[Invest&Law] "Commercial and Tax Act Amendments... Holding Company Stocks Face Major Turning Point Next Year"

Policy Momentum and Expectations for Shareholder Returns Align
"Full-Fledged Shift from 'Discount' to 'Premium' Anticipated"

There are growing expectations that successive amendments to the Commercial Act and the Tax Act will serve as triggers for a revaluation of the holding company sector’s valuation (the level of stock prices relative to corporate value) in the stock market.

According to the investment banking industry on October 29, Yang Ji-hwan, a researcher at Daishin Securities, stated in a recent report, "The amendments to the Commercial Act and the Tax Act are a complex positive factor, coinciding with value-up policies and a bullish market trend." He added, "With the momentum of policy implementation and strengthened expectations for shareholder returns, the phase of resolving the overall discount applied to holding companies will continue." Park Jong-ryul, a researcher at Heungkuk Securities, also released a report, diagnosing, "Next year will be a turning point for the holding company sector, shifting from a 'discount' to a 'premium.' It will be a time when changes in laws and regulations will actually alter corporate behavior."

Previously, the government and the ruling party led changes through two amendments to the Commercial Act this year, including expanding the scope of directors’ fiduciary duty (from company only to company and shareholders) and introducing cumulative voting. Yang noted, "Such amendments are expected to restrict actions where the interests of the largest shareholder and general shareholders conflict in major management decisions, and by strengthening the independence of the board of directors, will enhance the interests of all shareholders."

The government is currently pushing for a third amendment to the Commercial Act, which would mandate the cancellation of treasury shares. The aim is to enhance the rights of general shareholders by requiring companies to cancel a portion of their repurchased shares. In Korea, there has been criticism that companies’ repurchase and retention of treasury shares have been abused to strengthen owner- or major shareholder-centered governance structures. Financial Services Commission Chairman Lee Eog-weon also stated on October 27 at a parliamentary audit, "The Korean stock market has surpassed KOSPI 4000, but the price-to-book ratio (PBR) remains at about 1.1 times," adding, "The problem is that companies continue to increase the number of shares by buying back shares without canceling them."

Amendments to the Tax Act are also being promoted in various ways. A representative measure is the separate taxation of dividend income. This would tax dividend income separately at a lower rate, making dividend stocks more attractive to investors if implemented. Heungkuk Securities expects the average shareholder return rate to rise to 35% next year, an increase of about 10 percentage points compared to 2024. In particular, major holding companies plan to actively pursue shareholder return policies through the cancellation of treasury shares and increased dividends.

Accordingly, the securities industry expects that holding companies will be the biggest beneficiaries of the amendments to the Commercial Act and the Tax Act. Yang stated, "Thanks to government policy benefits, the discount rate for holding companies is likely to decrease, and considering the increase in the value of subsidiaries’ stakes and net asset value (NAV) due to the recent stock market rally, holding companies have ample upside potential."

Park added, "In terms of capital efficiency, attention should be paid to return on equity (ROE), dividend payout ratio, and treasury share cancellation rate. In terms of governance, the proportion of independent directors, transparency, and the level of environmental, social, and governance (ESG) disclosure should be examined." He further commented, "With the institutional foundation in place, it is now the execution capability of each holding company that will determine the premium."