Alphabet and Berkshire Have No Price Gap Between Preferred and Common Shares [Preferred Share Discount] 2

Preferred Shares of Samsung Electro-Mechanics, LG Electronics and Others Trade at 60% Discounts
Companies Overseas Have Put Various Safeguards in Place for Preferred Shares
"Duty of Loyalty to Shareholders Should Also Apply to Preferred Shares"

Samsung Electronics said at its third-quarter earnings briefing on October 29 that it would actively adjust the proportion of preferred shares in future share buybacks and cancellations. With preferred shares trading at a discount of more than 20% to common shares, the company said it would consider focusing its buybacks and cancellations on preferred shares to enhance corporate value.

This is the first time in about 11 years, since October 2015, that Samsung Electronics has said it would actively pursue buybacks and cancellations of preferred shares. At the time, Samsung Electronics preferred shares were also trading at a 22% discount to common shares.

Discounts of 60% for Major Preferred Shares, Including Samsung Electro-Mechanics and LG Electronics

The 20% price gap between Samsung Electronics common and preferred shares is relatively modest compared with that of other major preferred shares. According to the Korea Exchange, as of the previous day's closing prices on November 9, Samsung Electro-Mechanics preferred shares ranked first among major preferred shares for the steepest discount to common shares, at 63.1%. LG Electronics preferred shares ranked second at 60.9%, followed by Samsung SDI preferred shares at 59.1%. LG Chem preferred shares ranked fourth at 53.6%, and Hyundai Motor preferred shares fifth at 47.7%. In effect, most major preferred shares show a substantial price gap from their corresponding common shares.

One of the main reasons preferred shares trade at a steep discount to common shares in the Korean stock market is companies' passive shareholder return policies. The price gap has widened structurally as companies have repeatedly excluded preferred shares and bought only common shares when repurchasing and canceling their own shares. Preferred-share investors receive economic benefits that are not significantly different from those of common-share investors, but the lack of voting rights also makes preferred shares less attractive as an investment.

In overseas markets, shares without voting rights often trade at prices similar to common shares. Alphabet and Berkshire Hathaway in the United States are prime examples. There is little price difference between Class A shares of Google parent Alphabet, which carry voting rights, and Class C shares, which do not. When Alphabet issued Class C shares, which are similar in nature to preferred shares in Korea, it put in place a mechanism to compensate Class C shareholders for a set period if the shares traded below the price of its common shares, Class A. The company introduced the policy in 2012 after Class A shareholders strongly objected to the issuance of Class C shares, citing concerns about the dilution of shareholder value.

Warren Buffett's Berkshire Hathaway also issued Class B shares with significantly reduced voting rights, while allowing one Class A share to be converted into 1,500 Class B shares. The two classes were designed to have economic rights in a 1,500-to-1 ratio, and the conversion option makes arbitrage possible, helping prevent the price gap from widening.

Attorney Kim Gyusik, a manager at Vista Global Asset Management, said, "When Alphabet moved to issue Class C shares in 2012, Class A shareholders sued, arguing that issuing Class C shares that traded at a lower price would damage the value of their assets and that the company would breach its duty of loyalty to shareholders. They reached a settlement with the company. This set a precedent in which the price parity of non-voting common shares was treated as a matter of fiduciary duty, and compensation was provided. It has important implications for preferred shares in Korea as well."

Calls Grow in Korea to Address the Marginalization of Preferred Shares

Shareholders in Korea are increasingly calling for action to address the marginalization of preferred shares. Samsung Electronics' announcement that it would actively pursue preferred-share buybacks and cancellations came in response to strong demands from activist investors. Overseas activist funds, including UK-based Palliser Capital and US-based Dalton Investments, as well as Korean asset managers such as Life Asset Management and Petra Asset Management, have actively urged Samsung Electronics to buy back and cancel preferred shares since the second half of this year.

On October 13, Palliser urged Samsung Electronics to prioritize using its remaining shareholder-return funds to buy back and cancel preferred shares. Palliser also proposed using funds raised in the United States through the issuance of American depositary receipts (ADRs) to buy back and cancel additional discounted preferred shares in Korea. On September 15, Life Asset Management also proposed that Samsung Electronics prioritize preferred-share buybacks and cancellations when allocating funds for shareholder returns. It then sent another shareholder letter to Samsung Electronics on November 5, expressing concern about the company's decision to defer the allocation of shareholder-return funds until the end of January 2027.

Life Asset Management CEO Kang Daekwon explained the rationale behind the shareholder letter: "When the same amount is used to buy back and cancel shares, purchasing lower-priced preferred shares reduces the number of shares outstanding by more than buying common shares and can increase per-share value more quickly. Since more shares are reduced, a greater share of all future earnings and dividends goes to the remaining shareholders, benefiting shareholders as a whole."

Petra Asset Management CEO Lee Chanhyung also emphasized, "Assuming Samsung Electronics conducts KRW 50 trillion in share buybacks and cancellations, buying only preferred shares would improve earnings per share (EPS) by 4.2%, whereas buying and canceling only common shares would improve it by just 3%. A shareholder-return policy focused on preferred shares benefits both the company and all its shareholders."

"Strengthen Boards' Responsibility for Capital Allocation"

Some say the fundamental problem with preferred shares in Korea lies in their rights structure. Preferred shares generally have priority over common shares in dividends or the distribution of residual assets. Investors give up voting rights in exchange for the expectation of higher dividends or priority in the event of liquidation. US investment bank Goldman Sachs has adopted structures that provide fixed dividend rates of 5.3% to 7.5% for certain periods, depending on the preferred-share series, or link dividends to benchmark interest rates. Some series explicitly provide rights that differ from those of common shares in dividends and the distribution of residual assets, including liquidation preferences of $25,000 per share.

Experts say, however, that these safeguards do not function properly for Korean preferred shares. Most Korean preferred shares are essentially non-voting common shares by US standards, with "preferred" being little more than a name. In particular, older preferred shares, which were mainly issued in the past, offer only an additional dividend equivalent to 1% of par value on top of the dividend paid on common shares. Newer preferred shares also set minimum dividend rates based on par value, making the dividend benefit negligible relative to their actual share prices. A substantial portion of dividends is paid at the same rate as for common shares, and in most cases preferred shares receive no dividends if common shares do not.

There are also examples of countries that have systematically reduced the use of preferred shares. Lee said, "France also issued non-voting shares in the past to raise capital while allowing controlling shareholders to retain management control. But after the relevant systems and laws were reformed from 1996 onward, preferred shares were extensively converted into common shares or canceled. Korea should also consider the French example over the long term."

Experts emphasize that companies should strengthen their boards' responsibility for capital allocation to reduce discounts on preferred shares. Attorney Kim argued, "The revised Commercial Act's directors' duty of loyalty to shareholders should be actively applied to non-voting common shares (preferred shares) to prohibit discrimination against them relative to common shares. The mandatory tender offer system should also be expanded to include non-voting common shares."

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