Will Preferred Shares No Longer Be "Left Out in the Cold" After the Commercial Act Amendment? [Preferred Share Discount] (3)

More Companies Consider Buying Back and Canceling Preferred Shares Following Commercial Act Amendment
"Canceling Only Common Shares Could Violate Directors' Duty of Loyalty to Shareholders"
Hyundai Motor, Hanwha and Mirae Asset Cited as Ex

On June 17, Mirae Asset Securities decided to buy back and cancel all of its treasury shares, in a record-breaking KRW 300 billion buyback. It subsequently used KRW 100 billion of that amount to buy back and cancel preferred shares. Of the KRW 100 billion, KRW 10 billion was allocated to its first-class preferred shares (Mirae Asset Securities Preferred) and KRW 90 billion to its second-class preferred shares (Mirae Asset Securities 2nd Preferred B). This was the first time Mirae Asset's treasury share buyback and cancellation plan had included first-class preferred shares. At the time, a Mirae Asset Securities official said the decision was "intended to address the undervaluation of the share price and enhance shareholder value, while also narrowing the market price gap between common and preferred shares."

Mirae Asset's efforts to address the undervaluation of its preferred shares have yielded results. When the treasury share buyback was announced, Mirae Asset Securities' preferred shares traded at a 72.2% discount to its common shares. As of the closing price on November 9, the discount had narrowed by 11.1 percentage points to 61.1%. The case is seen as evidence that share buybacks can improve supply and demand for preferred shares and prompt the market to reassess their value.

More Companies Consider Buying Back and Canceling Preferred Shares After Commercial Act Amendment

BYC, a functional clothing company, also signed a trust agreement on August 5 to acquire KRW 3 billion worth of its own shares to stabilize its share price and enhance corporate value. Notably, it allocated KRW 2 billion of the total to buying back preferred shares and just KRW 1 billion to common shares. At the time, BYC's common shares were trading at around KRW 35,000, compared with KRW 23,800 for its preferred shares, which represented a discount of 32.1%. The company therefore focused its treasury share buyback on preferred shares to further increase corporate value. Two months later, the discount on BYC's preferred shares relative to its common shares had edged down to 31.6%.

Experts believe that cases of companies buying back and canceling preferred shares are increasing following last year's amendment to the Commercial Act, which expanded directors' fiduciary duties. Buying preferred shares at a greater discount than common shares allows a company to acquire more shares for the same amount, helping to increase corporate value. It can also help prevent legal disputes with preferred shareholders that could arise in the future.

Lee Gyeongyeon, a researcher at Daishin Securities, said, "With directors' fiduciary duties taking effect under the amended Commercial Act, the legal basis for protecting preferred shareholders, as well as common shareholders, has been strengthened." Lee added, "Because older preferred shares are essentially similar in nature to common shares, the more effectively fiduciary duties are applied, the more likely preferred shares are to be evaluated on the same basis as common shares. This will be a key factor enabling their revaluation." An official in the financial investment industry said, "Since the Commercial Act was amended last year, companies have been consulting legal advisers to carefully assess the risk of potential disputes with preferred shareholders that could arise from buybacks and cancellations focused on common shares."

Long-established traditional conglomerates have also taken an active role in buying back preferred shares, with Hanwha Group and Hyundai Motor Group among the leading examples. In its corporate value enhancement plan announced alongside a corporate spin-off on January 14, Hanwha said it would buy all of its old first-class preferred shares through an over-the-counter purchase and then cancel them. The plan covers 199,033 shares, with an estimated purchase price of approximately KRW 14.15 billion. Hanwha chose an over-the-counter purchase because the first-class preferred shares had already been delisted. It also said it planned to cancel the shares within a year of buying them back, to protect the interests of minority preferred shareholders whose shares remained after the delisting. In 2024, Hanwha also bought back all of its third-class preferred shares on the market and canceled them.

Hyundai Motor, Mirae Asset Securities and Hanwha Recognized as Role Models in Shareholder Returns

On August 26, Hyundai Motor also disclosed that it would cancel all 1.21 million of its three classes of preferred shares. Before the cancellation announcement, Hyundai Motor's first-class preferred shares traded at a 52.24% discount to its common shares; the discount has since narrowed to 46.49%. In November 2024, Hyundai Motor also spent KRW 1 trillion to buy back and cancel common shares and three classes of preferred shares: first-, second- and third-class. Hyundai Motor has broadened the scope of its shareholder returns by buying back common and preferred shares together.

Yoo Geonho, a senior research fellow at Mirae Asset Securities, said, "If Hyundai Motor buys back and cancels all of its old preferred shares and new preferred shares (Hyundai Motor 3rd Preferred B), earnings per share (EPS) for common shares could increase by nearly 11%, based on last year's results." He added, "Buying back and canceling preferred shares also benefits common shareholders." In particular, he said, "The amendment to the Commercial Act last year, which explicitly codified directors' duty of loyalty to shareholders, means that unequal treatment of the rights attached to older preferred shares could become an issue. This is changing the investment landscape surrounding preferred shares."

Ultimately, observers say that fundamental changes in the attitudes and actions of major Korean companies are essential to addressing the entrenched discount on preferred shares in the Korean stock market. Kim Suhyun, head of the research center at DS Investment & Securities, said, "The biggest reason preferred shares trade at a discount is that companies neglect them." He stressed, "Large companies, including Samsung Electronics, need to make a more active effort to narrow the discount on preferred shares."

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