Controversy resurfaces over SK hynix's potential Solidigm IPO

Controversy has resurfaced over SK hynix’s reported efforts to list its NAND flash memory subsidiary Solidigm in the U.S., after reports said the company had selected lead managers for an initial public offering (IPO), despite repeatedly maintaining that “nothing has been confirmed.”

In an effort to protect retail investors, Korean financial regulators have introduced rules that prohibit parent-subsidiary listings in the domestic market in principle while allowing exceptions under certain conditions. However, because Solidigm is seeking an overseas listing, the case has raised questions over whether SK hynix could face regulatory penalties if it fails to comply with shareholder protection requirements.

Bloomberg reported Thursday that Solidigm has selected Goldman Sachs and Morgan Stanley as lead underwriters for its planned IPO in the U.S. next year. The offering, if pursued, is expected to raise approximately $10 billion and value the NAND flash memory maker at up to $100 billion.

Solidigm's parent company, memory chip giant SK hynix, has maintained that no decision has been made regarding the IPO. In an Oct. 1 statement, SK hynix said that "nothing specific has been decided regarding Solidigm," adding that any decision on whether to use external or internal capital would “be made after comprehensively considering its economic impact on existing shareholders.”

The company reiterated its position in response to the Bloomberg report, saying: “We are reviewing various options to strengthen Solidigm’s competitiveness, but no decision has been made regarding its IPO.”

Rumors surrounding Solidigm's potential IPO circulated throughout the past summer, fueling controversy whether it is a duplicated listing of parent companies and subsidiaries among individual shareholders of SK hynix.

Solidigm's ownership structure involves multiple layers of parent companies. Solidigm is owned by U.S.-based AI Company, which is controlled by SK hynix. Above SK hynix are SK Square and SK Group's holding company, SK Inc.

Except for AI Company, all of these parent companies are publicly traded, and some investors argue that Solidigm's value is already reflected in their share prices. Critics say listing Solidigm separately could undermine the value of the parent companies and ultimately hurt their existing shareholders.

Similar controversies have emerged in Korea over the past IPOs of LG Energy Solution and the separate listings of major Kakao Group businesses. The overseas listings of LG Electronics' Indian subsidiary and Hyundai Motor's Indian subsidiary have also drawn similar criticism.

To address these concerns, the Financial Services Commission (FSC) began allowing parent-subsidiary listings only in exceptional cases from Aug. 3, requiring companies to fulfill five obligations, including assessing the impact of such listings on shareholders and protecting minority shareholders.

However, the restrictions on listings apply only to the domestic market.

According to the minutes of a July 22 meeting of the Securities and Futures Commission, a commissioner asked whether the chances of such penalties in domestic listings were slim because companies that fail to meet the requirements would be blocked from listing their subsidiaries in the first place. An FSC official confirmed this, but added that penalties could arise “in overseas listings because the Korea Exchange (KRX) does not review such offerings.”

This means that companies that fail to meet the five obligations would be barred from listing their subsidiaries domestically, while those pursuing overseas listings could face penalties after the listing if they fail to fulfill the requirements.

Some critics, however, argue that Solidigm's potential listing differs from past cases.

While companies such as LG Energy Solution were spun off from their parent companies' core businesses and listed separately, Solidigm was established following SK hynix's acquisition of Intel's NAND business and accounts for a relatively small share of SK hynix's consolidated revenue. Based on each company’s reported sales, Solidigm accounted approximately 9.3 percent of SK hynix’s sales in the first half of this year.

Against this backdrop, calls are growing for SK hynix to clarify its position on Solidigm's potential listing. Rep. Ahn Cheol-soo of the main opposition People Power Party wrote in a Facebook post Thursday that SK Group Chairman Chey Tae-won should clearly state whether Solidigm will pursue an IPO.

“Retail shareholders have already suffered substantial financial losses from duplicate listings of subsidiaries, as seen in the case of LG Energy Solution,” Ahn wrote. “Since rumors of Solidigm's IPO first emerged, SK has consistently offered evasive explanations instead of clarifying the facts. … “How could SK treat its shareholders this way unless it sees them as nothing more than a source of money?”