Will Commercial Act revision bolster financial group, bank shares?

By Lee Kyung-min

Expectations are growing that the long-undervalued shares of financial groups and banks will be re-rated, buoyed by the March 13 passage of a revision to the Commercial Act, market watchers said Sunday.

Propelling the optimism is the prospect of greater rights protection for minority and retail investors, as fortified by the revision whereby the fiduciary duty of firms is expanded to include both firms and shareholders.

Previously, the duty was limited to corporations, providing grounds for many firms to push ahead with corporate mergers or spinoffs creation at the expense of short- to medium-term share price drops.

Retail investors have long criticized the practice, citing a total disregard for shareholders with little say or market influence. However, firms say effective corporate activities will come under threat due to the revision, hamstrung by a countless number of frivolous lawsuits that waste both time and corporate resources.

“More minority and retail investors will be able to have their rights better protected, since the questionable business practice will be closely scrutinized,” Hanwha Investment & Securities researcher Eom Soo-jin said in a report.

This also includes holding firms’ unjustified financial support for struggling subsidiaries as well as physical spinoffs, whereby the holding firms retain full control of the new entity and its stocks are not shared with the existing shareholders.

This differs from regular spinoffs in which existing shareholders are given stakes in the newly spun-off entities.

The physical spinoffs remain a source of heated criticism from minority shareholders, since existing shareholders almost always bear the full brunt of steep share price declines if the troubled, financially unsound spun-off entities continue to receive undue financial assistance from their holding firms.

Shinhan Securities researcher Shin Kyung-wan said years of government strong-arming of the banks in the name of “mutual growth” will be revisited.

“Bank shareholders will question the commercial lenders’ social contribution package over the past two years, during which interest payments were delayed or waived for small, low-income businesses and the self-employed,” he said in a report.

The revision will, in his view, make it harder for the government to force commercial lenders to forfeit their net income at the expense of their shareholders.

The comment is in reference to a slew of efforts since 2023 in which the main opposition Democratic Party of Korea (DPK) had commercial lenders give up about 2 trillion won ($1.3 billion) for a “windfall tax.”

The DPK said the measures were warranted, since their interest income was generated almost exclusively as a consequence of rapid central bank key rate hikes over the past few post-pandemic years.

The latest revision will come into effect unless acting President Choi Sang-mok vetoes it to trigger a revote in the Assembly.

In this case, for the revision to take effect, a majority of the 300 sitting lawmakers must be present and two-thirds of them need to vote in favor.