Large Korean companies dismantling major takeover defense

Samsung Electronics hold a shareholder meeting on Nov. 3, 2022. [YONHAP]

Large Korean companies are making moves that are potentially shareholder friendly, canceling treasury shares and raising dividends.

Samsung C&T, a major Samsung Electronics shareholder, announced on Feb. 16 that its board has approved the cancellation all of its treasury shares over the next five years. The shares to be canceled are worth some 3 trillion won ($2.3 billion) at the current market price.

Treasury share cancellation, when coupled with share buybacks, is considered one of the stronger shareholder return policies in which a company cancels a certain amount of treasury stocks to increase the value of the remaining shares, and consequently endorse shareholder interests. It is one of the more frequently implemented shareholder return policies along with dividends.

In Korea, treasury shares are often used for takeover defense. They pay no dividend and have no voting rights, but can be sold to a third party, say, to someone who is in favor of the large shareholder, to exercise the voting rights without having to offer the shares to all shareholders.

“This is one measure of our shareholder-friendly policies,” a spokesperson for Samsung C&T said. “We will uphold policies to promote the rights and interests of shareholders.”

Samsung C&T owns about 24.7 million common of its own shares and 160,000 preferred shares.

Other large companies are making similar moves.

Hyundai Motor canceled 1 percent of its stock on Feb. 1.

Kia announced that it will buy back shares worth 2.5 trillion won in the next five years and cancel half of those in its fourth quarter earnings report.

The two carmakers also raised their dividends. Hyundai Motor increased its dividend by 50 percent to 6,000 won per share and Kia by 16.7 percent to 3,500 per share.

Hyundai Mobis, an auto parts maker, announced on Feb. 14 that it will buy back and cancel 150-billion-won worth of shares within this year.

SK Holdings had announced a 200-billion-won share buyback, and its plans to cancel all shares bought back since March 2022 in August.

“It’s new to see chaebol such as Samsung and Hyundai move actively toward shareholder returns,” said Park so-yeon, a researcher at Shinyoung Securities.

According to Park, the emphasis on corporate governance played a role in the change, since boosting shareholder interests plays a big role in ESG scores. The financial regulators push to improve treasury stock policies also encouraged the moves.

The growing influence of activist funds and common shareholders has spurred the trend as well, as seen in the recent SM Entertainment drama. Align Partners Capital Management, an activist fund with 1.1 percent of SM Entertainment’s shares, was involved in the early stages of the feud when it demanded the K-pop agency fix its governance.

There were 10 activist campaigns in 2020, but in 2022, there were 47, according to KB Securities.

“Many activist funds send letters to corporations like Samsung, SK and LG,” a source from the financial industry said. “Their influence is small so far, but companies are eyeing how other companies implement shareholder return policies.”

Finance think tank Korea Capital Market Institute (KCMI) thinks that this trend can pave the way to dial down the “Korea discount,” or stock value of Korean companies being undervalued compared with that of other countries.

“Inadequate shareholder returns, low profitability and growth are reasons for the ‘Korea discount,” KCMI's senior research fellow Kim Joon-seok said in a report released on Feb. 16.

Some argue for a patient approach towards shareholder return policies.

A board member of a major company, who requested anonymity, said shareholder return policies need long-term plans, and added that coming up with such plans is especially difficult nowadays amid the recession.

“Companies need to look over their governance structure, and activist funds need to refrain from killing the goose that lays golden eggs by making excessive demands,” Federation of Korean Industries’ corporate policy team leader Yoo Jeong-joo said. “They need to keep balance.”

BY CHOI EUN-KYUNG, SOHN DONG-JOO [sohn.dongjoo@joongang.co.kr]