[Why&Next] Record-breaking Management Control Disputes in Listed Companies... "Warning Signal for Korean-style Governance"

More Lawsuits Than Last Year's 'Record-Breaking' Number
Korean-Style Governance Vulnerable to Management Disputes Is the Cause
"Without Resolving Korea Discount, Risks Will Remain Exposed"

Disputes over management rights in listed companies are increasing day by day. This year, there are even more lawsuits than last year, which was the highest level in the past five years. Some analysts say this is "a warning signal for the Korean-style governance."

According to the electronic disclosure system on the 4th, there were 231 cases of 'litigation filing/application (management rights dispute lawsuits)' reported during the first to third quarters. This is a 7.9% increase compared to 214 cases during the same period last year. In 2023, a total of 266 lawsuits occurred, making it the year with the most management rights disputes in the 2020s. If the current pace continues, lawsuits related to management rights this year are expected to approach 300 cases. Hanmi Pharmaceutical Group, which has been embroiled in disputes since the beginning of the year, is still ongoing, and recently, disputes involving Korea Zinc have not ceased.

"Blood is thicker than water" is an old saying... Private equity funds emerging as 'catfish'

The apparent reasons for the sharp increase in management rights disputes can be summarized into three main points: ▲ Diluted ownership and weakened ties of the owner family after second-generation management ▲ The elevated status of private equity funds ▲ Increase in individual shareholders and activist funds. Park Joo-geun, CEO of Leaders Index, a corporate analysis research institute, said, "In the past, circular shareholding was common, but now most owner families control groups with small stakes through holding companies," adding, "As ownership is diluted due to inheritance taxes during succession, control weakens, creating space for institution-only private equity funds and hedge funds to intervene, which is the current trend in the capital market."

In fact, applying this to the recent case of Korea Zinc, the Choi family, who hold the chairman position, own only 15.6% of shares. The largest shareholder is Youngpoong, owned by the Jang family, with 25.4%. Fundamentally, since the owner family's stake controlling management rights is weak, the structure is such that disputes can arise anytime if the 'sense of partnership' is shaken. A hedge fund official said, "Foreign investors are also aware that Korean companies' governance is weak, so they are always eyeing potential targets." He added that the governance of Korean companies has not changed since the 'Sovereign incident' 21 years ago, when the foreign asset management firm Sovereign became the largest shareholder of SK Inc.

Moreover, as the scale and status of institution-only private equity funds grow, their involvement in management rights disputes is increasing as they seek new opportunities. MBK Partners, the largest private equity fund operator in Northeast Asia, had assets of about 40 trillion won as of the end of February, with the combined sales of invested companies reaching about 63 trillion won. The total commitment amount for domestic institution-only private equity funds reached 136.4 trillion won, breaking the record again last year. Among general private equity funds, so-called 'hedge funds,' the number of 'activist funds' that actively participate in management has also increased significantly, which is another factor in management rights disputes. The number of Korean companies attacked by activist funds last year was 77, a 9.6-fold increase compared to 8 in 2019.

'Korea Discount' also plays a role in disputes

Korea is considered one of the countries where the gap between the corporate value (valuation) assessed by the stock market and the M&A transaction price is large. It is common to pay a significant premium over the market price under the name of 'management rights premium.' Just this year, private equity fund operator Q Capital recently acquired drama production company Chorokbaem Media by paying more than three times the recent transaction price, and cases of paying tens of percent to several times more than the stock market price are not uncommon. An investment industry official said, "If the Korea Discount (the undervaluation of Korean companies) continues, where corporate value is not properly reflected in the stock market, management rights disputes will never subside."

Since most Korean companies have similar governance and succession risks are expected to increase in the future, the general market outlook is that management rights disputes will continue to rise for the time being. It is said that second cases like 'Korea Zinc' and 'Hanmi Pharmaceutical' will continue to emerge. According to the corporate data research institute CEO Score, the largest shareholders of listed companies are still mostly first-generation owners (55.7%), but second-generation (25.6%) and third- and fourth-generation (10%) owners also hold a significant and gradually increasing share. Private equity funds are the largest shareholders in 2.2% (58 companies). Meanwhile, experts point out that stock prices, which have surged due to management rights issues, often return to their original levels after disputes end, so caution is advised when investing.