[Companies Raising the Wall]② "A Means of Defending Management Rights... A Cheating Paper Given to Underperformers"

Two Conditions for Companies Targeted as 'Prey' by Private Equity Funds
Dual-Class Voting Rights and Poison Pills Are Also Extremely Rarely Recognized in the US

Capital market experts point out that the efforts of companies to strengthen their defense mechanisms against hostile takeovers are somewhat misguided. The conditions that private equity funds look for in target companies are fixed, and these issues cannot be resolved simply by raising the barriers to management control defense. Rather, the best strategy to prevent hostile mergers and acquisitions (M&A) is to focus on the company's core role by generating profits and actively communicating with shareholders.

Two Conditions for Companies Targeted as 'Prey' by Private Equity Funds

Namwoo Lee, Chairman of the Korea Corporate Governance Forum, said, "For example, the big tech companies in the U.S. have never been attacked," adding, "We need to understand why such coveted companies do not face hostile M&A attacks."

He explained that companies targeted by private equity funds for hostile M&A must meet two conditions. "Fundamentally, the company's fundamentals, meaning its intrinsic value and growth potential, must be strong. They look for companies with global competitiveness," he said. Secondly, "the company must be legally or ethically problematic or have poor governance, resulting in its stock price being undervalued compared to competitors," he explained.

Companies that have failed to 'value up' due to capital transactions benefiting major shareholders or intentional downward pressure on stock prices become prey for private equity funds. Private equity funds temporarily include such companies in their portfolios and then sell them again; companies with already high stock prices have limited room for further increase, making them less attractive.

Lee said, "Although the business community is currently uneasy, there are not many companies in Korea that satisfy both conditions, and if they do, those companies should raise their stock prices," adding, "This aligns with government initiatives like value-up." He stated, "Companies fulfilling the purpose of being listed, that is, generating substantial profits to maintain high valuations and providing shareholders with significant returns through dividends or stock price appreciation, cannot be targets of attacks."

"Differential Voting Rights and Poison Pills as Management Defense Tools Are Like Giving Cheating Sheets to Underperformers"

There are also concerns that the additional introduction of management control defense measures may, contrary to their original intent, become tools for executives and controlling shareholders rather than minority shareholders, thereby weakening the overall competitiveness of the capital market and industry.

Changhwan Lee, CEO of Align Partners Asset Management, said, "Without competition, companies rot," adding, "There is currently a positive movement in the capital market for value-up, but introducing management defense mechanisms like poison pills is a regression for the capital market."

In major foreign countries, management defense mechanisms are used only in exceptional cases and in a limited manner. In the U.S., the differential voting rights system is not a tool for defending management control of large corporations but is primarily used by startups. Since it violates the principle of one share, one vote, it is recognized only in very exceptional cases, and traditional investors such as pension funds, BlackRock, and Fidelity oppose differential voting rights. However, it is exceptionally allowed for companies with tremendous future technological capabilities or where the founder's unique abilities and vision are necessary.

Lee said, "Differential voting rights are granted only to individuals with special visions who create new things like social networking services (SNS) and search engines, and the rights disappear if the person passes away or ownership changes," adding, "It is completely inappropriate for already established Korean companies to introduce such measures." It is also practically difficult to introduce differential voting rights for already listed companies because they must obtain approval from other shareholders.

Lee explained, "Poison pills are currently a dormant system in the U.S.," adding, "It is difficult for a board of directors to make decisions that benefit specific shareholders without benefiting all shareholders. Such decisions immediately lead to lawsuits." He said, "Suggesting differential voting rights or poison pills for companies at high risk of management attacks is like giving cheating sheets to underperforming students," adding, "This is not a desirable direction for the development of the Korean capital market, which is striving for value-up."

Meanwhile, some companies in the business community are choosing to actively communicate rather than raising defense barriers against demands from activist funds. Recently, the UK-based activist hedge fund Palisade Capital acquired more than 1% of SK Square, the largest shareholder of SK Hynix. Palisade believes SK Square's stock is undervalued and is reportedly urging measures to eliminate the discount. An SK Square official said, "We are actively communicating with the fund and gaining many ideas," adding, "Rather than rejecting the fund's claims, we see this as an opportunity to enhance corporate value and shareholder value through existing portfolio value-up, new investments, non-core asset liquidation, and shareholder returns."

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