[NEWS ANALYSIS] Chaebol’s governance restructuring hangs in balance

South Korea’s key conglomerates are expected to closely watch the National Assembly’s move this week over whether lawmakers would pass pending bills to limit their ownership in the course of governance restructuring.

In light of the arrest of Samsung’s de facto leader Lee Jae-yong by the special prosecution over charges including bribery, hiding assets overseas and perjury, opposition lawmakers are pushing hard to pass the “economic democracy” bills that aim to restrict chaebol owners’ control over affiliates.
 

The conglomerates have been moving to break the chain of circular shareholding amid heightened calls for transparent governance in recent years. Many of them have been trying to create a holding company structure to simplify the chain in a way that can also strengthen the leader’s control.

The companies, however, are facing a double whammy as the opposition-led Assembly has also introduced a series of bills to revise laws to tighten the process of creating holding companies.

The bills include a Commercial Law revision, proposed by Rep. Park Yong-jin of the Democratic Party of Korea, which aims to prevent a newly-formed entity from offering new shares owned by a separated company in the case of a spinoff. The bill seeks to ban corporate owners from getting voting rights through stocks they receive from new entities.

Samsung for one, is to be hit the hardest in pursuing a holding company structure if lawmakers grant greenlight to the revision bill at the National Assembly’s plenary sessions scheduled on Thursday and March 2.

Samsung Electronics had announced in November that it would split the tech giant into a holding company and an operating unit within six months. Observers said doing so would strengthen Lee’s management control with more voting rights from a new company going to Lee, under the current law.

The revision bill, however, would force Lee to additionally buy higher stakes at Samsung Electronics if he wants more control, but the tech giant’s market cap currently sits at 266.3 trillion won ($231.5 billion), as of Friday, which makes it quite costly for Lee.

“Considering political situations, it is difficult for Samsung Electronics to push the split in February or March,” said Yoon Tae-ho, an analyst at Korea Investment & Securities

“The best scenario for Samsung is for the Commercial Law revision bill to be voted down at the Assembly and the company pushes the governance restructuring at the end of a presidential election, maybe in May.”

In South Korea, the next presidential election is likely to be advanced to May from its usual December this year, as the Constitutional Court is expected to rule on the fate of disgraced President Park Geun-hye in March, following her parliamentary impeachment sparked by the influence-peddling scandal involving her confidante Choi Soon-sil.

Meanwhile, retail and snack food giant Lotte Group plans to split and merge its four affiliates including Lotte Shopping, Lotte Confectionery, Lotte Chilsung and Lotte Food.

Market watchers say the group is less vulnerable than Samsung to a law revision but can be somewhat affected.

Lotte, for the time being, is likely to split each affiliate into investment and operating companies, and merge investment entities into a holding firm. In doing so, Lotte can seek to enhance Chairman Shin Dong-bin’s management control while weakening the circular shareholding chains.

As Shin and his elder brother Shin Dong-joo, former vice chairman of Lotte Holdings in Japan, hold a similar portion of shares in Lotte affiliates, spinning off Lotte’s core subsidiaries will rarely affect their control over the group, Yoon said.

For Lotte, scaling up Shin Dong-bin’s control over the group to a stronger level than that of Dong-joo will be the core issue in Lotte’s transition to a holding company structure, he noted.

The nation’s largest shipbuilder Hyundai Heavy Industries also announced last month to split the company into six units and turn one of them, tentatively named Hyundai Robotics, into a holding company.

At the upcoming shareholders’ meeting on Feb. 27, the company plans to get an approval for its plan to split in April and relist the holding company on the bourse in May. This is to break the circular shareholding structure among Hyundai Heavy Industries, Hyundai Samho Heavy Industries and Hyundai Mipo Dockyard.

If the National Assembly passes a Fair Trade Act revision bill which would force corporate owners to mandatorily sell their stocks in the affiliates prior to the spinoff, the control of Chung Mong-joon, who has a 10.2 percent controlling stake in Hyundai Heavy Industries, will be weakened, said Lee Sang-hyeon, an analyst at Hi Investment & Securities.

“Considering the power transition from Chung Mong-joon to his eldest son Chung Ki-sun (senior vice president of Hyundai Heavy Industries), Chung’s grip will be further weakened,” Lee said.

Hyundai Motor Group has a similar structure to that of Hyudnai Heavy Industries. The automaker’s governance structure is circular, starting from Hyundai Mobis to Hyundai Motor to Kia Motors and back to Hyundai Mobis.

Although the automaker did not announce any plan for a transition into a holding company, some raise the possibility, reports said. 

By Kim Yoon-mi (yoonmi@heraldcorp.com)