Restructurings in Korea test the limits of CG reform
by Stephanie Lin, ACGA
Regulators seek to get better deals for investors as corporate overhauls favour majority owners, writes ACGA Research Manager Stephanie Lin
Recent corporate restructuring plans in Korea have sparked significant controversy, particularly among minority shareholders who feel marginalized by decisions that appear to benefit controlling shareholders at their expense. The restructuring of heavy equipment manufacturer Doosan Group, along with similar moves by SK Innovation and Hanwha Energy, underscore ongoing issues with corporate governance in Korea.
However, the landscape may be shifting. With ongoing discussions on corporate governance reform, the rise of shareholder activism, and the introduction of the Corporate Value-up Program, these transactions are facing greater scrutiny, making it more challenging for controlling shareholders to push through their agendas without addressing the concerns of minority shareholders.
The Case of Doosan Restructuring
On 11 July, Doosan Group announced a major restructuring plan. The company proposed to divide its operations into three sectors: clean energy, smart machines, and advanced materials.
The restructuring plan involves three stages:
1. Doosan Enerbility will be divided into an operating company and a new investment corporation, with the latter holding shares of Doosan Bobcat.
2. Loss-making robotics company Doosan Robotics will merge with the new investment corporation.
3. Doosan Robotics will gain full control of Doosan Bobcat, a financially stable entity, through a share swap of 1 to 0.63 .
The proposal faced strong opposition from Doosan Bobcat's minority shareholders, who viewed the merger ratio as unfair. They were particularly concerned about exchanging 1 share of the profitable Bobcat for only 0.63 shares of the loss-making Doosan Robotics, whose high market price does not reflect its underlying book value. Similarly, minority shareholders of Doosan Enerbility were dissatisfied, as they would lose a stable cash-generating asset without adequate compensation.
Minority shareholders also expressed dissatisfaction with the execution of the restructuring plan by the three listed Doosan companies. The boards and independent directors of these companies failed to seek input from minority shareholders throughout the process and made insufficient efforts to communicate the rationale behind the plan.
The controversial proposal drew the attention of the Financial Supervisory Services (FSS), which rejected Doosan’s initial securities reports on 24 July, telling Doosan to either revise the proposal or improve its communication with shareholders. Subsequently, on 6 August, Doosan Robotics issued a revised securities report, but the merger ratio remained unchanged. In response, the governor of the FSS, Lee Bok-hyun, emphasized their commitment to demanding unlimited corrections for any deficiencies in the company’s securities reports.
On 26 August, FSS once again rejected Doosan’s revised securities report, instructing the company to use intrinsic value to assess the investment company spun off from Doosan Enerbility.
Amid strong opposition from minority shareholders and pressure from regulators, Doosan withdrew the most controversial component of its restructuring plan—the proposed share swap between Doosan Robotics and Doosan Bobcat—on 29 August, while proceeding with the first two stages.
However, the merger between Doosan Robotics and Doosan Enerbility’s spun-off investment company remains problematic because minority shareholders of Doosan Enerbility receive Doosan Robotics shares based on a merger ratio derived from the undervalued investment company, which is tied to Doosan Bobcat's depressed market valuation.
Discontent stirs elsewhere
The discontent surrounding Doosan's restructuring is not an isolated incident. In July, two other major transactions in Korea faced similar scrutiny from minority shareholders and local corporate governance organizations, such as the Korea Corporate Governance Forum (KCGF) and Solidarity for Economic Reform (SER), for their potential negative impact on minority shareholders.
First, Hanwha Energy announced plans on 5 July to acquire an additional 8% stake in Hanwha Corp through a tender offer at a price perceived as unfair to minority shareholders. Second, SK Innovation on 17 July proposed a merger with its unlisted affiliate, SK E&S, which also faced criticism over its merger ratio. The board of SK Innovation decided to use market values, rather than asset values, to determine the merger ratio—a decision that was questioned by SER. If asset values had been used, SK Inc’s stake in the merged entity would have been 8.4% smaller compared to conducting the merger based on market value, potentially reducing the influence of SK Group Chairman Chey Tae-won and his family, who collectively own 25.7% of SK Inc.
On 27 August, despite opposition from the National Pension Service (NPS), which holds 6.2% of SK Innovation's shares as the second-largest shareholder, the merger was approved with 85.8% of the vote. SK Inc., the largest shareholder, holds 36.2% of SK Innovation. Additionally, 95% of foreign investors in attendance voted in favour of the merger, influenced by the recommendations of global proxy advisors ISS and Glass Lewis, who supported the merger on the grounds that it would help the two companies maintain stable earnings and strengthen their financial structures.
Corporate transactions in Korea frequently prioritize the interests of controlling shareholders, often at the expense of minority investors. For instance, if Hanwha’s acquisition was completed, the controlling family's ownership stake in Hanwha Corp would have increased from 44% to approximately 52%. Similarly, Doosan’s restructuring would raise Doosan Corp’s ownership of Bobcat from 13.1% to 27.1% even after scrapping the share swap from the restructuring plan.
These restructuring plans challenge the effectiveness of ongoing corporate governance reforms and test the limits of the Corporate Value-Up Program. Many family-run conglomerates appear more focused on maintaining control through transactions that often misappropriate value, shifting it from minority shareholders to majority shareholders. This raises critical concerns about how to inspire trust and confidence in the value creation process when companies can engage in blatantly value-destructive behaviours toward minority shareholders. If such transactions continue without addressing minority shareholders' concerns, the effectiveness of the Corporate Value-Up Program is questionable, particularly in terms of what it can realistically achieve. Closing the valuation gap requires improved capital allocation, stronger corporate governance, and better protection of minority shareholders' rights.
The road ahead…
On 10 September, Doosan announced that it would postpone the shareholders' meeting to vote on the proposal originally scheduled for 25 September. It stated that additional corrections to the securities report would be included once the schedule is confirmed.
The outcome of the proposal remains unclear. Doosan Corp holds a 30.7% stake in Doosan Enerbility, while minority shareholders own 69.6%, including a 6.9% stake held by NPS. If NPS, following its previous stance in the SK deal, votes against the restructuring plan and exercises its appraisal rights, the deal could face serious obstacles. Doosan would be required to pay KRW 929 billion (US$693,713,656), exceeding its stock repurchase limit of KRW 600 billion (US$448,038,960). As of September 10, 2024, Doosan Enerbility's share price was KRW 16,560 (US$12.37), below the appraisal price of KRW 20,890 (US$ 15.55).
Minority shareholders of Doosan Enerbility could be forgiven for thinking that if Doosan Robotics seeks control of Doosan Bobcat, the board should sell it at a premium, rather than proceed with complex transactions which would result in minority shareholders losing control of a stable, cash-generating asset without fair compensation.
Download File Disclaimer
In addition to the ACGA website disclaimer access to the "Members' Area" of the ACGA website is subject to the general disclaimer and content attribution statements below.
General Disclaimer
By logging into our Members' Area you acknowledge that all materials displayed on the site or made available for download are for the exclusive use of ACGA members. You may not share the content with parties outside of your organisation.
Content Attribution
The copyright ownership of all material on our website belongs to ACGA. Should you wish to use any materials in the course of your corporate research, including directly quoting or paraphrasing sections, reprinting, reproducing or the like, we request that you give proper acknowledgement to ACGA and share a copy with us. Please email irina@acga-asia.org.