risks are sufficiently disclosed and whether minority shareholder protections are adequate," an FSS official said.

Although the FSS does not have the authority to block the offering outright, market expectations are rising that it could request revisions, as it did last year when it demanded two rounds of corrections to Hanwha Aerospace’ capital increase plan under similar circumstances.

In response, Hanwha Solutions said the board decision was made after extensive review, including advance briefings, detailed analysis and consultations with external experts, and therefore does not violate fiduciary duties.

The company warned that without the capital increase, risks such as a credit rating downgrade, increased refinancing pressure and higher funding costs could undermine corporate value.

"The rights offering is expected to improve our financial position, lowering our debt ratio to below 150 percent and stabilizing net borrowings at around 9 trillion won on a consolidated basis this year," a company official said. "Over the longer term, we aim to further strengthen our financial health by reducing our debt ratio to around 100 percent and managing net borrowings at about 7 trillion won by 2030."