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[KH Explains] Why do spinoff IPOs anger South Korean investors?

Experts say LG Energy Solution IPO might have faced a series of suits in US for diluting share value of its parent company, but not here

A ceremony is held to celebrate the initial public offering of LG Energy Solution at the Korea Exchange’s Seoul branch. (The Korea Exchange)
A ceremony is held to celebrate the initial public offering of LG Energy Solution at the Korea Exchange’s Seoul branch. (The Korea Exchange)
The market debut of LG Energy Solution last month was literally a festive event, with investors in and out of the country pouring in an astronomical sum of money to buy new shares of the company eyeing to be the world’s top battery maker.

But shareholder rights activists in South Korea say that the mega deal was another case in which a split-off was done intentionally to take the battery subsidiary public, a process that undermined the interests of parent company shareholders.

The world’s second-largest battery maker became South Korea’s second most valuable company in a blockbuster initial public offering on Jan. 27, with a market value of 117 trillion won ($97 billion) as of Friday, outpacing SK hynix, which had been No. 2 since November 2016.

The battery maker listing, however, has enraged shareholders of its parent company LG Chem, who accuse it of diluting the value of their shares. The process was carried out without swapping the shares between the parent and the subsidiary -- which would have let LG Chem investors benefit from LG Energy Solution’s listing.

In South Korea, a listed company is not required to swap subsidiary shares for its parent company shares, or compensate parent company shareholders when holding an initial public offering.

“The so-called parent-child listings are popular because they raise capital without sacrificing the ownership stake. The majority shareholders don’t want a rights issue since new shares dilute theirs and they would need fresh capital to avoid that,” said Lee Sang-hoon, a professor of law at Kyungpook National University.

Had LG Chem chosen to issue new shares to raise capital instead of splitting off the battery division, LG Corp., the group’s holding company that controls LG Chem, would have had to buy some of them to prevent its stake from shrinking and retain management control, Lee added.

The holding company would have to stump up 5 trillion won to do that, but turning the battery division into LG Chem’s wholly owned subsidiary helps avoid this, according to Lee and other experts.

LG Chem, which wholly owns the battery maker, saw its controlling stake slide to 81 percent after the IPO. But even after raising fresh capital of 12.7 trillion won in the stock listing, it is still the battery maker’s largest shareholder.

“Imagine Alphabet taking Google public. Alphabet wouldn’t do it because shareholders would immediately strike back with a lawsuit for weakening the value of their shares,” Lee said.

In 2015, Google listed Alphabet on the Nasdaq and became its private subsidiary. Google shareholders swapped their shares for Alphabet shares one-for-one, according to the US Securities and Exchange Commission filing.

But LG Chem shareholders had to watch their share prices plunge and would not see the support they would receive from a US court if they were to file for damages from the spinoff listing, according to Lee.

LG Chem shares stood at 678,000 won ($568) as of Friday, down about 36 percent from their peak at 1.05 million won on Jan. 15, 2021. That is a much larger dip than a 10 percent overall decline in the Kospi in the same period. 

“Unless LG Chem itself suffered damage, the shareholders have no legal standing to bring the case to the court. The commercial code places a company’s interests above those of minority shareholders. It says nothing about protecting minority shareholders,” Lee said.

Lee said minority shareholders need the protection provided in advanced markets like the US and UK, where the board of directors is legally required to act in the interests of both the company and shareholders.

“We too need our law to say shareholder interests, along with the company’s, should be protected. And we need specific clauses to allow for spinoff IPOs in a very limited way,” Lee said.

He proposed compelling institutional investors to veto a spinoff taking place at the expense of minority investors, who need greater voting power to make their voices heard at a shareholder meeting.

Minority investors could also exercise rights to have their shares repurchased by a parent company that is floating a cash-hoarding subsidiary, at the higher prices set by bets on what the market sees as a lucrative listing, Lee added.

Despite growing calls for strengthening rules on spinoff IPOs, financial authorities are seen as sitting on their promise to roll out ways to better protect minority investors.
 
Experts say that is because regulators would have to reach consensus not only with the public and lawmakers to rewrite rules, but also with chaebol that used spinoff IPOs as a way of expanding their corporate empires for decades.

“The contentious spinoff IPOs are ways for chaebols to expand their businesses. Suddenly taking that away and banning them altogether would be tricky. It will be hard to reach consensus,” said Kim Woo-chan, director of the Economic Reform Research Institute.

Kim, a Korea University business professor heading the watchdog, singled out family chiefs as the biggest obstacle to reform, saying the family owners would oppose anything that threatens their control.

“The reason Posco openly promised not to take its profitable steel subsidiary public was that the chairman knew his time would run out eventually, unlike chaebol (chiefs),” Kim said, referring to the steelmaker’s recent decision to become a holding company and split off its steel unit.

“Chaebol would have a harder time giving up on the ‘kingdoms’ they are building. That is our greatest challenge,” Kim said.

But chaebol are not the only corporations engaged in the contentious practice. Tech giants like Kakao are increasingly using it to expand its business -- a strategy many say runs against its open promise to seek growth through “innovation,” which they believe means reducing reliance on the disputed market tool.

Kakao took full advantage of the spinoff IPOs in the last two years as the messaging platform giant floated three subsidiaries -- Kakao Games in September 2020, KakaoBank in August 2021 and Kakao Pay in November 2021 -- while maintaining its control over them at the expense of individual shareholders.

Some Kakao executives, including a former nominee named to head holding company Kakao Corp., have been under fire for exercising their stock options soon after their market debut to pocket the share price difference. The executives earned windfall profits while most shareholders suffered a stock plunge.

By Choi Si-young (siyoungchoi@heraldcorp.com)
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