[Viewpoint] Corporate Physical Division and Shareholder Protection Elevated to a National Agenda Item

Nam Gil-nam, Director of Capital Markets Office, Korea Capital Market Institute

One of the capital market tasks included in the 110 national agenda items of the Yoon Seok-yeol administration, announced by the 20th Presidential Transition Committee in early May, was shareholder protection related to physical division. The task regarding physical division involves revising regulations to ensure that the rights of minority shareholders of the parent company are not infringed when a new business is split off and listed as a separate subsidiary. The reason why physical division, introduced in 1998 during the process of overcoming the foreign exchange crisis for efficient corporate restructuring, has made it onto the new administration’s national agenda list is due to the significant backlash from minority shareholders against physical divisions and split listings by large conglomerates in recent years.

Although investor concerns about physical division are high, regulatory frameworks cannot be established based solely on a few socially spotlighted cases. There were 47 cases of physical division among listed companies in 2021, and 55 cases in 2020. More than half of these were physical divisions of KOSDAQ companies. While physical divisions by some large conglomerates attract media attention, non-conglomerate companies are also implementing physical divisions for various purposes ranging from attracting investment to restructuring.

Reactions to physical division differ depending on the market. While news of physical divisions by large companies is perceived negatively in the KOSPI market, it is treated relatively positively in the KOSDAQ market. Additionally, there is a tendency for the corporate value of physically divided companies to improve in the mid to long term, indicating differences depending on the investment period. Therefore, for more fundamental institutional improvements, it is necessary to base them on an in-depth analysis of the actual conditions of physical division.

Even if the number is not large, the problems revealed so far regarding physical division cannot be ignored. In particular, the abuse of physical division by controlling shareholders for private gain likely occurred frequently in the backward corporate governance environment where minority shareholders’ rights were not properly protected. Therefore, to protect minority shareholders, it is necessary for controlling shareholders and management to communicate with minority shareholders about the purpose and effects of physical division, and to establish various means to reconcile interests among shareholders beyond just voting at shareholders’ meetings.

In this regard, in March, financial authorities revised the Corporate Governance Report guidelines to require companies to explain their policies for shareholder protection, such as collecting minority shareholder opinions and protecting dissenting shareholders’ rights when pursuing physical division, and if such policies do not exist, to explain the reasons and future plans. Although strengthening the requirements for the Corporate Governance Report is a soft norm, it has made physical division more stringent than before, which could lead to meaningful changes.

The preparation of Corporate Governance Reports primarily targets large companies and will expand to all KOSPI-listed companies from 2026, which means KOSDAQ companies are excluded. Furthermore, simultaneous listings of parent and subsidiary companies, including split listings through physical division, reveal problems from the perspective of corporate value for both parent and subsidiary companies, necessitating countermeasures. Empirical analysis shows that simultaneously listed subsidiaries have relatively lower corporate value among newly listed companies, and the corporate value of the already listed parent companies shows a discount effect after the subsidiary’s listing. Therefore, in the case of simultaneous listings, there is a need to strengthen listing examinations from the perspective of enhancing corporate value. Ultimately, before introducing drastic new regulations, it is necessary to meticulously supplement existing regulations and evaluate their policy effects.

Nam Gil-nam, Director of the Capital Market Division, Korea Capital Market Institute

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