SOUTH KOREA: An Introduction to Capital Markets

Korean Capital Markets Overview 

Haeng-Gyu Lee, Yeji Kim, Jipyong LLC

A promising year of yet another boom for the Korean stock market seemed plausible with the blockbuster listing of Korean battery maker LG Energy Solution Ltd. (“LG Energy Solution”) on 27 January 2022. LG Energy Solution attracted record demand for an initial public offering (“IPO”) in Korea when it raised over 12.7 trillion Korean won (which was equivalent to approximately USD10 billion in early 2022) from, among other investors, over 400 million non-institutional individual investors. This strong debut saw LG Energy Solution standing shoulder to shoulder with giants like Samsung Electronics Co, Ltd and Kakao Corp, sharing the ‘must-get stock’ sentiment among the Korean investors.

This excitement, however, quickly subsided with the breakout of Russia’s unprovoked war on Ukraine in February 2022. In the face of a weak market, much anticipated IPOs of Hyundai Engineering & Construction Co, Ltd, SK Shieldus Co, Ltd, Hyundai Oilbank Co, Ltd, and One Store Co, Ltd have been scrapped, adding to the Korean stock market slump. As a shared experience between the global stock markets including the US stock market, the Korean stock market has also suffered from the growing likelihood of a recession.

The unfolding energy crisis stemming from the Russo-Ukraine war and aggressive rate hike by global central banks including the Federal Reserve System (the “Fed”) to counter steep inflation have put an end to an era of unprecedented market liquidity resulting from low interest rates and opened a door to a strong dollar which, consequently, hindered IPO and M&A activities. Soaring interest rates driven by the Fed and the strong dollar are wrecking Asian countries such as Korea, Japan and Taiwan with fleeing capital and currency depreciations – some even voice their concerns over a possibility of a 1997-style Asian crisis. To add to the already dim outlook, the looming energy crisis and inflation in Europe work to enhance market volatility.

The foreign trade-oriented Korean economy and its capital markets are expected to be confronted with enormous market volatility and uncertainty (owing to the growing global economic uncertainty). With the current skyrocketing interest rates, inflation and greenback strength, Korea’s household debt crisis and asset bubble which has expanded during the COVID-19 pandemic are feared to have devastating effects on the Korean economy. This inevitably will lead to IPO and M&A activities and, consequently, the Korean capital markets being put on pause. The contraction of the IPO market can extend to disputes between investors and issuers (and/or the issuer’s largest shareholders) as it makes it more difficult for pre-IPO investors such as venture capital or private equity firms to exit. The listed companies also suffer from difficulties in maintaining additional financing, fear of defaulting on existing debt (including convertible bonds) obligations and, ultimately, the prospect of delisting.

Notwithstanding the above, semiconductor, secondary battery, energy and robotics companies remain as stock investors’ favourites. As of 30 September 2022, there have been successful listings of four companies on the KOSPI Market and 44 companies on the KOSDAQ Market with notable debut of Daesung Hi-Tech Co, Ltd, Daemyoung Energy Co, Ltd, W-SCOPE CHUNGJU PLANT Co, Ltd, Laserssel Co, Ltd and Yuil Robotics Co, Ltd. It is expected that smaller and mid-sized IPOs will revive a rather rigid Korean IPO market in the last quarter of 2022.

A topic that is currently being vigorously discussed in the Korean capital markets scene will be the implementation of protection measures for the existing investors of a parent (the “Parent Shareholders”) in the event of a split-off subsidiary IPO. Before and after the proposed split-off, the Parent Shareholders have witnessed a sharp drop in the share price of the already listed parent and were forced to take a loss. For example, LG Chem Ltd’s decision to split off its globally leading battery business to establish, and list, a wholly owned subsidiary, LG Energy Solution, saw LG Chem’s shareholders being forced to watch the value of their shares drop. With a growing number of disgruntled investors and an attempt by the Korean Financial Services Commission to tackle this issue, a proposal granting Parent Shareholders appraisal rights in the event of a split-off of the existing business to incorporate a subsidiary has been put forward (such dissenters’ rights were not previously available). Concurrently, an in-kind distribution of the split-off subsidiary’s shares to the Parent Shareholders is also being explored. The Korea Exchange has also stepped in and made it clear that the Parent Shareholder protection measures will be thoroughly scrutinised when the listing review is conducted with respect to the proposed IPO of the split-off subsidiary. Accordingly, listed companies looking to split off part of its business to form, and list, a subsidiary are required to carefully plan and prepare Parent Shareholder protection policy and measures.

It would be fair to say that we are facing global crisis and change unprecedented since World War II. Amidst drawbacks, we trust Korea, as the one and only nation which has accomplished the so-called Miracle on the Han River, to rise up to the challenge and prepare for yet another bumper year. We hope to see Korean capital markets taking initiative in overcoming difficulties in the coming year and be a source of inspiration for, and positive influence on, other global capital markets (as is the case for Korea’s growing cultural influence around the world).