[KCGF Opinion] HL Holdings' transfer of treasury shares to foundation is a breach of fiduciary duty

22 Nov 2024



HL Holdings' transfer of treasury shares to foundation is 

a breach of fiduciary duty

 

“Most Korean stocks are uninvestable without revision of the Commercial Act”

 


After the recent Doosan scandal, which drew disapproval from financial regulators and was featured in a major exposé by the Financial Times, an international investor with two decades of experience in the Korean market expressed deep concern in mid-July. He warned, “Unless the Commercial Act is revised to provide stronger investor protections, foreign investors will find it virtually impossible to justify investing in Korean equities.”


In a disclosure on November 11th, HL Holdings announced the BoD’s decision to donate a portion of its treasury shares, 470,000 shares valued at W34,750 per share (totaling approximately W16.3 billion or 5% of the company's issued shares), to a foundation for the purpose of fulfilling its social responsibilities. This decision, however, is seen as a clear violation of the rights of minority shareholders, including the National Pension Service(NPS), retail, institutional, and foreign investors, in our view.


By donating treasury shares, which were effectively purchased with shareholders' money, to a foundation without shareholder approval, the company is essentially giving away free shares. This is a clear violation of shareholders' rights and a blatant disregard for shareholder value. While corporate social responsibility is a noble goal, it should be funded by the founding family, not through a dilution of existing shareholders' equity. We would like to inquire whether the four non-executive directors of HL Holdings, who approved this board resolution, fully considered the potential negative impact on the interests of minority shareholders when exercising their fiduciary duties.


The timing of this board decision is highly questionable, coinciding with the sensitive debate over revisions to the Commercial Act. Moreover, the opposition party is considering a proposal to amend Article 382-3 ("Directors' Duty of Care and Loyalty") of the Commercial Act to allow directors to take into account environmental and social factors. However, we express serious concerns that some listed companies may exploit this potential amendment, by donating treasury shares to foundations in order to secure friendly stakes, under the pretext of fulfilling their corporate social responsibility. As seen in the KT&G case, where shareholders filed a lawsuit, we have observed a harmful governance practice involving the donation of over 10% of treasury shares with voting rights to more than six non-profit foundations. Including shares purchased with company funds, these friendly non-profit foundations now collectively hold 11% of KT&G's total issued shares and exercise 13% of the voting power. Unfortunately, pro-KT&G non-profit foundations have become the company's largest shareholder and have consistently supported management in shareholder votes.



In response to the recent concerns regarding the donation of treasury shares to a foundation, and in accordance with the government's value-up initiative, the Forum proposes the following to the HL Holdings board:


1.   The board should reconvene and revoke its November 11 resolution to donate treasury shares;


2.   As an alternative (if the first proposal is difficult to implement), the foundation's articles of association should be amended to permanently prohibit the exercise of voting rights attached to the donated treasury shares; and


3.   The board of directors should assume a proactive role in the full implementation of the recently announced corporate value-up enhancement plan.



Despite the skepticism, Korean companies have been actively engaging in massive share buybacks, often involving trillions of won. While share buybacks are often touted as a way to enhance shareholder value, the failure to cancel treasury shares undermines this goal by primarily benefiting controlling shareholders at the expense of minority shareholders. If the W16.3 billion slated for donation were used to cancel shares, a shareholder with a 1% stake would see their ownership increase to 1.05%. With the additional W20 billion share buyback and cancellation planned for the following year, this shareholder's stake would further grow to 1.12%.






November 21, 2024

Korean Corporate Governance Forum Chairman,

Namuh Rhee