U.S. activist hedge fund Elliott Management recommended on Monday that Hyundai Motor Group combine Hyundai Motor and Hyundai Mobis to create a holding company. It asked the group to cancel all existing and future treasury shares in the two companies and raise the dividend payout ratio to around 40 to 50 percent of total net income. The U.S. hedge fund also suggested that the group add three independent board members to the current board. With its latest move, Elliott seems to be starting to actively intervene in the group’s management since it demanded for the group’s restructuring early this month, mentioning its ownership of the shares of Hyundai Motor Group’s affiliates worth one trillion won.
For Hyundai Motor Group, which has planned to resolve its complicated cross-shareholding structure by making Hyundai Mobis a holding company, it is difficult to simply accept Elliott’s demands. Yet, it is not easy for the U.S. hedge fund either to achieve their demands at the general meeting of shareholders because it holds only around 1.5 percent of the common shares in the key affiliates of Hyundai. Still, Elliott disclosed their suggestions apparently to appeal to other shareholders, thereby exerting pressure on the executives of Hyundai Motor Group. By doing so, the hedge fund revealed its real self, which drives a company’s shares up by taking issue with governance streamlining.
Elliott also tried such intervention in 2015 by opposing the merger of Samsung C&T and Cheil Industries. Back then, Samsung Group was able to defend itself from the U.S. hedge fund that demanded special dividends by persuading individual shareholders and earning support of the National Pension Service. However, Elliott is hardly the only one taking such a strategy. Sovereign Asset Management, Hermes Investment Management, and Carl Icahn have already succeeded in making profits by threatening the management rights of SK, Samsung and KT&G. Particularly, they were able to exercise their influence by purchasing in advance the shares of a group that has issues such as management succession.
What allowed these hedge funds, which could not care less about the future of Korean conglomerates, to just eat and run was the lack of protection for management rights. In the United States, Europe and Japan, protection measures are put in place such as dual-class stock or poison pill to prevent hostile merger and acquisitions (M&A). Thus, it does not take a genius to figure out why Korean companies easily fall prey to “vulture funds.”
Yet, an amendment bill to commercial law pushed by the government and the ruling party does not include any of such protection measures but contains toxic provisions through which outside forces can easily attack Korean conglomerates’ management rights such as a derivative suit and a concentrated vote system. The government claims that additional provisions are aimed at stopping the abuse of major shareholders, but it is still doubtful whether conglomerates should be forced by law when they have acknowledged and started to improve the governance structure on their own. A business cannot continue to grow if it has to be busy defending its management rights, without the stability of management and investment. Retrogressive policies and system will only bring about the devastation of our industrial ecosystem.