The Financial Supervisory Service is putting retail companies' governance overhauls under a microscope. The aim is to examine whether they have substantively aligned with protecting minority shareholders' rights, even if all formal procedures were completed. Most of the agenda items that the National Pension Service voted against at the Mar. shareholders meeting also took issue with the structure itself that shut out minority shareholders' voices.
According to the retail industry on the 3rd, the Financial Supervisory Service recently put the brakes on E-MART's plan to make Shinsegae Food a wholly owned subsidiary. The Financial Supervisory Service requested on the 30th of last month that E-MART submit a correction to the securities registration statement it had filed. The registration statement contains details on a stock exchange between E-MART and Shinsegae Food. E-MART had planned to exchange 1,042,112 shares of Shinsegae Food (26.91% equity) for E-MART shares at a ratio of 1 to 0.5031313 and incorporate Shinsegae Food as a wholly owned subsidiary.
There are two main reasons behind the Financial Supervisory Service's request to file a corrected report. First is whether the proceeds from the sale of Shinsegae Food's food service division were included when calculating the stock exchange ratio between E-MART and Shinsegae Food. Shinsegae Food's food service division was sold in Aug. last year to a subsidiary of OURHOME, a catering and food materials company, for a price of 120 billion won. Minority shareholders of Shinsegae Food are voicing dissatisfaction that when Shinsegae Food sold its food service division, it priced it at about four times the then price-to-book ratio (PBR) and sold it externally, but in this stock exchange between E-MART and Shinsegae Food, the deal proceeded at about half the liquidation value.
Another reason minority shareholders are raising their voices is that Shinsegae Food attempted a voluntary delisting and failed. In Jan., as E-MART pursued a tender offer for Shinsegae Food, it ended up securing a final equity stake of only 73.1%, suffering a setback. Having failed to secure 95%, E-MART failed in its bid for Shinsegae Food's voluntary delisting. This can also be interpreted as indicating that the price E-MART offered was still undervalued. At the time, E-MART applied a 20% premium over the previous one-month average and offered 48,120 won per share. Some minority shareholders argued that this price amounted to only 0.59 times the price-to-book ratio (PBR).
Behind the minority shareholders' voices influencing the Financial Supervisory Service's judgment is the second amendment to the Commercial Act passed last year. To prevent management decisions at listed companies from being made based solely on the voices of controlling shareholders, minority shareholders' rights were strengthened, and outside directors were required to make decisions considering the interests of all shareholders, not just the company.
Kim Bong-gi, CEO of Value Partners Asset Management, said, "Directors must consider the interests of all shareholders fairly, not just the company, and especially in transactions where conflicts with controlling shareholders arise, stricter standards are required," adding, "E-MART's case still typically relies on formal procedures to evade substantive fairness review."
Earlier, the Financial Supervisory Service also requested that Hyundai G.F Holdings, the holding company of Hyundai Department Store Group, submit a corrected report. This concerned the plan to calculate the stock exchange ratio with Hyundai Home Shopping at 1 to 6.357 and make Hyundai Home Shopping a 100% subsidiary. The Financial Supervisory Service told Hyundai G.F Holdings, "In the corrected report, clearly state again whether directors fulfilled their duty of loyalty to minority shareholders."
A Hyundai Department Store Group official said, "In the corrected report, we presented that special committees were formed and convened at both Hyundai G.F Holdings and Hyundai Home Shopping and that discussions took place on protecting minority shareholders' interests during this process, and we received approval from the Financial Supervisory Service," adding, "After the Commercial Act amendment passed, we faithfully complied with what the financial authorities requested accordingly."
The retail industry sees the financial authorities as moving to supervise based on substance consistent with the intent of the amended Commercial Act. This means that even if formal requirements are all met as before, if there is any element that runs counter to minority shareholders' intent, they are signaling a willingness to put the brakes on management decisions.
This is in the same vein as the direction in which the National Pension Service exercised its voting rights at the Mar. shareholders meeting. The National Pension Service expressed opposition to Lotte Corporation's "plan to hold and dispose of treasury shares." This agenda item emerged after the third amendment to the Commercial Act passed, making the retirement of treasury shares mandatory. The gist is to allow companies not to retire treasury shares but to hold or dispose of them if there is a managerial purpose such as improving the financial structure or introducing new technologies.
Expressing opposition to the agenda item, the National Pension Service said, "In a structure where the majority shareholder's approval alone can pass the item, it is difficult for general shareholders' opinions to be sufficiently reflected," adding, "If exceptions to the retirement of treasury shares are recognized broadly, it could lead to damage to shareholder value." A capital markets industry official said, "If it is judged that minority shareholders' rights are being sacrificed due to controlling shareholders' conflicts of interest, even if formal requirements are met, if substantive harm is proven, for the time being it will be difficult for things to proceed (as companies want)."
In response, a retail company official said, "We are only now creating guidelines on how far discussions should go in cases of conflicts of interest," adding, "While we agree with the authorities' intent, excessive involvement and interference could hold back agile responses when managerial judgment requires them."