[Exclusive] Stick Investment Seeks Treasury Share Sale... Controversy Over Securing Friendly Stakes

All 13.5% Treasury Shares Up for Sale
Founder Leads Talks with Major Financial Groups
Conflict with Activist Camp Expected to Escalate
Turning Treasury Shares into Friendly Stakes Runs Counter to Government Policy

Stick Investment, a major private equity fund (PEF) management company in South Korea, is reportedly seeking to secure friendly shareholders by selling its treasury shares as a means of defending management control. This move comes as activist shareholders have pressured the company to enhance corporate value by retiring treasury shares, prompting Stick Investment to play a "defensive card" in response. Controversy is expected, as the government is intensifying its efforts to institutionally block the so-called "treasury share magic"-the use of treasury shares to strengthen control.

According to the investment banking (IB) industry on November 2, Stick Investment is looking for buyers to sell all of its 5,642,609 treasury shares, representing a 13.5% stake. It is known that Chairman Do Yonghwan, the founder, has reached out to several asset management firms and major financial groups, including Shinhan Financial Group. The intention is interpreted as an attempt to stabilize management control by disposing of non-voting treasury shares and securing new friendly stakes.

Stick Investment has so far rejected demands from the domestic activist fund Align Partners and the US-based activist asset manager Mill Capital to retire its treasury shares. The company has explained that it plans to use the treasury shares for future mergers and acquisitions (M&A) or as RSUs (restricted stock units) for employee compensation. However, as news of the planned sale of treasury shares emerged, criticism has grown that this represents a change in purpose aimed at defending management control, and conflict is expected to intensify.

On October 30, Align changed its stated purpose of shareholding from "general investment" to "influencing management control," which is interpreted as a direct response to Stick Investment's move to sell its treasury shares. Align had maintained amicable discussions with Chairman Do, but apparently viewed this latest decision as crossing a line.

A proxy battle could take place as early as next year's general shareholders' meeting. In this scenario, Chairman Do's side is at a disadvantage in terms of shareholding structure. Currently, Stick Investment's side holds a total of 19.04%. Chairman Do himself holds 13.46%, while related parties such as his children and partner-level executives hold a combined 5.58%.

On the other hand, the activist camp holds a 13.38% stake through Mill Capital alone, matching Chairman Do's share. Align has recently increased its stake from 6.64% to 7.63% through open-market purchases. The combined stake of the two activist groups now exceeds 21%. In addition, domestic Petra Asset Management has recently acquired a 5.09% stake. While there is no direct alliance, Petra is also focused on value investing. CEO Yonghwan Seok is a director at the Korea Corporate Governance Forum, which emphasizes shareholder value enhancement, making Petra a likely ally of the activist camp. An alliance of individual shareholders demanding the retirement of treasury shares also holds over 4%.

In this situation, Chairman Do's side appears to be attempting to convert treasury shares into friendly stakes through a sale. However, this move is in direct conflict with the government's policy direction. The Financial Services Commission and the Fair Trade Commission have recently prioritized banning the use of treasury shares as a means of controlling companies. The ruling party's proposed third amendment to the Commercial Act, which includes mandatory retirement of treasury shares, is in line with this. If public opinion turns against Chairman Do's side, it is likely they will be at a disadvantage in next year's proxy battle.

However, a dramatic compromise cannot be ruled out. Stick Investment is a PEF management company, not a typical manufacturing or service company, and activist funds are focused more on improving governance and enhancing shareholder value than on securing management control. Given the nature of PEFs, replacing management or key executives requires unanimous consent from all limited partners (LPs). Since the activist camp is not a buyout fund, there is little incentive for them to directly acquire the company.

An IB industry insider commented, "Stick Investment was inadvertently listed during the acquisition of another company. While this is not the situation Chairman Do would have wanted, making a decision such as retiring treasury shares to enhance shareholder value could be a win-win in the long run."