[Why&Next] SK·Doosan 'Rebalancing' Summons 국민연금 Stewardship Code

Controversy Continues Over Merger Ratio, Voices Calling for 국민연금's 'Role'
'Samsung C&T Trauma' 국민연금 Likely to Decide at Review Committee
Merger Could Fail if Stock Purchase Rights Are Exercised

As SK Group and Doosan Group accelerate their rebalancing (business restructuring), attention is also focused on the direction of the National Pension Service's (NPS) exercise of voting rights regarding the mergers of their subsidiaries. This is because the atmosphere is unfavorable for optimistic views on the mergers, with ongoing controversies mainly among minority shareholders who argue that existing shareholder value is being damaged, and even political circles getting involved. In particular, since the controlling stakes in the subsidiaries targeted for merger by each group are not high, the NPS, which holds the next largest share after the 'owner family,' could become the 'casting vote.'

According to the Financial Supervisory Service's electronic disclosure system on the 25th, SK Innovation and SK E&S will hold extraordinary general meetings of shareholders on August 27, while Doosan Enerbility, Doosan Bobcat, and Doosan Robotics will hold theirs on September 25. These meetings are to approve the merger proposals between SK Innovation and SK E&S, and between Doosan Bobcat and Doosan Robotics, respectively. Since mergers require special resolutions, approval must be obtained from at least two-thirds of the attendees at the meeting and at least one-third of the total issued shares.

"Merger ratios are absurd" Calls for National Pension Service's role

Doosan holds a 68.19% stake in Doosan Robotics, and Doosan Enerbility, the major shareholder of Doosan Bobcat, holds 46.08%, both quite high, so smooth approval is expected. SK E&S, an unlisted company, is similarly controlled by SK Holdings with a 90% stake. The problem lies with Doosan Enerbility and SK Innovation, whose major shareholders hold 30.67% and 36.25% respectively, indicating relatively low control. Both also have about 20% foreign ownership. Other minority shareholders are voicing dissatisfaction, claiming that the merger ratios are calculated to favor major shareholders and disadvantage minority shareholders. The merger ratio between SK Innovation and SK E&S is 1 to 1.19, and between Doosan Robotics and Doosan Bobcat is 1 to 0.63.

Judging by the shareholding structure alone, passing the merger proposals is by no means easy, and public opinion is also cold. Doosan, in particular, is under heavy fire. The National Assembly has proposed the 'Doosan Bobcat Prevention Act,' and the Korea Corporate Governance Forum criticized the merger as a "stock exchange between an undervalued blue-chip company (Doosan Bobcat) and an overvalued theme stock (Doosan Robotics) exploiting the merger ratio clause." Calls are rising for the NPS to exercise its voting rights in accordance with its stewardship code. The NPS is the second-largest shareholder in both SK Innovation and Doosan Enerbility, holding 6.85% of Doosan Enerbility and 6.28% of SK Innovation.

Exercise of appraisal rights could derail merger

In the 2015 Samsung C&T shareholders' meeting, which was controversial over merger ratios, the merger between Samsung C&T and Cheil Industries passed with 69% approval. Without the NPS's support, which held about 11% of shares at the time, the merger would have been impossible. However, it was later revealed that the Minister of Health and Welfare and the head of the NPS Fund Management Office pressured for approval, resulting in prison sentences. This incident triggered the introduction of the stewardship code in 2018. The aftermath of that merger is still ongoing. An NPS official stated, "To recover damages incurred during the merger process, we plan to file a damages lawsuit against those involved in the merger within this year." According to the People's Solidarity for Participatory Democracy, the estimated damages range from at least 520 billion KRW to up to 675 billion KRW.

Having learned a bitter lesson from Samsung C&T, many expect that the current merger proposals will be decided by the Stewardship Responsibility Committee (SRC). While general voting rights exercises are decided by the Fund Management Office, if the decision is difficult or if more than one-third of SRC members request it, the SRC decides on the voting rights. The SRC is a specialized committee established under the National Pension Fund Management Committee, the highest decision-making body for fund management, to implement the stewardship code. It consists of nine members: two each recommended by employer, employee, and regional subscriber groups, and three recommended by expert organizations. Hong Chun-wook, CEO of Prism Investment Advisory and a former NPS fund manager, said, "Since this is a difficult issue to decide independently, it will likely be referred to the SRC. Given that the NPS opposed the merger between SK C&C and SK in the past, it is hard to be optimistic about the pension fund's approval."

Moon Sung, a lawyer at Yulchon Law Firm and former head of the NPS shareholder rights exercise team, said, "Before exercising voting rights, the purpose and merger ratios will be scrutinized, and the timing of the merger decision, which favors the major shareholder and disadvantages minority shareholders, will be a key issue. If the company fails to adequately explain these three points, it is highly likely that the NPS will vote against the merger." If the market price at the time of voting is significantly lower than the stock purchase price proposed by the company, the NPS may exercise its appraisal rights to avoid losses. Exercising appraisal rights means abstaining from voting. In this case, for Doosan Enerbility, the NPS's holdings amount to about 900 billion KRW, exceeding the stock purchase claim limit of 600 billion KRW, which would trigger grounds for terminating the merger agreement. This means that exercising appraisal rights could lead to the merger's collapse.