[Reporter’s Notebook] Poison Pill Is Toxic for the First Step of 'Value-Up'

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"If there is no competition in a corporation, the company will eventually rot." Recently, Lee Chang-hwan, CEO of Align Partners, whom I met, pointed out this in response to the business community's claim that the poison pill (Poison pill, a right to subscribe for new shares as a defense against hostile takeovers) should be introduced in Korea. The poison pill is a system that grants existing shareholders the right to purchase shares at a price lower than the market price to prepare for hostile mergers and acquisitions (M&A) or management rights infringement. As its name suggests, the poison pill is a deadly poison that breaks the opponent's will to secure shares.

The business community argues for the introduction of the poison pill based on statistics showing that the number of Korean companies targeted by activist funds has increased about tenfold in four years. In fact, during last month's regular shareholders' meeting period, the activities of activist funds, which emphasized enhancing shareholder value and improving governance, stood out. Through 'vote battles,' outside director candidates entered the board, and some companies actively accepted shareholder proposals. Discussions related to 'corporate value-up policies' to resolve the chronic Korea discount (undervaluation of the Korean stock market) led these changes.

The business community fears the intensified activist funds and voices the introduction of the poison pill more than ever, but at this point, the poison pill could be poison to the entire domestic capital market. According to the Fair Trade Commission, the internal shareholding ratio of large business groups subject to disclosure last year reached 60%. It is an absolutely difficult structure for hostile M&A to succeed. It is hard to find companies with such high friendly shareholding ratios of the controlling family in the U.S. and France, where the poison pill has been introduced. Rather, it is highly likely to block even legitimate M&A that secures future growth engines.

Moreover, the value-up has just taken its first step. The average price-to-book ratio (PBR) of domestic listed companies is only 1.05 times, leading to many criticisms that "stock prices are undervalued compared to corporate value." This is significantly lower compared to the U.S. (3.6 times), Japan (1.4 times), and Taiwan (2.1 times). The poison pill inevitably weakens the value of the government's value-up program. It is obvious that management defense measures will favor executives and controlling shareholders over minority shareholders.

In advanced capital markets, various agendas are carefully examined to determine what helps shareholder interests and corporate growth. Excessive claims are naturally rejected. Concerns about the controlling family's management rights are nothing but excessive worries. At last month's Samsung C&T shareholders' meeting, the coalition of foreign activist funds demanding large dividends was completely defeated in the vote battle. The business community should not worry about hostile M&A, which has never succeeded even once in the domestic market, but rather focus on resolving the Korea discount to establish the value-up that has just begun.

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