Cross-share Holdings
It seems that the law banning cross-share holdings, which was not expected to pass the National Assembly before the end of this year, will be able to make it through the National Policy Committee and the plenary session sooner or later, though in a limited manner.
The revision is likely to have a less-than-expected impact, because the committee accepts the existing forms of cross-share holdings while adding some exceptional clauses to the revision bill. Nevertheless, big businesses’ adoption of a holding company structure is likely to be accelerated following the ban on circular equity investment.
According to the Fair Trade Commission’s data, only 22 out of the 62 major business groups in Korea owned a holding company, as of the end of September this year. For example, SK, LG, GS, Doosan, CJ, and LS have already turned themselves into holding companies. Meanwhile, the Samsung and Hyundai Motor Groups are still maintaining a circular equity investment structure. In addition, it is said that even the converted conglomerates are in possession of many subsidiaries out of the structure.
Cross-share holdings have been criticized as an expedient tool for the inheritance and donation of property, strengthened business ownership, support for insolvent affiliates, and circumvention of regulations. Under the circumstances, President Park Geun-hye has shown a strong will to put a brake on it, including the law in her election promises and national policy goals.
The economic community has been opposed to the law, mentioning that the ban on cross-share holdings could result in shrinkage of investment and M&As, and make it difficult to cope with hostile M&A attempts. This is why the National Policy Committee opted to allow exceptions in certain cases.
The community is relieved to see that the cross-share holdings which have been made so far are not subject to the prohibition. According to the Economic Reform Research Institute’s report published in July last year, as much as 9.6 trillion won (US$9.1 billion) of equity value has to be sold in order to remove the circular equity investment of the top 15 groups. The amount is approximately 6 trillion won (US$5.6 billion) for the Hyundai Motor Group and about 1 trillion won (US$943 million) for Samsung.
The revision bill is expected to add speed to their conversion into holding companies down the road, because the conversion is the surest way for corporate successions not based on cross-share holdings.
Concern over Vulnerability to M&A by Speculative Funds
In the meantime, some industry insiders are pointing out that the ban on cross-share holdings will lead to a shrinkage of investment amid today’s adverse business conditions, such as the tapering of the Fed’s quantitative easing exit strategy, expansion of the scope of ordinary wages, and ongoing weak yen trends. They say that the prohibition could be particularly fatal for those going through restructuring.
For example, investment through capital increase should be made when a company intends to restructure its subsidiaries, but the efforts could be made difficult if it is regarded as a new circular equity investment. Korean companies like STX PanOcean could be taken over by foreign funds at a giveaway price, too.
Another controversy lies in the limited defense of ownership, that is, the ban on cross-share holdings means that local enterprises cannot deal with hostile takeover attempts by foreign funds. “The government is moving to deter investment on one side while trying to revitalize the economy by means of private investment on the other,” said the Federation of Korean Industries.
Exceptional Clauses Allowed for Certain Cases
Four exception clauses are to be included in the revision bill. Specifically, the comprehensive exchange and transfer of shares are allowed when deemed necessary during the course of the four cases of corporate mergers and divisions, acquisition of entire business rights, exercise of security rights and reception of payment in substitutes, and business restructuring.
The problem is the specific scope of the exception clause regarding business restructuring. The National Policy Committee recently held a legislative subcommittee meeting and decided that cross-share holdings for restructuring purposes include the investment of private property by a business owner and participation of a subsidiary shareholder in a paid-in capital increase. In this case, it is allowed without limitation in the equity share, and an increase in share ratio caused by forfeiture has to be addressed within one year.