Securing Voting Rights and Tax Benefits... 'Regular Tactic' Foundation Contributions

Partial Exemption of Inheritance and Gift Tax When Contributing Stocks
Rare Cases of Monetization for Public Interest Projects
Effective Holding Company Role by Exercising Voting Rights of Treasury Shares

It has become common practice for large conglomerates to establish nonprofit corporations such as social contribution foundations and contribute their treasury shares to exercise voting rights through these entities. There are growing calls to revise the Commercial Act to better protect shareholder rights and to more meticulously regulate the voting rights of shares contributed to public interest foundations.

Under the current Inheritance and Gift Tax Act, shares contributed to public interest corporations can be exempted from inheritance and gift tax by 5% up to a maximum of 20% (on the condition that voting rights are not exercised). Additionally, according to the Fair Trade Act amended in 2020, shares acquired or owned by public interest corporations affiliated with mutual investment restriction groups are generally restricted from exercising voting rights, but there are various exceptions. First, if the public interest corporation is the sole shareholder of a specific affiliate, it can exercise voting rights. In the case of listed companies, voting rights up to 15% combined with related parties can be exercised only on major agenda items such as appointment and dismissal of executives, amendments to articles of incorporation, mergers, and business transfers. This is intended to allow defense against hostile mergers and acquisitions (M&A).

From a corporate perspective, if used well, it is a win-win situation where treasury shares without voting rights can be contributed to increase friendly equity and achieve tax savings. It is pointed out that this is also the reason why HL Holdings, the holding company of HL Group, is contributing about 470,193 treasury shares (4.76% of issued shares) to a foundation that has not yet been established. Professor Hong Ki-hoon of Hongik University’s Department of Business Administration said, "Contributing treasury shares purchased for the purpose of enhancing shareholder value to a foundation is not positive for shareholder value and can be seen as a means of defending management rights," adding, "This behavior contradicts the recent trend of valuing the rights of minority shareholders and shareholder value."

There are also voices that stock contributions may not align with the purpose of "fulfilling social responsibilities." This is because unless the shares are sold and converted into cash, the shares themselves are unlikely to substantially aid public interest activities. Practically, if it is difficult to sell the shares, dividends must be received, but the dividend payout ratio of domestic companies is relatively low. There are even criticisms that some companies abuse public interest corporations as de facto holding companies. Professor Lee Chang-min of Hanyang University’s Department of Business Administration explained, "In fact, corporate foundations and other public interest corporations should sell shares or otherwise generate cash to carry out public interest projects, but most do not and just hold the shares," adding, "This is the background to the classic problem where shares contributed to foundations are used to strengthen control or defend management rights."

Recently, foundations have also become a focal point in the management dispute of Hanmi Pharmaceutical Group. This is because if the Gahyeon Cultural Foundation and the Im Seong-gi Foundation, which are related parties of Song Young-sook, chairwoman of Hanmi Pharmaceutical Group, exercise voting rights at the Hanmi Science shareholders' meeting, the outcome of the management dispute could be significantly affected. To prevent this, the Im Jong-yoon and Im Jong-hoon brothers have raised criticism against the foundations under Hanmi Pharmaceutical Group. The brothers’ side filed a police complaint against their mother, Chairwoman Song, and stopped donations to the foundations, which is interpreted as an attempt to restrict the foundations’ voting rights. A financial investment industry insider pointed out, "No matter how independently public interest corporations or foundations operate, it is customary for current or former company executives or related parties to serve as chairpersons, so they are effectively friendly equity," adding, "More sophisticated measures are needed to restrict the voting rights of treasury shares."