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By Anna J. Park
Frequent split-offs of domestic listed companies have become a target of criticisms among the country's retail investors. Minor shareholders have become acutely aware that Korean-style corporate split-offs seem to serve only the interests of major shareholders, to the detriment of all else.
The recent IPO of LG Energy Solution (LGES) is one such typical case, in which the split-off of LG Chem's most lucrative battery operation resulted in decreased stock value to minor shareholders, while triggering a massive influx of capital into the new corporate body. Ever since LG Chem announced the split-off plan for its battery business last year, the company's share price has been on a downward trend.
The core reason that the LGES IPO harmed the minor shareholders of LG Chem was that the original shareholders of LG Chem did not receive any extra shares or proportionate rights to the newly created affiliate's shares, unlike conventional split-off or spin-off systems in the U.S. stock market.
LGES is just one example. The Korean stock markets are full of similar split-off cases; SK Bioscience's split-off from SK Chemical, Kakao Bank and Kakao Pay's split-off from Kakao, soon-to-be listed SSG.com's split-off from E-mart as well as SK on splitting off from SK Innovation.
The problem is that all these split-offs are done in a way that does not respect the original shareholders' ownership, as they are stuck with the parent company's stock which inevitably sees its value shrink, rather than being given a stake in the more lucrative new entity.
This type of split-off is rare in the U.S., where corporate law and stock market regulations stipulate listed companies' clear obligation to shareholders. Corporate directors have fiduciary duties to the company as well as the firm's shareholders, so minor shareholders may pursue legal action against any breach of fiduciary duties, such as in the event of a split-off that leaves them high and dry.
Thus, market experts point out that legal differences between Korea and the U.S. are one of the key causes of the diverged split-off systems between the two countries, saying revisions to Korea's Capital Markets Act and Commercial Act will be needed to improve the current situation. Unlike conventional spin-offs or split-offs in the U.S., where existing shareholders are either given new shares of a newly created corporation or given a choice to exchange their old shares for the new ones, split-offs in the Korean stock markets have been conducted without offering any benefits to original stockholders.
As the voices of opposition among minor shareholders have grown fiercer on the matter, the country's financial authorities are vowing to rectify the problem.
"The first major issue of the IPO of a split-off company is the protection of minor shareholders. As the issue is not only related to the capital market but also to the country's Commercial Act, the FSS is currently examining the matter to come up with measures, and it plans to consult with related ministries, if the matter requires a revision to the Commercial Act," Financial Supervisory Service (FSS) chief Jeong Eun-bo told reporters on Wednesday, adding that the FSS as well as the Financial Services Commission (FSC) are jointly looking into ways to improve the nation's problematic split-off system.
Aiming to earn more votes, major presidential candidates have also announced their pledges to regulate the infamous system. Both Lee Jae-myung from the ruling party and Yoon Suk-yeol of the main opposition party pledged to revise related regulations, bestowing either a right to purchase stocks or preemptive rights to new shares to minimize the risk to minor shareholders. Ahn Cheol-soo of the People's Party also vowed to prohibit the current style of split-off.
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