Lee Jae-myung, the presidential candidate of the Democratic Party of Korea, and the Democratic Party of Korea are pushing for the mandatory disposal of treasury stock, which is expected to impose restrictions on corporations' use of treasury stock. South Korea lacks adequate management rights defense mechanisms, prompting some corporations to use treasury stock for management rights defense.
According to the business community on the 21st, LS Group and Hanjin Group recently formed a treasury stock alliance to respond to management rights threats from Hoban Group. They have begun utilizing treasury stock for management rights defense. While treasury stock carries no voting rights, selling it externally grants voting rights.
LS Group's holding company, LS, plans to dispose of 387,365 shares of treasury stock (1.20% of total issued shares) on the 2nd of next month to issue exchangeable bonds worth 65 billion won targeting Korean Air, a subsidiary of Hanjin Group. Korean Air can exchange these bonds for LS treasury stock from December until May 2030.
LS stated that the purpose of issuing the exchangeable bonds is for repaying borrowing funds to Korea Development Bank. However, the business community sees this issuance targeting Korean Air as LS being mindful of management rights defense. If Korean Air exchanges the bonds for LS treasury stock, LS could gain voting rights as a friendly shareholder in the event of a management rights dispute.
LS Group is wary of Hoban Group's acquisition of LS shares. It has been revealed that Hoban Group acquired less than 3% of LS shares amid ongoing legal disputes between its subsidiary, Taihan Cable & Solution, and LS Group's subsidiary, LS Cable & System. Hoban Group is also reported to hold shares in LS Cable & System. If the shareholding exceeds 3%, it can exercise influence over management, including the right to request access to accounting books.
LS Group appears to be securing allies in preparation for management rights threats. This collaboration between LS and Korean Air regarding treasury stock is an extension of their business partnership formed last month. Given the collaboration between Hanjin Group, primarily focused on the airline industry, and LS Group, focused on electric power and cable industries, the business community interprets this as a strategy to counter Hoban Group rather than direct business cooperation. Earlier in March, LS Group also promised a strategic alliance and comprehensive cooperation with LIG Group, part of the broader LG family.
Hanjin Group also revived the voting rights of treasury stock, conscious of Hoban Group, the second-largest shareholder of its holding company, Hanjin KAL. Hoban Construction, a subsidiary of Hoban Group, became the second-largest shareholder by purchasing shares of Hanjin KAL from the private equity fund KCGI, which had been involved in a management rights dispute with Korean Air in 2022. Hoban Construction had also participated in the acquisition of Kumho Industrial, which owned Asiana Airlines, in 2015.
On the 12th, Hanjin KAL announced that Hoban Group had increased its stake in Hanjin KAL to 18.46%, prompting Hanjin KAL to decide on the 15th to donate 0.66% of its treasury stock to the employee welfare fund. By donating treasury stock to the internal welfare fund, the voting rights can be restored as the fund now owns the shares. Hoban Group has been steadily increasing its equity in Hanjin KAL since last March through its affiliates.
Cho Won-tae, chairman of Hanjin Group (including affiliates holding 20.09% of common stock), utilized the treasury stock contributed to the employee welfare fund to widen the equity gap with Hoban Group from 1.6 percentage points to 2.29 percentage points. When combining the stakes of the employee welfare fund, Delta Air Lines (14.90%), and Korea Development Bank (10.58%), the total equity stands at 46.23%. Among the shareholders holding less than 5% of Hanjin KAL, the combined equity of Naver, GS Group, and Hanil Cement is estimated at about 3.85%, presumed to be friendly equity for Cho Won-tae.
Some segments of the political arena and activist funds criticize the act of utilizing treasury stock for defending management rights as an infringement of shareholder interests. However, within the business community, there are concerns that if the mandatory disposal of treasury stock is imposed without adequate management rights defense measures such as differential voting rights, domestic entities may lose management rights to foreign private equity funds without resistance.