Hana Securities: "Commercial Act Amendment Positive for Corporate Credibility"

As concerns have been raised that the amendment to the Commercial Act may increase the financial burden on companies and negatively affect their future credit ratings, a domestic securities firm has assessed that the fundamental direction of the Commercial Act is actually positive in terms of corporate credibility.

Kim Sangman, a researcher at Hana Securities, stated in a report titled 'Amendment to the Commercial Act from the Perspective of Bonds and ESG' on July 30, "From an ESG perspective, the purpose of this amendment to the Commercial Act is to narrow the gap of conflicting interests between controlling shareholders and other stakeholders, including minority shareholders and creditors."

First, Kim pointed out, "If the recently promulgated (as of July 22) amendment to the Commercial Act was somewhat abstract and symbolic in nature, the direction of the upcoming (second) amendment will likely include items that could have a more substantial impact on the capital market, including the stock market." He cited the separation of dividend taxation and the mandatory retirement of treasury shares as representative examples.

He further explained, "An unavoidable issue in the process of expanding shareholder returns is the need to balance creditor protection," and added, "If cash outflows increase due to larger dividends and treasury share buybacks, companies' financial burdens will increase, and this may be accompanied by a rise in nominal debt ratios." Recently, Korea Ratings Corporation also published a report expressing concerns that, as the rights of minority shareholders are strengthened through the amendment to the Commercial Act, the rights of creditors could be weakened.

However, Kim dismissed the possibility of creditor rights being infringed upon by the amendment to the Commercial Act as contradictory, considering the original intent of the law. He emphasized, "The Commercial Act is fundamentally based on two principles in the relationship between shareholders and creditors." He continued, "First, the rights of creditors must take precedence over the rights of shareholders, who bear only limited liability for the company's assets."

Secondly, he explained, "Since shareholders, as subordinated claimants, are incentivized to maximize the outflow of company assets, there are both procedural requirements for dividend decisions and substantive requirements for the existence of distributable profits." He added, "If changes in capital structure resulting from this amendment to the Commercial Act act unfavorably towards creditors, there is a high possibility that the bond market itself will activate mechanisms to mitigate such effects."

Accordingly, it cannot be concluded that shareholder-friendly management necessarily leads to the infringement of creditor interests. Kim stated, "Shareholder-friendly management, as long as a reasonable level of financial soundness is maintained, can be seen as rational decision-making from a sustainability perspective." He further emphasized, "If such management enhances the company's image or credibility, it can also improve the company's credit rating. Ultimately, it is a matter of degree, but the overall direction is likely to be a positive factor for corporate credibility."

Nevertheless, he noted, "Leaving the maintenance of such appropriateness entirely to individual companies may inevitably cause anxiety and doubts, so it is necessary to supplement this through detailed enforcement ordinances of relevant laws in the future." He suggested that it would be appropriate to benchmark various mechanisms from major overseas countries to maintain a balance between strengthening shareholder rights and protecting creditors.

In addition, he noted the need to check the financial leverage (debt ratio) of companies with high treasury share holdings at this point in time. According to Hana Securities' analysis of the debt ratio distribution of the top 100 companies with the highest treasury share holdings as of the end of March, based on data compiled by Infostock, 77 companies had a debt ratio of 100% or less, accounting for the overwhelming majority. Only 4 companies had a debt ratio exceeding 200%.