By Yoon Ja-young
As global activist hedge funds are increasingly threatening local businesses, entrepreneurs are demanding the government provide them with shields such as poison pills and golden parachutes.
According to business information provider Chaebul.com Monday, owner families of the country's top 25 companies and their friendly forces held on average 43.23 percent stake. When excluding treasury stocks which lack voting rights, the figure falls to 38.86 percent. Small shareholders take up 30.3 percent, followed by foreign investors at 20.48 percent and the National Pension Service at 5.99 percent.
The friendly stake for the owner family of Samsung Group stood at 34 percent. In Samsung Electronics, it was a mere 17.74 percent. Hyundai Motor Group's owner family had a 34.17 percent friendly stake which would vote with them.
Experts say local businesses are vulnerable to “wolf pack” attacks by hedge funds.
“The hedge fund which first attacked Barnes and Noble in the United States, for instance, had an 18.7 percent stake in the bookstore chain. When combined with the stakes of other hedge funds hidden behind it, the attackers held 36.14 percent. Hedge funds are increasingly taking this wolf pack strategy,” said Shin Seok-hoon, a senior researcher at the Korea Economic Research Institute.
He explained they hide themselves and avoid obligations such as disclosure rules by using diverse financial contracts such as options, futures and swaps as loopholes.
“Korea, meanwhile, is discussing a commercial law revision which aims at restricting governing shareholders' right. Some of them don't even exist in other countries, and they are likely to open the doors for speculative hedge funds to hurt management.”
The justice ministry recently submitted the revision plan that includes a cumulative voting system and multiple derivative actions. They all aim at restricting large shareholders' rights. Experts, however, point out they also need shielding.
“Unlike other countries where the businesses are also equipped with shields, the government seems to be only sharpening swords that could be abused by global hedge funds,” Shin said.
Jung Koo-ryong, CEO of Inzi Controls who currently serves as the president of the Korea Listed Companies Association, said businesses are in urgent need of shields for managerial control such as dual class stocks and poison pills, which are common in other major countries.
Under a dual class stock system, certain stocks are equipped with more voting rights, enabling the largest shareholder to protect their managerial control. Poison pills, meanwhile, allow shareholders to purchase new shares at low prices in case of hostile M&A threats. The United States, Japan and France have adopted both measures.
Xiaomi, which will be listed on the Hong Kong bourse this year, is also scheduled to be under the dual class stocks. Its chairman will have more than half of the voting rights despite holding a 31.4 percent stake, which will protect him from interventions by hedge funds.
“Sovereign attacked SK Group in 2003, and Elliott threatened Samsung in 2015. Recently, an activist fund is meddling in management despite the government's positive evaluation of Hyundai Motor Group's efforts to improve its corporate governance structure,” Jung said.
He pointed out Sovereign Fund reaped 900 billion won by attacking SK, and investor Carl Icahn reaped 150 billion won from KT&G as Korean firms were vulnerable to attacks without protective measures.