ed Hedge funds' attack

Time to consider tools to protect management rights

U.S. hedge fund Elliott Associates’ attempt to block the proposed merger of Samsung affiliates is rekindling debate over whether the government should adopt measures to protect conglomerates’ management rights from hostile takeover bids.

Business representatives say Korean companies can easily fall prey to attacks by speculative foreign funds because of a lack of proper tools to defend management. What is allowed now is selling treasury shares to friendly forces, just as Samsung C&T, a construction and trading unit of Samsung Group, did to KCC, a construction material supplier, to revive their voting rights. Korea is also one of the few countries in the world where the “one share, one vote’’ system is enforced under commercial law.

In fact, Korea’s large companies have often been the target of hedge funds seeking to “eat and run.’’ In 2003, Monaco-based Sovereign Asset Management attacked SK Corp., the flagship of the nation’s third-largest conglomerate. In 2006, Carl Icahn, an American financier, and his partners launched a hostile bid for KT&G, after the tobacco and ginseng corporation had dismissed an acquisition offer.

Concerns about global funds’ attacks on Korean companies were reignited in June, when Elliott, which had bought a 7.12 percent stake in Samsung C&T, opposed the company’s merger with Cheil Industries, Samsung’s de facto holding company. More recently, U.K.-based fund Hermes Investment Management disclosed that it owned 5.02 percent in Samsung Fine Chemicals through related parties. Also, there are rumors that other hedge funds might attack Hyundai Motor and other flagship Korean companies where the largest shareholders’ controlling stake is insufficient and corporate governance is weak.

Most problematic is that these speculative funds aim to maximize profits by threatening management rights. It would be utterly pointless if they are allowed to take the helm of a painstakingly built company ― albeit temporarily ― before disposing of it.

So most industrialized countries have adopted tools that can help protect management control, including “poison pills’’ that enable existing shareholders to buy shares cheaply when there are takeover attempts.

Our business organizations have long argued for the introduction of such systems. In 2009, the Justice Ministry announced a revision bill to the commercial law to that effect, but to no avail, in the face of anti-business sentiment prevalent in our society.

Of course, it’s possible for controlling shareholders in family-run conglomerates to abuse such protective schemes in expediting their hereditary succession of wealth. Some critics even suggest that it’s not easy for hedge funds to launch attacks on Korean companies, given the stakes held by chaebol tycoons, their families and their related subsidiaries.

Rep. Park Young-sun of the main opposition party and other lawmakers submitted a revision bill to the foreign investment promotion act, which would restrict foreign investment “when it hampers the smooth operation of the Korean economy.’’ But this seems not to be enough.

The government needs to consider introducing more stringent measures to ensure that top managers can run businesses stably without any worry about attacks from speculative funds. Needless to say, it’s necessary to improve our backward governance structures.