"Why Are Preferred Shares 45% Cheaper in the Same Company?" Concerns Over Korea's Preferred Share Discount

Korea Corporate Governance Forum Seminar
Preferred Shares Trading at an Average 45% Discount to Common Shares
Preferred Share Discounts Widen Despite Capital Market Reforms
"Conglomerates Should Take the Lead in Buybacks and Retirements of Preferred Shares"

"The same company, the same profit, the same dividend resources. But the price is cut in half." (Kyusik Kim, Portfolio Manager at Vesta Global Asset Management)

"This is essentially a discount on the Korea Discount." (Sachin Mistry, Managing Director of Pallas Capital)

It has been diagnosed that the phenomenon in which preferred shares of domestic listed companies, including Samsung Electronics and Hyundai Motor Company, are trading at an average 45% discount compared to common shares directly reflects the structural weaknesses of Korean corporate governance. In particular, the widespread practice among companies of buying back and retiring primarily common shares has further deepened the issue of preferred share discounts. There is a growing chorus of voices calling for business conglomerates to take the lead in buybacks and retirements of preferred shares, in addition to recommendations such as the introduction of a mandatory tender offer system.

On August 31, at a seminar held at the Korea Institute of Financial Investment Education in Yeouido, Sachin Mistry, Managing Director at Pallas Capital, presented the first topic, stating, "The preferred share discount observed in the Korean capital market is not merely a pricing anomaly. It highlights extensive weaknesses in corporate governance and capital allocation."

Mistry first pointed out, "In Korea, preferred shares are traded at an average discount of about 45% compared to common shares," adding, "In advanced markets, securities similar to non-voting preferred shares usually see only a single-digit percentage discount." He analyzed, "This is because there are already many companies in Korea with a controlling shareholder, and, under these circumstances, the practical influence of general shareholders' voting rights is limited. Investors are pricing in corporate governance risks."

As of the end of July, the domestic stock market had 114 listed preferred shares, with a combined market capitalization of approximately 200 trillion won. According to the Governance Forum, on August 11, Samsung Electronics' preferred shares traded at 182,000 won, which is 25% lower than its common shares (239,500 won). During the same period, the price gap between preferred and common shares was 63% for Doosan and 50% for Hyundai Motor Company.

Mistry also pointed out that this phenomenon of preferred share discounts leads to several problems. He explained that since preferred shares make up a significant portion of the Korean stock market, this results in an overall market valuation decline, effectively amounting to a "discount on the Korea Discount." Furthermore, not only does it raise the cost of capital for companies, but it also casts doubt on the credibility of Korean capital market reforms in the eyes of overseas investors. He criticized, "The expansion of directors' fiduciary duties through amendments to the Commercial Act may also be put to the test, as this could further weaken the influence of ordinary investors while making it easier to strengthen the power of executives and controlling shareholders."

Accordingly, Mistry suggested, "From a corporate standpoint, the board of directors should value companies and assess capital costs based on a standard that fully includes preferred shares, making capital allocation decisions accordingly." He recommended that "value-up programs should include specific indicators, goals, and improvement plans related to preferred shares." He further argued, "In cases where the discount rate becomes excessive, companies should consider buybacks and retirements of preferred shares or converting them into common shares. Purchasing heavily discounted preferred shares provides greater value enhancement than buying back common shares."

He explained that buying back and retiring discounted preferred shares could reduce inefficient capital and lower the cost of capital while also simplifying capital allocation, ultimately benefiting common shareholders as well. He added, "Financial authorities must also ensure that directors' fiduciary duties are applied equitably to preferred shareholders, clearly define standards, and seek reform measures to strengthen the treatment of preferred shareholders during mergers and other processes."

The second presentation, delivered by Portfolio Manager Kyusik Kim, echoed these concerns, declaring, "Preferred share discounts are the canary in the coal mine of Korean corporate governance. Addressing preferred share discounts is the starting point for re-rating the Korean capital market, including common shares." Kim argued, "Korean preferred shares should essentially be viewed as 'non-voting common shares.' In the US, non-voting common shares are not traded at a discount. For instance, Alphabet Class C shares, which have no voting rights, trade at the same price as voting Class A shares, and Berkshire Hathaway's gap between Class B and voting shares is only about 1%."

He further stated, "Domestic preferred shares are trading at a 26-64% discount to common shares," pinpointing the cause less on the lack of voting rights and more on 'tunneling,' namely, discrimination in the process of buybacks and mandatory tender offers. He cited cases such as LG and Kumho Petrochemical entirely excluding preferred shares from their share buybacks, and Hanwha Corp publicly buying back preferred shares at 0.34 times net asset value in 2024, delisting them as a result.

Kim presented "two solutions": First, actively applying Article 382-2(2) (fiduciary duty) and 382-3 (duty to protect the interests of all shareholders and ensure fair treatment) of the amended Commercial Act to non-voting common shares to prohibit discrimination among equal-ranking shares. Second, introducing a mandatory tender offer system and expanding its scope to include non-voting common shares.

During the panel discussion, Suhyeon Kim, Head of Research Center at DS Investment & Securities, stated, "There is a reason companies buy only common shares. When common shares are retired, the controlling shareholders' ownership goes up, but retiring preferred shares does not have that effect." Kim further said, "The amended Commercial Act should now tighten regulations to bar boards from discriminating among shareholder classes. Decisions to buy only common shares without reviewing the cheaper option among a company's shares now require justification and explanation."

He noted, "Samsung Electronics is likely to be the first case. Samsung Life and Samsung Fire & Marine Insurance are subject to the 10% cap under the Insurance Business Act, making it difficult to further retire common shares." He added, "If Samsung Electronics, at the board meeting in January next year, increases the scale of preferred share buybacks and retirements to a new level—say, exceeding the 30% threshold of 2015—this could set a new standard."

Kang Dongoh, an individual investor who proposed the preferred share re-rating campaign, commented, "I'm not saying companies must always buy back preferred shares. The real issue is whether boards thoroughly compare which is more advantageous to all shareholders—buying back common or preferred shares—when they allocate billions of won for share buybacks." He cited BYC's recent disclosure on August 5 that it would allocate more funds to buying back preferred shares in its new repurchase plan and added, "Change has already begun. Preferred share-based repurchase is no longer just a theory."

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