Split off proposal could help protect shareholder rights

A proposal to protect shareholder rights in the case of a corporate split off has been drafted by the government to present as a bill to the National Assembly this year.

The proposal was announced Sunday.

Shareholders have complained in recent years that they have lost out when companies have split off subsidiaries, as the share price of the parent drops while that of the newly listed company rises.

In a split off, a company will sell some shares in a promising subsidiary, allowing it to raise capital while maintain control of the newly listed entity.

LG Chem, which listed LG Energy Solution in 2022, is down about 40 percent from its peak. SK Innovation has fallen more than 30 percent since it split its battery unit off in October last year.

Kakao has lost more than half of its value over the past year as it split off Kakao Bank and Kakao Pay.

Shareholders and regulators say that stock owners may not have a strong enough voice in these decisions and that the splits are made without their interests being properly considered.

Under the proposal released Sunday by the Financial Services Commission and the Financial Supervisory Services, three shareholder protection measures will be introduced.

According to the draft, shareholders will have to be notified of any plans for a split and about any relevant analysis within three days of a board vote on the matter. They will have to be given a general time line of the transaction.

Shareholders will be allowed to sell their shares before the split. The price will be negotiated between the shareholders and the company. If they failed to reach an agreement, an average market price prior to the decision will be used.

Even if an agreement is not reached, either party can request a decision from a court.

Under the final provision, the Korea Exchange will be given additional powers, and can prohibit a company from splitting off a business for 5 years if shareholders are not properly protected.

The exchange will review the efforts that the parent company has made to protect its investors, which could include allowing shareholders to swap the parent shares for those of the split off subsidiary or a dividend increase.

Preemptive rights that would allow shareholders to buy additional shares in the future was not included in the package, even though the introduction of preemptive rights was a campaign promise of President Yoon Suk-yeol.

Companies pursue split offs as the transaction allows the parent company to maintain its control of its subsidiary while still attracting investment.

In a spin off, all existing shareholders receive a prorated shareholding in the new company, and the parent has no control. Shareholder rights are protected, as everyone is an owner of the existing company and the newly spun off company in equal proportions.

Public opinion has been turning again split offs. The negative perception of the practice was one factor in Kakao's decision to withdraw its plan to split off its mobility unit.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]