"LS and Hanjin KAL Boards Should Reverse Their Treasury Share Decisions"
On May 19, the Korea Corporate Governance Forum criticized the alliance between Hanjin KAL and LS, which was established through the use of treasury shares, calling it "a decision that infringes on shareholder interests." On this day, Lee Namwoo, Chairman of the Korea Corporate Governance Forum, stated, "Selling treasury shares to allies under the pretext of collaboration to solidify control is unfair," expressing this criticism.
Previously, on April 25, LS and Hanjin Group signed a memorandum of understanding (MOU) to strengthen business cooperation and collaboration with the goal of mutual growth and maximizing shareholder value. Afterwards, Hoban Group increased its stake in Hanjin KAL by an additional 0.56 percentage points, bringing its total shareholding to 18.46%. LS Cable & System and Hoban Group affiliate Taihan Electric Wire have previously been involved in litigation over patent infringement issues, and it is reported that Hoban currently holds about 3% of LS shares.
Passenger aircraft of Korean Air and Asiana Airlines are taxiing toward the runway at Gimpo Airport apron in Gangseo-gu, Seoul. Photo by Kim Hyunmin kimhyun81@
In response, on May 15, Hanjin KAL announced that it would contribute 0.66% of its treasury shares (worth approximately 66.3 billion KRW) to its employee welfare fund. The following day, LS disclosed that it would issue exchangeable bonds worth 65 billion KRW to Korean Air, a subsidiary of Hanjin KAL, for the purpose of debt repayment. As a result, Korean Air will be able to exchange these bonds for 387,365 shares of LS (equivalent to 1.2% of total issued shares).
Chairman Lee pointed out that this is "a decision that undermines shareholder value." He further explained, "Although treasury shares do not have voting rights, in the 2015 merger between Samsung C&T and Cheil Industries, KCC acquired 5.8% of Samsung C&T's treasury shares for 674.3 billion KRW and secured voting rights, demonstrating that voting rights can be revived in the event of a 'third-party sale.'
He continued, "LS has secured an ally in Korean Air through the issuance of exchangeable bonds, and according to media reports, if LS purchases Hanjin KAL shares in the future, a 'white knight alliance' could be formed. Globally respected companies such as Apple and Google, Apple and TSMC, and Nvidia and TSMC have maintained close collaborative relationships for decades without holding each other's shares. This is because true collaboration is based on trust, not capital transactions."
He also emphasized that since treasury shares are purchased with the company's cash (which belongs to all shareholders, not the controlling shareholder), they cannot be used as a means of defending control. He argued that defending control should be achieved through legitimate means such as maintaining a high stock price and high valuation (price level relative to corporate value), and that the use of treasury shares in Korea is a representative example of governance practices that ignore global standards and reveal inconsistencies between law and accounting.
Chairman Lee stated, "LS currently holds a total of 4.85 million treasury shares (15% of total issued shares), including 390,000 shares related to the recent exchangeable bonds," and added, "LS should soon announce a value-up plan after board discussions, and this plan should include the cancellation of 15% of its treasury shares." He also said, "If the shares are canceled, the value for existing shareholders will immediately increase by 18%. If treasury shares remain on the books as dormant shares, they become a major factor for stock price discount."
Previously, on April 22, the Forum issued a statement titled "Seven Recommendations for the Capital Market to the New Administration," in which it recommended that, except in cases where there is a transparent purpose such as employee stock compensation, existing treasury shares should be immediately canceled and newly acquired treasury shares should be canceled within three months by including this as a best practice in the company's articles of incorporation.
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