Korea Inc. under attack

Samsung Group has won the first round
in their battle against an activist American
hedge fund trying to block a merger of
two Samsung companies, a crucial move
for a power transition in the family-run
Korean corporate empire. The Seoul District
Court dismissed an injunction request
from Elliot Associates in an attempt
to overturn Cheil Industries’ $8 billion
takeover bid for Samsung C&T, in which
Elliot holds a 7.1 percent stake. The hedge
fund claims the merger “significantly undervalues”
its shareholding. The court
ruled that the price was set in compliance
with current laws.
The hedge fund filed for another injunction
to nullify the voting rights of
KCC Corp., which increased its stake in
the builder to help Samsung in its takeover
bid. A ruling is due before the shareholders’
meeting on July 17. Outside of
court, international proxy advisory firms
have upped their support for Elliot and
are urging foreign investors in Samsung
C&T to vote against the merger proposals.
A ruling determining the validity of KCC’s
new stake of 5.79 percent and which side
the National Pension Service . the staterun
pension fund that holds a swing vote
with 11.21 percent . will take could determine
the fate of the deal.
What comes next could be more worrisome
than the fight between Samsung
and the foreign funds. During the fast industrialization
period between the 1960s
and 1980s, the Korean government encouraged
companies to go public. It hoped
Korean companies would be able to raise
funds more stably through the stock market
rather than resort to expensive bank
loans. Listed companies were given various
tax incentives.
Today, it is an entirely different world.
Interest rates are low, making it cheaper
for companies to borrow rather than issue
shares. Banks are willing to lend funds to
companies cheaply. Unlisted companies
are no longer disadvantaged in terms of
taxes. In a family business, the owner of
an unlisted company pays less inheritance
taxes when bequeathing shares to his
heir. He doesn’t need to worry about
pleasing shareholders or disclosing details
about management.
Foreign companies were the first to
capitalize on the loopholes. They began to
leave the Seoul bourse. Online shopping
companies like Auction and Gmarket that
were acquired by America’s eBay went
private from 2004. U.S. healthcare company
Inverness, which bought Korean
firm Standard Diagnostics, had the unit
delisted in 2010. Hankuk Electric Glass,
acquired by Asahi Glass, and Kukje Electric,
which merged with Hitachi, also
withdrew from the Korean bourse. 3node
and China Food Packaging of China also
bowed out. Toray Chemical, formerly
Woongjin Chemical, is also taking steps to
get off the local bourse.
The number of unlisted companies
with assets of more than 2 trillion won
($1.78 billion) jumped last year to 60 from
39 in 2007. There have been zero initial
public offerings since 2012. No companies
want to go public. The owner of a company
with 3 trillion won in assets said
being unlisted helps with tax payments
and the hereditary corporate succession. It
also is not easy to make long-term plans
for a listed company as shareholders demand
immediate results. Companies with
large capitalizations like Samsung, SK
and KT&G are often targetted by speculative
hedge funds. Hostility towards big
corporate names runs deep in our society.
The companies feel the heat when foreign
investors together with credit rating agencies,
advisory groups and the media gang
up on them.
American corporate giants enjoy a different
status. Google, for instance, offers
Class A and Class B common stock that
differ in respect to voting rights. Each
share of Class A common stock is entitled
to one vote per share, while 10 votes are
given to each share of Class B stock. The
co-founders of Google own 92.5 percent
of Class B stock, which are far fewer than
Class A shares, and command 60.1 percent
of voting rights. Such control has allowed
Google to make aggressive management
decisions, purchasing 200 online
companies like YouTube and Android
over the last decade. Mark Zuckerberg,
founder of Facebook, has majority
voting power because he holds Class B
stock that entitles him to 10 votes for each
share. Warren Buffett has 200 votes for
each of his shares in Berkshire Hathaway.
Rights of minority shareholders must
be respected. But at the same time, management
rights should also be guaranteed.
If a company’s management comes under
attack, its owners will spend more to buy
up shares rather than invest for the future.
Only when companies are happy to go
public will jobs be created. Only in that
situation will the Korean economy have a
solid future. Samsung’s battle should not
be a lonely fight. If Samsung loses, other
companies could fall prey to outside predators.

*The author is a senior editorial writer of the JoongAng Ilbo.

by Lee Chul-ho