[Economy Pulse] The Final Piece for Strengthening Shareholder Rights

Dual Listings Must Mandate Investor Protection
Mandatory Tender Offer System Should Be Introduced Gradually
Preventing Share Price Suppression Requires Incentive Measures

The rights of ordinary shareholders have been strengthened. Agenda items at general shareholder meetings can now be deliberated online. When electing multiple directors, voting rights can also be concentrated on a single candidate. Most notably, the directors' fiduciary duty to shareholders has been legally codified, and the retirement of treasury shares has become mandatory. Amendments to the Commercial Act for the protection of shareholder rights and the transparency of corporate governance were enacted at lightning speed. Discussions that had long stalled were all concluded within just a few months.

It feels as if we have reached the end point of strengthening shareholder rights. Once begun, it must be brought to a conclusion. The final pieces of the puzzle may be the prohibition of dual listings and the introduction of a mandatory tender offer system. There have been several cases where, during dual listings or corporate acquisitions, only the shares held by controlling shareholders were purchased, resulting in the value of ordinary shareholders being undermined. When a parent company that is already listed spins off a core business into a subsidiary, lists the subsidiary, and then monopolizes its shares, the parent company’s ordinary shareholders are left owning a mere shell company. When only the controlling shareholders' shares are acquired at a premium during equity acquisitions, ordinary shareholders end up trapped at lower market prices.

Therefore, the financial authorities have decided to prohibit dual listings in principle. However, exceptions will be made only when business independence, management independence, and investor protection are guaranteed. In the case of the mandatory tender offer system, although there are differing views on the criteria, price, and scope of application, the authorities are pursuing a plan to mandate the purchase of all remaining shares when more than 25% of shares are acquired.

Dual listing is not a significant issue in major economies. In the United States, parent companies typically own 100% of their subsidiaries’ shares, so dual listing cases are extremely rare. In Europe, strong regulatory controls on corporate governance lead to a low frequency of dual listings. In Japan, due to capital market reforms that restrict cross-shareholdings, the number of delistings among dual-listed companies has been increasing. The prohibition of dual listing aligns with global trends. However, when applying exceptions, the review criteria for business and management independence must be clearly defined. Conditions for allowing dual listings should also be differentiated by type, such as physical or spin-off divisions. Most importantly, investor protection is key. The consent procedure for ordinary shareholders should be mandatory. Ordinary shareholders should be given priority allocation of public offering shares or, conversely, be granted appraisal rights. The fiduciary duty of parent company directors to shareholders is essential. On the other hand, dual listings aimed at promoting growth or efficiently attracting investment through overseas subsidiaries should be considered as exceptions.

The global standard for the mandatory tender offer system is the European model. When 30% of shares are acquired, a tender offer for all remaining shares at the same price must be made. In contrast, the United States does not have a mandatory tender offer system. It is difficult to immediately introduce the European model in Korea, given the chaebol-centered governance structure. At the same time, it is not feasible to follow the U.S. model, which is based on a well-established market competition system. Therefore, I propose a plan that requires a tender offer for 50% plus one share of the total shares outstanding when more than 25% of shares are acquired. Subsequently, the scope of the tender offer can be expanded in stages. Compared to the European model, this proposal lowers both the threshold and scope of application, considering both corporate and ordinary shareholder perspectives. Exceptions should be made in cases of restructuring or industrial reorganization.

The true final piece of the puzzle is preventing the artificial suppression of share prices. Prohibiting dual listings and implementing a mandatory tender offer system are of little benefit if share prices remain low. However, the proposal currently being discussed in the National Assembly regarding share price suppression needs to be revised. It is illogical to uniformly apply a PBR of 0.8 across different industries, given the varying characteristics. Due to the nature of taxation, incentives may be more effective than penalties. My consistent suggestion has been to lower the gift and inheritance tax rates for companies with a PBR higher than the industry average. This approach seems more rational. Both the carrot and the stick are necessary to achieve policy goals.

From the perspective of controlling shareholders, this series of shareholder rights enhancement measures may be perceived as constraints on management activities and growth. However, strengthening the rights of ordinary shareholders will drive greater transparency in management and improvements in corporate governance, ultimately leading to enhanced corporate value. After all, the desire for a company's success is shared by both controlling and ordinary shareholders.

Junseo Lee, Professor of Business Administration at Dongguk University

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