As the third amendment to the Commercial Act, which includes a mandatory cancellation of treasury shares, is being pushed forward, Kwangdong Pharmaceutical has moved to use a substantial amount of its treasury shares to defend management control.
Kwangdong Pharmaceutical has faced criticism that its ownership structure is weak because the owner family's equity stake is low. But as the discussion on canceling treasury shares gained speed, it decided to hand over the treasury shares it had increased over the past five years to a white knight.
Kwangdong Pharmaceutical disclosed on 29th that it decided to dispose of 3.73 million of the roughly 13.14 million treasury shares it held to Geumbee, Samhwa Crown & Closure, and Samyang Packaging. It will transfer 660,000 shares and 710,000 shares to Geumbee and Samhwa Crown & Closure, respectively, via a stock exchange, and sell about 2.39 million shares to Samyang Packaging.
Kwangdong Pharmaceutical said the disposal of treasury shares was a decision to build business partnerships. Through a stock exchange, it intends to share equity in the counterpart companies and maintain long-term cooperation in related business fields.
There have often been cases of building partnerships between companies and strengthening business cooperation through stock exchanges. Earlier, Hyundai Motor and KT decided in 2022 to strengthen business cooperation in mobility through an equity exchange, and CJ Group and NAVER also formed a strategic alliance through an equity exchange in 2020.
But the market sees Kwangdong Pharmaceutical's disposal of treasury shares differently this time. With the government and the ruling party discussing a bill to require listed companies to cancel treasury shares, some interpret the move as the owner family using treasury shares to strengthen management control.
Through this equity exchange and disposal, Kwangdong Pharmaceutical has been able to use part of its treasury shares as friendly equity. Treasury shares have no voting rights, but when transferred to other corporations, the voting rights are revived. If the treasury shares freed up by the equity exchange are viewed as friendly equity for the owner family, the friendly equity ratio soars from the 18% range to 25%.
Kwangdong Pharmaceutical holds 13,140,239 treasury shares, equivalent to about 25.1% of its outstanding shares. In the bio sector, it is cited as one of the companies with the most treasury shares, along with Daewoong Pharmaceutical (about 29.67%). Kwangdong Pharmaceutical has continued to expand its treasury share ratio, but the last decision to dispose of treasury shares to enhance shareholder value was five years ago, in 2020.
The backdrop to Kwangdong Pharmaceutical's steady expansion of treasury shares is said to be vulnerable management control due to the owner family's low equity ratio. Choi Seong-won, chair of Kwangdong Pharmaceutical, holds a 6.59% equity stake in Kwangdong Pharmaceutical, and even when adding all friendly equity of related parties, it stands at 18.19%.
The issue is that external investor Fidelity has secured a 9.9% equity stake in Kwangdong Pharmaceutical. On a single-shareholder basis, its equity ratio is higher than Chair Choi's. While Fidelity said it acquired Kwangdong Pharmaceutical shares for "a simple investment purpose," a change in Fidelity's stance cannot be ruled out given the owner family's weak management control.
An industry official said, "When the owner family's equity ratio is low, the company can raise the value of its holdings through treasury share purchases and later use methods such as converting treasury shares into friendly equity," adding, "Kwangdong Pharmaceutical's sustained efforts to buy back shares have been part of this strategy."
As listed companies with treasury shares have recently been issuing exchangeable bonds (EB) to increase friendly equity, Kwangdong Pharmaceutical's disposal of treasury shares is expected to have a similar effect.
A financial investment industry official said, "Whether it's EB issuance or a treasury share exchange, it ultimately runs counter to the government's policy of boosting minority shareholders' equity value through cancellations," adding, "Kwangdong Pharmaceutical is talking on the surface about strengthening business cooperation, but it appears to have made a decision that ultimately helps the controlling shareholder strengthen management control."