[Weekend Money] Dual-Listing Controversy Is Unavoidable, Even Overseas

Concerns persist over share-price declines and diminished control by ordinary shareholders
Kakao sets a precedent, detailing its reasons for opposing a dual listing

An analysis has found that even when a parent company lists a subsidiary on an overseas market, it constitutes a dual listing and raises significant concerns about a discount.

Hanwha Investment & Securities said that under the dual-listing guidelines that took effect in August, a subsidiary’s listing on an overseas market also constitutes a dual listing.

The dual-listing guidelines impose specific duties on a parent company’s board, based on its duty of loyalty to shareholders under the Commercial Act, when a subsidiary is listed, and introduce stricter review standards for subsidiary listings. The same principles apply when a parent company lists a subsidiary on an overseas market.

A dual listing occurs when a parent company separately lists a subsidiary. In South Korea, companies have sometimes pursued this option despite controversy over the potential erosion of parent-company value, since it can raise large amounts of capital while minimizing the dilution of major shareholders’ control. The problem is that a dual listing divides investment demand between the parent company and its subsidiary, negatively affecting the interests of the parent company’s minority shareholders.

Until now, listing a subsidiary on an overseas stock market was considered a relatively better option than a dual listing on the domestic market. This was because it would bring in new funds from overseas investors and, with the markets separate, was thought to have a limited effect on the parent company’s value.

However, listing a subsidiary on an overseas stock market still raises concerns about a discount. Separating a business that is included in the parent company’s consolidated earnings and corporate value into an independent company can weaken shareholders’ claims on future cash flows from a specific business segment and the parent company’s authority to allocate capital, potentially causing its share price to fall. It also dilutes ordinary shareholders’ ability to exercise control and influence over the listed business segment.

Kakao is one example of a dual listing that did not go ahead for these reasons. On August 20, the Korea Exchange requested Kakao disclose information about its plan to pursue a $1 billion U.S. initial public offering (IPO) for its subsidiary Kakao Mobility. Kakao disclosed that its board had resolved on September 22 to oppose plans to list Kakao Mobility on the U.S. stock market.

The reasons for opposing the plan included concerns about "investment demand being divided between Kakao and Kakao Mobility," "a greater discount to Kakao’s net asset value (NAV) due to the dual listing," and "increased complexity in corporate valuation." Another reason was that "the primary purpose is to provide liquidity for shares held by certain financial investors (FIs), making it difficult to conclude that the move would serve the economic interests of ordinary shareholders."

"It is common for a parent company’s major shareholders or board to actively pursue a subsidiary listing. It is pleasantly surprising that Kakao’s board publicly opposed the listing, even setting out specific reasons for its opposition," said Eom Su-jin, a researcher at Hanwha Investment & Securities. "A subsidiary’s overseas listing can be justified only when there is clear confidence and evidence that it will significantly strengthen the subsidiary’s core capabilities, for example, by building local factories, acquiring overseas companies, or recruiting outstanding talent abroad."

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