Managerial rights defense system needed to fend off hedge fund attack

U.S. hedge fund Elliott Associates is attacking Samsung Group in full range. While it bought 7.12 percent stake in Samsung C&T, it also purchased 1 percent stake each in Samsung SDI and Samsung Fire and Marine Insurance. Elliott is opposing to the merger of Samsung C&T and Cheil Industries, and even if the merger is approved of at the extraordinary shareholders` meeting on July 17, there is high possibility that the hedge fund will continue intervening in Samsung C&T`s management. Elliott claims that the merger ratio is unfavorable to C&T and goes against shareholders` interests, but it`s actual purpose is to realize capital gains.

Global hedge funds` attack on Korean companies is unlikely to stop at Samsung. Excluding large companies that turned into holding companies like LG and SK, other major companies like Hyundai Motor, Korean Air and Hyundai Heavy Industries where largest shareholders own few stakes while corporate governance is weak are the likely candidates of attack.

It is natural in free market economies that hostile takeovers can cause companies to lose grip on management and turn management to others. This encourages companies to innovate and enables the economy to develop further. Immediately after the outbreak of the currency crisis in 1997, the Korean government encouraged hostile takeovers to facilitate corporate soundness. However, the problem is that foreign speculative funds seeking short-term gains are threatening Korean companies.

A for Korean companies, it is about the only way for them to defend management by selling treasury shares, just as Samsung C&T sold its treasury shares to KCC to revive voting rights. Strong managerial rights defense systems are in place in advanced countries. They include dual voting rights (giving many voting rights per share), poison pills enabling existing shareholders to buy new shares cheaply when takeover attempts occur, and forcing executives of takeover target companies to be paid higher bonus. Google and Ford, and Sweden`s Wallenberg family have dual voting rights, which allow them to make long-term investments and pursue R&D without having to worry about defending management rights. Management rights protection rights are weak in Korea which demands for legal and systemic examination.

The need for a management rights defense system was touted about when SK was attacked by Sovereign Asset Management in 2003 without little fruits. This was because of rampant distrust by the public that management rights can be guaranteed even if a company doesn`t manage right and that the system could be used for chaebol succession. In order to introduce a managerial rights defense system that goes beyond the "one share, one vote" system, companies should display transparent management to reassure the public and markets.