Korean Corporate Governance Forum Opinion
Hanwha Energy’s tender offer of Hanwha Corp lacks fairness
"Hanwha Group’s tender offer reignites calls for revisions to
Commercial Code"
On July 3rd, Ministry of Economy and Finance has announced disappointing Value-up tax support plan to enhance listed companies’ shareholder return. As the editorial of a major press suggests as there appears to be a lack of a control tower of the Value-up program given the recent tax support plan lacks protection of minority shareholders.
It is unclear whether this is a coincidence, but, on July 3rd, the government decided to temporarily postpone the proposed amendment to the Commercial Code, which aimed to expand the scope of directors’ duty of loyalty from the company to its shareholders. Just two days later, on July 5th, Hanwha Energy announced its intention to conduct a tender offer, stating that it would “strengthen responsible management” by acquiring an additional 8% stake in the common shares of Hanwha Corp, in which it already holds a 9.7% stake. The proposed purchase price for 6mn shares subject to the tender offer is W30,000 per share, which represents an 8% premium over the closing price of W27,850 on July 4th.
While the company has stated its intention to "strengthen responsible management" and “enhance shareholder value”, its public tender offer document failed to provide shareholders with a clear understanding of its specific value enhancement plans and how they will translate into tangible benefits for shareholders. They need a detailed corporate Value-up plan to persuade minority shareholders. Hanwha Corp’s controlling shareholders offer a blueprint that the corporate value could be enhanced through the execution of responsible management, but minority shareholders cannot understand why they need to sell their shares at the current depressed valuation after suffering extremely low price performance for a long term. This calls for an active role of financial authorities to at least scrutinize such public tender offers and consider measures such as rejecting disclosure documents without sufficient specificity or imposing stricter disclosure On the same day, BoD of Hanwha Corp decided to acquire and cancel 450,000 preferred shares at W40,500 which is 11% premium from July 4th’s closing price, W36,350. We cannot understand why the board approved share repurchase of preferred shares at a 35% premium over the common share at the same time controlling shareholder asked minority shareholders to accept the tender offer.
Hanwha Corp effectively being the holding company of the Hanwha Group, the controlling shareholder hold 44% of the issued shares including Chairman Kim Seung-youn’s 23% stake. Vice Chairman Kim Dong Kwan, President Kim Dong-won, and Vice President Kim Dong-Sun not only hold Hanwha Corp’s 5%, 2%, 2% stake each, but also indirectly holding Hanwha Corp’s 10% stake through Hanwha Energy, that three sons’ 100% stakes as a private company. If the tender offer is successful, it is expected that the controlling shareholders’ stake in Hanwha Corp will reach approximately 52%.
The majority of local press focused on the group management succession to the 3rd generation. While succession planning is undoubtedly an important event, the focus on the tender offer from a governance perspective is the potential for infringement on the interests of Hanwha Corp’s minority shareholders. This looks like a matter of fairness in our view.
Hanwha Corp’s BoD should promptly take measures to protect the interests of its minority shareholders from the perspective of their fiduciary duties. Rather Hanwha Corp should immediately disclose its Value-up plan, which has been emphasized by President Yoon Seok-Yeol since the beginning of the year and make efforts to bring the stock price to a fair level.
From a procedural perspective, the current tender offer is concerning as the Vice Chairman Kim Dong Kwan and his family are the controlling shareholders of both companies, and as he is also a director of Hanwha Corp, he is an interested party with exclusive access to information and authority of Hanwha Corp, creating a conflict of interest, in our view.
Restricting directors’ self-dealing is a key principle and global standard. Even if Hanwha Corp itself is not harmed by the current tender offer, the proposed purchase price appears to be set at an extremely low level of share price and valuation, as exemplified below. As such, the interests of Hanwha’s minority shareholders may be infringed upon, in our opinion.
However, the claim by Hanwha Energy, a private company owned by the three sons, that the tender offer is to “strengthen responsible management” is contradicted by the performance and valuation of Hanwha Corp’s share price, which shows the opposite results. Let us look at TSR and valuation from Hanwha Corp common shareholders’ perspective. Prior to the tender offer, share price fluctuated -7%, +8%, +7% for last 3-year, 5-year, and 10-year period, respectively, based on the share price on the day before the tender offer. Even when factoring in the dividend yield, the common stock’s TSR has been a mere 0%, +1%, and +3% per annum over the past 3-year, 5-year, and 10-year periods, respectively. This represents an extremely poor shareholder return that even fails to match local bank deposit interest rates. According to Naver Securities, Hanwha Corp’s PBR is at 0.27x, and according to SK Securities’ latest research, the company’s common shares are trading at 69% discount to its NAV. It is curious whether Hanwha Corp’s BoD has engaged in serious discussions regarding the company’s capital allocation policy and solution to address the destruction of corporate value.
