Treasury Stocks Play Magic
South Korean conglomerate owners have strenthened their managerial control by shifting the governance structure of their groups to a holding company system through such measures as spinoffs and in-kind investment.
The Korea Fair Trade Commission (KFTC) recently looked into 19 business groups’ 22 holding companies and announced on Nov. 13 that 28.2% and 44.8% of the holding companies are owned by owners and owner families, respectively.
The KFTC explained that such high shareholdings are based on treasury stock-related tricks like spinoff and investment in kind. “For holding company structure adoption, an enterprise is divided into holding and operating companies, during which treasury shares without voting rights are given voting rights, and then owner family members can strengthen their control even without share purchase,” said the commission.
According to the KFTC, 12 out of the 19 business groups adopted a holding company structure by conducting investment in kind after spinoff, and owner family members’ shareholding more than double in the 12 groups. In addition, the holding companies’ shareholdings in the operating companies almost doubled as a result of new share allotment to the holding companies’ treasury shares and in-kind investment.
For example, the shareholding of owner family members jumped from 11.01% to 30.45% in SK, from 7.4% to 34.03% in LG, from 27.7% to 55.18% in Amore Pacific, and from 16.89% to 50.11% in Hanjin Heavy Industries.
At present, the owner family members have shares in 113 companies outside the holding company structure, and 46 out of them are subject to intra-group transaction-related regulations. It has been frequently pointed out that conglomerate owners run subsidiary companies outside the structure to do more transactions inside their groups. The KFTC is going to monitor the companies.