[The View] Maximizing Shareholder Value: Subsidiary Listings Are No Exception

The challenge left by Solidigm's IPO halt
Balancing "capital raising" and "shareholder value"

SK hynix has halted plans to raise pre-IPO investment for its U.S. subsidiary Solidigm and to consider an initial public offering (IPO). The company said the decision was made after taking into account overall capital market conditions. The plan to secure investment funds to meet demand for artificial intelligence (AI) has been put on hold for now. While it is impossible to attribute the decision to any single factor, the controversy has revived a familiar question in South Korea’s capital markets: How should companies balance funding needs with the rights of existing shareholders?

Shareholders of SK hynix, who took on risks during the acquisition and business turnaround, are bound to care about how the rewards of growth are shared. That is why news of a separate listing for a core business has prompted more concern than anticipation. As the company emphasizes the need to expand its business, existing shareholders want to know how the value of their investments will change.

However, claims that a subsidiary’s listing necessarily erodes shareholder value should be treated with caution. Issuing new shares reduces the parent company’s ownership stake, but brings new funds into the subsidiary in return. If the subsidiary raises funds at a fair price and uses them for profitable investments, the value of the parent company’s stake could increase even as its ownership percentage falls. A reduction in ownership percentage is not the same as an economic loss. A subsidiary listing can also be a way to secure the capital needed for growth and have the business’s value assessed by the market.

The review should therefore begin with the specific terms of the transaction. The first distinction to make is whether the subsidiary will issue new shares to raise investment funds or the parent company will sell some of its stake to raise cash. The impact on existing shareholders will vary depending on the valuation, the size of the sale and how the funds are used. If a stake is transferred at a price that does not adequately reflect its future value, some of the existing shareholders’ share of that value could pass to new investors. It is the responsibility of management and the board to provide the information needed to assess this.

The issue of the parent company discount should be viewed in the same context. A subsidiary’s listing does not make the value of the parent company’s stake disappear. But if it is unclear how the subsidiary’s performance will benefit the parent company’s shareholders, through dividends or other means, the market may assign that stake a lower value. The discount could deepen further if concerns about conflicts of interest grow within a multi-tiered corporate governance structure. A broad appeal to growth across the corporate group cannot substitute for protecting the interests of shareholders in each listed company.

In this regard, it is significant that financial authorities have stressed that the parent company board’s duty to protect shareholders also applies to overseas listings. Rules on multiple listings require an assessment of the impact on shareholders, measures to protect them, communication with shareholders, a board resolution and disclosure. The fact that a listing takes place overseas does not change the board’s responsibilities to shareholders of the domestic parent company. Nor should the parent company’s board evade its judgment and responsibilities by describing the decision as a subsidiary’s fundraising matter.

These procedures must amount to more than completing paperwork. Before and after a listing, the board should disclose comparisons of the value of its stake, expected investment returns and the costs of alternative financing methods. It should also obtain an independent review to check that its assumptions are not overly optimistic. If shareholders are expected to be disadvantaged, the board should propose specific measures to mitigate the impact and give shareholders ample opportunity to express their views. Persuading shareholders should be part of the decision-making process, not simply a public relations effort after the announcement.

Halting consideration of the listing does not automatically resolve the question of how to fund investment. Using internal cash flow could reduce the funds available for other investments, while issuing corporate bonds or taking out loans could increase interest expenses and financial risk. Management must present alternatives that take these costs into account. Decisions should be based on the costs shareholders will bear and the benefits they stand to gain, rather than the convenience of raising funds or a preference for listing.

The decision can be viewed positively insofar as it has eased concerns about a multiple listing. But halting one company’s listing plans does not, by itself, ensure shareholder protection. The same principles and procedures must apply to similar decisions in the future. Raising capital for growth and protecting shareholders are goals that must be pursued together. When a company explains its investment opportunities and shows that it can share the benefits fairly, shareholders can also support its long-term investments.

Park Seonggyu, professor at Willamette University in the United States

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