Another procedural issue is that the mandatory tender offer is only for a small 8% stake, rather than the entire issued shares. This could potentially subject minority shareholders to structural coercion. Even if minority shareholders are aware that the tender offer price is unfairly low, they may feel compelled to accept it, as refusing tender could lead to further deterioration of the company’s corporate governance. Inducing minority shareholders to effectively “jump off the ledge” constitutes an element of undue coercion. This is one of the key rationales underlying the advocacy for the adoption of a 100% mandatory public tender offer in more developed markets.
From a substantive standpoint, the tender offer of W30,000 represents a PBR of merely 0.28x, which indicates an exceptionally low valuation. In effect, the controlling shareholder is exploiting the minority shareholders by acquiring their shares at this severely depressed price. In our view, this course of action is manifestly inequitable, and it not aligned with the motto of “responsible management.” Furthermore, if the direct and indirect shareholding of Vice Chairman Kim Dong Kwan and his two brothers were to increase from 19% to 27%, it would result in a significant surge in the control premium. As a result, the minority shareholders’ restraining influence on controlling shareholders would be significantly weakened, and this could potentially have a detrimental impact on the overall corporate value.
In the case of Hanwha Corp’s Board of Directors, particularly, the independent directors, should take a leading role in addressing this issue. If this were to occur in more developed markets such the US or the UK, the following global standards would like to be applied. Excluding the three inside directors, including Vice Chairman Kim Dong Kwan, the board should establish a special committee comprised solely of independent directors, and work to protect the interests of minority shareholders and ensure they are not compelled to sell their shares at an unfairly low price from the perspective of their fiduciary duty to shareholders. The special committee should assert that W30,000 per share that Hanwha Energy is too low, at the minority shareholders’ best interest, so Hanwha Energy should either purchase at a fair price assessed by independent experts (which is much higher price) or purchase all shares at a fair price without structural coercion on the minority shareholders.
Lastly, we would like to emphasize that the repeated use of family-controlled private companies for succession should not be repeated. We have concerns over possible merger between Hanwha Energy and Hanwha Corp in the future. If this were to happen, the Value- up program will reverse and Korea Discount is likely to widen. If the proposed amendments to the Commercial Act, which includes the duty to protect shareholders as part of the directors’ duty of loyalty, is passed by the National Assembly, it would be able to protect the property of minority shareholders in cases of the related-party transactions, like this one.
July 11, 2024
Korean Corporate Governance Forum
Chairman, Namuh Rhee
Korean Corporate Governance Forum Opinion
Hanwha Energy’s tender offer of Hanwha Corp lacks fairness
"Hanwha Group’s tender offer reignites calls for revisions to
Commercial Code"
On July 3rd, Ministry of Economy and Finance has announced disappointing Value-up tax support plan to enhance listed companies’ shareholder return. As the editorial of a major press suggests as there appears to be a lack of a control tower of the Value-up program given the recent tax support plan lacks protection of minority shareholders.
It is unclear whether this is a coincidence, but, on July 3rd, the government decided to temporarily postpone the proposed amendment to the Commercial Code, which aimed to expand the scope of directors’ duty of loyalty from the company to its shareholders. Just two days later, on July 5th, Hanwha Energy announced its intention to conduct a tender offer, stating that it would “strengthen responsible management” by acquiring an additional 8% stake in the common shares of Hanwha Corp, in which it already holds a 9.7% stake. The proposed purchase price for 6mn shares subject to the tender offer is W30,000 per share, which represents an 8% premium over the closing price of W27,850 on July 4th.
While the company has stated its intention to "strengthen responsible management" and “enhance shareholder value”, its public tender offer document failed to provide shareholders with a clear understanding of its specific value enhancement plans and how they will translate into tangible benefits for shareholders. They need a detailed corporate Value-up plan to persuade minority shareholders. Hanwha Corp’s controlling shareholders offer a blueprint that the corporate value could be enhanced through the execution of responsible management, but minority shareholders cannot understand why they need to sell their shares at the current depressed valuation after suffering extremely low price performance for a long term. This calls for an active role of financial authorities to at least scrutinize such public tender offers and consider measures such as rejecting disclosure documents without sufficient specificity or imposing stricter disclosure On the same day, BoD of Hanwha Corp decided to acquire and cancel 450,000 preferred shares at W40,500 which is 11% premium from July 4th’s closing price, W36,350. We cannot understand why the board approved share repurchase of preferred shares at a 35% premium over the common share at the same time controlling shareholder asked minority shareholders to accept the tender offer.
Hanwha Corp effectively being the holding company of the Hanwha Group, the controlling shareholder hold 44% of the issued shares including Chairman Kim Seung-youn’s 23% stake. Vice Chairman Kim Dong Kwan, President Kim Dong-won, and Vice President Kim Dong-Sun not only hold Hanwha Corp’s 5%, 2%, 2% stake each, but also indirectly holding Hanwha Corp’s 10% stake through Hanwha Energy, that three sons’ 100% stakes as a private company. If the tender offer is successful, it is expected that the controlling shareholders’ stake in Hanwha Corp will reach approximately 52%.
