"Existing Dual Listings Must Also Be Resolved, Not Just New Ones"... Experts Deliver a Stern Warning

Asia Finance Association International Conference Held
Experts Discuss Solutions to the Korea Discount
Need for Majority of Minority Rule and Mandatory Tender Offers
Proxy Advisors Also Criticized: "Fair Value Must Be Paid"

On the 3rd, at the Asia Finance Association International Conference held at Seoul National University in Gwanak-gu, Seoul, Woochan Kim, Professor of Business Administration at Korea University (far left), is conducting a panel discussion during a special session.

Experts have pointed out that in order to resolve the chronic undervaluation of the Korean capital market—known as the “Korea Discount”—the unique issue of dual listings in Korea must be fundamentally addressed. While an amendment to the Commercial Act has blocked new dual listings, existing dual listings remain a significant hurdle.

During a special session on "Activating Shareholder Engagement" at the Asia Finance Association (Asian-FA) International Conference held at Seoul National University on the 3rd, experts identified dual listings as a main driver behind the destruction of corporate governance in Korea. They emphasized that while dual listings maximize the control of major shareholders who typically own only 30–40% of shares, they diminish the influence of minority shareholders who collectively hold the majority stake, resulting in severe conflicts of interest.

Existing Dual Listings Must Also Be Addressed... The Need for Both Incentives and Penalties

Kim Hyungkyun, Head of CH Partners, pointed out, "After the global financial crisis in 2008, many Japanese companies streamlined their business structures by delisting their listed subsidiaries overseas, but in Korea, many such cases were left unchanged." He continued, "A few years ago, I directly asked Nisshinbo in Japan—the parent company of Saeron Automotive, which remains listed in Korea—about the background, but received no answer. This shows how they have thoroughly taken advantage of Korea’s lax regulatory and legal environment, which lacks obligations to protect minority shareholders."

He added, "Dual listings do not only harm the general shareholders of the parent company. The interests of the general shareholders of the subsidiary can also be sacrificed for the benefit of some shareholders of the parent company."

Lim Sungyoon, CEO of Dalton Korea, stressed that systems like "majority of the minority" (MoM) are essential to address dual listings. This system requires that, in key agenda items where controlling and minority shareholders' interests conflict—such as mergers, spin-offs, or share swaps—the approval of a majority of minority shareholders (excluding the votes of controlling shareholders and their affiliates) be obtained. Lim commented, "In Korea, family-owned conglomerates (chaebols) wield exceptionally strong control, and dual listings often occur among their affiliates. Introducing a system that excludes the votes of controlling shareholders in inter-affiliate transactions with conflicts of interest would provide far fairer opportunities for minority shareholders."

He also emphasized that the government needs to establish clearer "carrots and sticks" to resolve existing dual listings. “In Japan, such efforts led to tangible changes and reform progress. If the government truly aims to improve corporate governance and the stock market, it must focus on dismantling the current dual listing structures,” he advised.

There were also criticisms about Korea’s unique "management premium." Experts argued that, as in the United States, a mandatory tender offer system should be introduced so that all shares held by general shareholders must be acquired in mergers and acquisitions. Woochan Kim, Professor of Business Administration at Korea University and moderator of the session, said, "With the introduction of mandatory tender offers, companies would have to acquire all shares, thereby significantly reducing the dual listing problem. However, the government, concerned about a slowdown in the M&A market, is considering compromise measures such as '50% plus one share.' Such approaches will not fundamentally solve the dual listing issue," he criticized.

NapkinAI creation image

Bear Hugs Foster Virtuous Cycles in the U.S.

Professor Woochan Kim, who moderated the discussion, also raised the topic of "bear hugs" (hostile takeover bids). He explained, "A bear hug is a public tender offer at a price far above the market value. If the board of directors of the target company truly acts in the interests of the company and shareholders, they could never reject such an offer."

Lee Changhwan, CEO of Align Partners Capital Management, illustrated this with his experience at the U.S. private equity firm Kohlberg Kravis Roberts (KKR). He said, "At the time, North American funds would acquire about 5% stakes in undervalued listed companies and then approach the board with a proposal like, 'Your company is trading at six times EBITDA, but we want to buy the whole company at ten times.' While such proposals would be laughed off by boards at large Korean companies, in the U.S., the process begins immediately upon receiving such an offer."

Afterwards, the board is obligated to immediately hire an advisor to determine whether the offer is fair in accordance with its fiduciary duty to shareholders. If the offer is accepted, the company is acquired and delisted from the market. Lee emphasized, "This is a system in which undervalued companies are removed from the market at a fair price, resolving market discount and increasing efficiency." In March, the Financial Services Commission also announced plans to amend M&A disclosure rules, requiring boards to officially disclose their opinions on hostile M&A offers. The Democratic Party is also discussing reforms to the M&A disclosure system through amendments to the Capital Markets Act.

NapkinAI Created Image

Proxy Advisors Give Mechanical Recommendations... Ultimately a Matter of 'Efficiency'

Questions and criticisms were also raised about the role of proxy advisory firms. Some argued that proxy advisors like ISS have exploited the lack of regulation in Korea’s capital market by recommending against the adoption of cumulative voting and other measures unfavorable to minority shareholders, as part of a regulatory arbitrage strategy. However, both Lee and Lim rejected this perspective. Lee explained, "In Korea, I believe proxy advisors act this way not to maximize their own interests, but simply because their overseas clients are not interested in the Korean market. When I meet foreign shareholders, they are often surprised by global proxy advisors’ negative recommendations."

He continued that, since overseas institutions do not allocate enough budget for proxy advisors to carefully analyze Korean corporate governance, proxy advisors apply only mechanical standards to minimize costs. "There is a structural limitation: three analysts have to review 2,000 Korean companies in just two weeks," Lee said. "This may be a necessary measure to reduce costs, but the result is a complete disregard for minority shareholders," he warned.

Lim also pointed out that overseas proxy advisors lack understanding of the Korean market. "Because Korea represents such a small portion of foreign investors’ portfolios, they rely entirely on reports from proxy advisors like ISS, who do not have a deep understanding of Korea's unique chaebol control structure or the essence of the Korea Discount. It is crucial for activists to reach out to foreign investors and properly inform them about the realities of the Korean market," he emphasized.

Kim stressed the critical role of the National Pension Service (NPS), a major player in the domestic market. He pointed out that asset managers entrusted with NPS funds actually have no voting rights. "The NPS Fund Management Center often supports reasonable shareholder proposals and possesses expertise, but the Trustee Responsibility Specialist Committee is composed of non-experts or stakeholders (such as labor union and employer group representatives), and operates like a black box," Kim criticized. Professor Kim also argued, "The system should be improved so that voting rights are delegated to activist funds or professional asset managers entrusted with capital, allowing experts to exercise shareholder rights responsibly."

This content was produced with the assistance of AI translation services.