"Cancel Treasury Shares": Activist Funds Launch an Offensive

Palliser Capital: "LG Chem Faces Severe Discount"
Calls for Share Buybacks, Board Restructuring, and More
Activist Funds Target Gabia, JB Financial Group, STIC Investments, and Others
Commercial Act Amendments and Government Policies Expected to

Global activist funds are pressuring domestic companies to boost their stock prices. As the Lee Jaemyung administration, which has pledged to usher in the 'KOSPI 5000 era,' actively pursues enhanced shareholder value, it appears that a favorable environment has been created for activist funds.

Palisade Capital Targets LG Chem Following Samsung C&T and SK Square

According to the investment banking (IB) industry on October 24, UK-based activist fund Palisade Capital has launched a "public campaign" against LG Chem. On October 21 (local time), Palisade announced measures to enhance LG Chem's value-including changes to the board structure and share buybacks-at an investment conference held in New York, USA. Palisade is a long-term shareholder with more than 1% stake in LG Chem, making it one of the company's top 10 shareholders.

Palisade specifically argued that LG Chem's stock is severely undervalued and demanded: ▲improvements to the board composition, ▲revisions to executive compensation schemes, ▲a capital allocation system focused on returns, ▲share buybacks utilizing LG Energy Solution shares, and ▲implementation of a long-term discount management program.

Following this news, LG Chem's stock price surged. On October 22, LG Chem closed at 391,000 won, up 13.01% from the previous day. During intraday trading, the stock even hit a 52-week high.

Palisade, headquartered in the UK, is an activist fund founded in 2021 by James Smith, who previously headed the Hong Kong division of the well-known Elliott Management. Elliott made its name in Korea by challenging management succession issues at Samsung Electronics and Hyundai Motor in the past. Palisade also acquired stakes in Samsung C&T in 2023 and SK Square last year, subsequently making shareholder proposals targeting Samsung Group and SK Group.

Choi Younggwang, a researcher at NH Investment & Securities, stated in a report on October 23, "The value of LG Chem's stake in LG Energy Solution is inevitably subject to a discount due to dual listing. However, the fact that an activist fund has put forward recommendations to enhance corporate value will likely reduce the discount rate, as it increases the possibility of more efficient utilization of inefficiently allocated assets."

He further predicted, "From a mid- to long-term perspective, as policies to strengthen shareholder value continue, demands from shareholders like Palisade for greater asset efficiency are expected to keep increasing."

Commercial Act Amendments and Value-Up Policies: Activist Influence Expected to Grow

Industry observers believe that, along with the government's stance to strengthen minority shareholder rights and successive amendments to the Commercial Act, activist funds' activities will become even more vigorous.

Already, activist funds have begun voicing demands for enhanced shareholder value at companies such as Gabia, JB Financial Group, STIC Investments, and KT&G. In particular, they are calling for share cancellations to boost stock prices. As discussions led by the ruling party about mandating share cancellations become more active, the influence of activist funds is expected to expand.

On October 21, Oh Gihyung, chairman of the Democratic Party's "KOSPI 5000 Special Committee," sponsored amendments to the Income Tax Act and Corporate Tax Act to clarify that share buybacks are capital transactions. While the International Financial Reporting Standards (K-IFRS) adopted by Korea view share buybacks as capital transactions, the Corporate Tax Act has regarded them as asset transactions, resulting in ongoing inconsistencies between accounting principles and tax law.

If share buybacks are clearly defined as capital transactions, the company's capital is reduced at the moment of the buyback. Since capital decreases, the corresponding shares must also disappear, creating a logical structure that necessitates share cancellations. Ultimately, this amendment could pave the way for mandatory share cancellations.

In July, Lee Soyoung, a Democratic Party lawmaker, sponsored a partial amendment to the Commercial Act to introduce "advisory shareholder proposal rights," allowing minority shareholders to make recommendations on corporate management, and to strengthen the effectiveness of general shareholder proposal rights. Advisory shareholder proposals allow recommendations to the board and management regarding specific policies, disclosures, and planning. Even if such proposals are approved, the company or directors are not obligated to comply.

However, the first amendment to the Commercial Act passed by the National Assembly specifies directors' fiduciary duty to shareholders. If advisory shareholder proposal rights are introduced, management will find it harder to ignore them due to this fiduciary duty. Activist funds are also likely to leverage this to increase their pressure.

Jung Jisoo, a senior researcher at the Korea Capital Market Institute, explained in a report titled "Characteristics and Implications of Advisory Shareholder Proposals in Major Countries," "In major countries where advisory shareholder proposals are allowed, such as the United States, it is generally impossible for shareholder proposals to infringe on the board's authority itself. However, non-binding advisory proposals or special resolutions and advisory votes are permitted. This year, minority shareholders are also showing increased interest in advisory shareholder proposals as a means of shareholder activism."