[Letters] ‘Poison pill’ for businesses

There has recently been a renewed discussion and media play about a possible “poison pill” system to be enacted in Korea. Those who argue for further protection of management via this mechanism insist Korea needs one and compare the absence of such protection to those countries that have them, such as the United States.

I will openly say that the United States and Korea are very different in terms of shareholder structure and shareholder activism, or, to pick a better word, shareholder participation. In addition to the above, in Korea we have a social value system which does not necessarily prohibit but does strongly discourage dissent and open criticism; traits that work against shareholder participation in many cases.

Most good publicly listed companies (i.e. not empty “shells”) have a very high insider holdings structure and cross-holdings in Korea unlike the U.S., thus preventing any realizable “hostile” attack by mere potential voting percentage. I dislike the word hostile since it implies the insider management is necessarily the “good” guys (since in many cases they are not, clearly .?.?. often tramping upon minority shareholder rights) but in Korea we call anyone who disagrees with management as hostile by the media, so let it be for now.

Most individuals and other minority shareholders rarely vote during shareholder meetings and those who voice differing opinions are often cast as “weird/strange” and “time wasters”.

Management often increase their holdings via quasi-legal means such as having their relatives buy discounted convertible notes (e.g. BW and CB) whenever they like to. This practice, while legal or not, happens in real life in Korea ultimately diluting, or also known as “stealing” from minority shareholders. But let’s avoid such mean words from hereon.

The Confucian culture was adapted to an extreme in Korea, sometimes having strange consequences. In the investment world, it means most Korean individuals who hold shares of listed companies are unlikely to voice their discontent even if their mind says so clearly. Most will just wash it out over a dinner with soju with friends but rarely actually vote their thoughts in shareholder meetings nor bother to even attend. In fact, in many shareholder meetings the majority of attendees are either company employees or bodyguards invited by the company just in case some “strange” shareholders decide to take a real trip to the meeting in person.

Here are some technical issues often missed by many, including the media:

In order to execute an unsolicited tender offer (TOB), one needs to have a brokerage to act as the main coordinator in the process of gathering shares from those who support such deals. But in Korea all major brokerages so far refuse to do such jobs due to fear that acting as main brokerage executing an unsolicited TOB against management would tarnish their image, and in the long-run limit their business with jaebeol. So TOB is fully legal on paper in Korea but in practice they must be preorganized and preagreed with management not ones by uninvited entities.

Stock for stock offers are also not recognized in Korea, a practice common in markets such as the U.S. In other words, offers needs to be cash only, in Korean accounts, limiting the range of suitors for the targeted companies.

In addition to the above, there are more but I will skip them as they are of less import. The key takeaway here is that one of the reasons the Korean stock market is relatively cheap in valuation is the high insider holdings and limited shareholder participation, I would say.

If we have in addition to the above a system of further management protection via poison pills, one may conclude the equity market will suffer further valuation discounts. Korea would not benefit from such actions as a discounted equity market has many negative implications, including higher real interest rates and thus higher costs borne by the ultimate sufferers of such results ? the individual consumers, the common folks.

In other words, adding more protection to the already well-protected management of listed companies is de facto pro-elite action and anti-average citizen action. After all, humans tend to behave their best when they know their actions may have consequences.

Management will behave better and cleaner if they know they can and will be shown the exit door by minority shareholders. And management should not worry about being asked to go out if they did their best in the first place ? and let the shareholders recognize this and make a judgment. Trust the shareholders.

In closing, Korea may some day need a poison pill (as we do not know what the future brings us), but clearly not today.

Um Joon-ho, Fidelis Magnus, LLC