Will new shareholding rule encourage conglomerates' investments?

SK hynix's high-bandwidth memory 3E chips are displayed at the company's booth for SK AI Summit in southern Seoul, Nov. 3. Yonhap

The government is expected to ease a shareholding rule that requires a holding company’s "grandchild firm," or second-tier subsidiary, to own a 100 percent stake when pursuing acquisitions, a move that could pave the way for conglomerates here to accelerate investment through mergers & acquisitions (M&As) or fundraising.

According to government officials, economy-related ministries are set to announce a deregulation package aimed at revising laws related to holding firms and rules separating commerce and finance.

Highlighting the package will be a revision to rules on holding firms having grandchild firms. Korea’s Monopoly Regulation and Fair Trade Act prohibits a second-tier subsidiary of a holding company from having its own subsidiary, but makes an exception when the second-tier subsidiary holds a full 100 percent stake in the third-tier subsidiary.

When revised, the government will allow a second-tier subsidiary to have its own third-tier subsidiary if it owns over a 50 percent stake. This will be applied to advanced industries only, as a compromise plan between business communities’ calls for deregulation and civic groups’ concerns over potential side effects.

The 100 percent rule is aimed at limiting corporate shareholding structures to three tiers and maintaining simple and transparent governance. However, it has become a major constraint in future industries that require massive investments, especially as the market value of promising tech startups has skyrocketed.

The debate over this rule has been centered on SK hynix, one of the world’s leading memory chipmakers. SK hynix is a second-tier subsidiary of SK Group’s holding firm, SK Inc., which controls investment firm SK Square with a 31.5 percent stake. SK Square controls SK hynix with a 20.07 percent stake.

Existing regulations mean SK hynix has been required to purchase a full stake when pursuing M&A deals, such as its 2021 acquisition of the foundry company Key Foundry. As of September, SK hynix operated nearly 60 subsidiaries, fully owning all domestic entities under its direct control.

An artist's rendering of SK Group's semiconductor cluster in Yongin, Gyeonggi Province / Courtesy of SK Group

As the revision will lower the shareholding requirement to 50 percent, it paves the way for SK hynix to pursue M&A activities at lower cost. Since the revision package will also partly allow nonfinancial holding groups such as SK Group to engage in financial leasing, SK hynix can establish special-purpose companies (SPCs) involving financial investors to raise external capital.

The SPCs can build semiconductor fabs and then lease them back to SK hynix. Through this, SK hynix can raise capital for capacity expansion without issuing new shares.

SK Square currently holds only a 20.07 percent stake in SK hynix, while the fair trade act requires a first-tier subsidiary to own at least a 20 percent stake in a second-tier subsidiary. If SK hynix issues new shares, it may weaken SK Square's share, potentially inviting regulatory actions.

Industry officials believe that SK Group is more likely to pursue financial SPCs for securing massive investment capital to meet soaring global memory chip demand, rather than focusing on M&A deals targeting other companies.

In November, SK Group Chairman Chey Tae-won told reporters that enhancing memory production capacity is “something the group must achieve on its own,” adding it is “not a situation that can be solved through M&A deals.” The company has also claimed that it will need around 600 trillion won ($408.1 billion) over the next few years to expand its memory chip production capacity.

Civic groups opposing the deregulation also argue that SK Group had presented what it called a “SK hynix investment model” to the government, using SPCs to raise funds, claiming that the revision effectively loosens rules for the sake of supporting SK hynix’s fundraising.

“If SK hynix seeks to invest in semiconductor facilities, it has to secure resources from its profits and loans first and then tap into issuing new shares,” Solidarity for Economic Reform said Tuesday. “But SK Group wants to skip this process and demanded the government ease regulations.”

It added, “There are expectations that a national investment fund could take part in SK’s plan. If the fund invests into the plan, the only returns it may receive would be lease payments from SK hynix. This means SK hynix and Chairman Chey Tae-won could secure significant profits with limited risk, while the public would bear excessive risks and potential losses relative to returns.”