The majority of local press focused on the group management succession to the 3rd generation. While succession planning is undoubtedly an important event, the focus on the tender offer from a governance perspective is the potential for infringement on the interests of Hanwha Corp’s minority shareholders. This looks like a matter of fairness in our view.
Hanwha Corp’s BoD should promptly take measures to protect the interests of its minority shareholders from the perspective of their fiduciary duties. Rather Hanwha Corp should immediately disclose its Value-up plan, which has been emphasized by President Yoon Seok-Yeol since the beginning of the year and make efforts to bring the stock price to a fair level.
From a procedural perspective, the current tender offer is concerning as the Vice Chairman Kim Dong Kwan and his family are the controlling shareholders of both companies, and as he is also a director of Hanwha Corp, he is an interested party with exclusive access to information and authority of Hanwha Corp, creating a conflict of interest, in our view.
Restricting directors’ self-dealing is a key principle and global standard. Even if Hanwha Corp itself is not harmed by the current tender offer, the proposed purchase price appears to be set at an extremely low level of share price and valuation, as exemplified below. As such, the interests of Hanwha’s minority shareholders may be infringed upon, in our opinion.
However, the claim by Hanwha Energy, a private company owned by the three sons, that the tender offer is to “strengthen responsible management” is contradicted by the performance and valuation of Hanwha Corp’s share price, which shows the opposite results. Let us look at TSR and valuation from Hanwha Corp common shareholders’ perspective. Prior to the tender offer, share price fluctuated -7%, +8%, +7% for last 3-year, 5-year, and 10-year period, respectively, based on the share price on the day before the tender offer. Even when factoring in the dividend yield, the common stock’s TSR has been a mere 0%, +1%, and +3% per annum over the past 3-year, 5-year, and 10-year periods, respectively. This represents an extremely poor shareholder return that even fails to match local bank deposit interest rates. According to Naver Securities, Hanwha Corp’s PBR is at 0.27x, and according to SK Securities’ latest research, the company’s common shares are trading at 69% discount to its NAV. It is curious whether Hanwha Corp’s BoD has engaged in serious discussions regarding the company’s capital allocation policy and solution to address the destruction of corporate value.
Another procedural issue is that the mandatory tender offer is only for a small 8% stake, rather than the entire issued shares. This could potentially subject minority shareholders to structural coercion. Even if minority shareholders are aware that the tender offer price is unfairly low, they may feel compelled to accept it, as refusing tender could lead to further deterioration of the company’s corporate governance. Inducing minority shareholders to effectively “jump off the ledge” constitutes an element of undue coercion. This is one of the key rationales underlying the advocacy for the adoption of a 100% mandatory public tender offer in more developed markets.
From a substantive standpoint, the tender offer of W30,000 represents a PBR of merely 0.28x, which indicates an exceptionally low valuation. In effect, the controlling shareholder is exploiting the minority shareholders by acquiring their shares at this severely depressed price. In our view, this course of action is manifestly inequitable, and it not aligned with the motto of “responsible management.” Furthermore, if the direct and indirect shareholding of Vice Chairman Kim Dong Kwan and his two brothers were to increase from 19% to 27%, it would result in a significant surge in the control premium. As a result, the minority shareholders’ restraining influence on controlling shareholders would be significantly weakened, and this could potentially have a detrimental impact on the overall corporate value.
In the case of Hanwha Corp’s Board of Directors, particularly, the independent directors, should take a leading role in addressing this issue. If this were to occur in more developed markets such the US or the UK, the following global standards would like to be applied. Excluding the three inside directors, including Vice Chairman Kim Dong Kwan, the board should establish a special committee comprised solely of independent directors, and work to protect the interests of minority shareholders and ensure they are not compelled to sell their shares at an unfairly low price from the perspective of their fiduciary duty to shareholders. The special committee should assert that W30,000 per share that Hanwha Energy is too low, at the minority shareholders’ best interest, so Hanwha Energy should either purchase at a fair price assessed by independent experts (which is much higher price) or purchase all shares at a fair price without structural coercion on the minority shareholders.
Lastly, we would like to emphasize that the repeated use of family-controlled private companies for succession should not be repeated. We have concerns over possible merger between Hanwha Energy and Hanwha Corp in the future. If this were to happen, the Value- up program will reverse and Korea Discount is likely to widen. If the proposed amendments to the Commercial Act, which includes the duty to protect shareholders as part of the directors’ duty of loyalty, is passed by the National Assembly, it would be able to protect the property of minority shareholders in cases of the related-party transactions, like this one.
July 11, 2024
Korean Corporate Governance Forum
Chairman, Namuh Rhee