New cross-shareholding ban takes effect

By Korea Herald

Conglomerates pressured to improve governance

  • Published : Jul 25, 2014 - 21:39
  • Updated : Jul 25, 2014 - 21:39
South Korea’s antitrust watchdog on Friday launched a ban on any new cross-shareholding investment among the affiliates of conglomerates, a move aimed at improving governance of the nation’s leading family-controlled conglomerates.

With the new ruling, the Fair Trade Commission is able to impose penalties of up to 10 percent on all newly issued cross-shareholding arrangements. The bill was approved by the National Assembly at the end of 2013.

Cross-shareholding practices are often used by owner family members of South Korean conglomerates to secure control over their business empire with a handful of shares.

For instance, in Samsung Group, Samsung Everland, its de facto holding company, holds a controlling stake in Samsung Life Insurance, which owns a stake in Samsung Electronics and other affiliates. This web of circular shareholdings allows Samsung vice chairman Lee Jay-yong, who holds 25 percent stake in Samsung Everland, to maintain control over the group’s electronics and financial units.

But from now on, subsidiaries of a conglomerate with total assets greater than 5 trillion won ($4.8 billion) will be banned from making new cross-shareholding investments among themselves.

The ban, however, gives an OK to existing cross-holdings in order to avoid a possible negative impact on the economy, according to the FTC.

The state-run antitrust agency believes the cross-shareholding ban could help improve the corporate governance and transparency of South Korean conglomerates.

Lotte, the country’s fifth-largest conglomerate by assets, has already started streamlining its complex shareholding structure.

Earlier this week, Lotte Hotel, which serves as Lotte Group’s de facto holding company, purchased a 4 percent stake in Lotte Engineering and Construction from five other affiliates. Also, Lotte Shopping, which operates Lotte Department Store and Lotte Mart, took in a 12.7 percent stake in Lotte International from six other affiliates, as part of steps toward restructuring the group’s complex circular shareholdings, Lotte said in a statement.

Attention is turning to possible changes in the circular ownership structures in Samsung and Hyundai Motor Group, the nation’s two largest conglomerates.

Market watchers said the revised rule would pressure these groups to spend trillions of won to change their corporate governance structures.

Many market investors are apparently positive about the new rule as they believe cross-shareholding practices by conglomerates is a major factor contributing to the country’s exceptionally low dividend yields.

By Oh Kyu-wook (