[Inside Chodong] Steamed Buns Without Filling and Retail Investors

[Asia Economy Reporter Song Hwajeong] As social distancing measures have been strengthened ahead of the year-end and New Year holidays, split gatherings are becoming widespread. People who want to hold year-end parties and other gatherings split the number of attendees to avoid exceeding the limit and book accommodations or restaurants accordingly. Under the current distancing rules, private gatherings are allowed for up to 4 people. If the number exceeds this, they split the group and reserve two separate rooms.

Splitting is also trending among companies. Many companies are separating business divisions to create separate corporations and then going public in a series of so-called "split listings." Since most of these involve spinning off core business units considered future growth engines, there are concerns that the original parent companies may end up like "steamed buns without filling."

The problem is that corporate splitting is disadvantageous to minority shareholders. There are two types of corporate splits: physical division (muljeok bunhal) and personnel division (injeok bunhal). In the case of personnel division, existing shareholders receive shares in both the newly established company and the surviving company according to their shareholding ratio. In physical division, the existing company holds 100% of the shares of the new company. From the company's perspective, physical division is advantageous because it can secure 100% ownership of the new company and raise funds through listing. Therefore, most companies that have recently undergone splits have chosen the physical division method. Investors who invested in the company based on the growth potential of the core business feel frustrated when that business is spun off into another company and listed separately. Moreover, since the core business is separated, the existing company's stock price inevitably falls, causing losses. LG Chem, which surged last year due to its secondary battery business, has recently been hitting new 52-week lows day after day. The stock price, which exceeded 1 million KRW in January this year, has dropped to the 630,000 KRW range. LG Chem spun off its battery division to establish LG Energy Solution. LG Energy Solution is scheduled to go public in January next year, and it is expected that demand related to secondary batteries will concentrate on LG Energy Solution after the listing, negatively impacting LG Chem's stock price. SK Innovation, which also spun off its battery division like LG Chem, is in a similar situation. Its stock price, which reached an intraday 52-week high of 327,500 KRW in February, has fallen to the 220,000 KRW range. At the end of last month, it even broke below the 200,000 KRW level. SK Innovation spun off its battery division to establish SK On. CJ ENM also saw its stock price decline after announcing last month that it would spin off major production functions of its entertainment, drama, film, and animation businesses through physical division to establish a new company. Since then, the stock price has fallen for eight consecutive trading days, dropping rapidly from the 180,000 KRW range to the 130,000 KRW range. NHN's stock price also plunged following news of a physical division of its cloud business. On the 24th, NHN announced it would simply and physically split its cloud business to establish "NHN Cloud" (tentative name). As a result, the stock price fell by 9.87% on the 27th. Due to the company's unilateral decision, individual investors must endure not only the loss of investment in core businesses but also the decline in stock prices.

As corporate split listings lead to the erosion of shareholder value for individual investors, presidential candidates have also pledged to improve related regulations. On the 27th, Yoon Seok-yeol, the People Power Party's presidential candidate, announced a pledge to modernize the capital market through fair recovery, including strengthening investor protection when companies go public after physical division. The pledge includes granting preemptive rights to parent company shareholders when a new business is spun off and listed as a separate company. Lee Jae-myung, the Democratic Party's presidential candidate, also promised to revise regulations related to simultaneously listing parent and subsidiary companies to prevent damage to parent company shareholders during physical division.

Enhancing the value of shareholders who trusted and invested in the company is the duty of corporations. This should not be ignored solely for the benefit of companies and major shareholders.

This content was produced with the assistance of AI translation services.