Dongwon to adjust merger ratio under pressure from retail investors

Dongwon Group, South Korea’s leading seafood and logistics conglomerate, is changing the merger ratio of its two major affiliates, accepting a request by retail investors – the latest sign that shareholder activism is on the rise.

Succumbing to demands from individual and institutional investors, Dongwon said on Wednesday the merger will be carried out based on each company’s net asset value instead of the companies’ share prices, the latter being the more commonly used method.

Dongwon’s rare decision to reflect minority shareholders’ requests in its merger plan is an indication that activist shareholders are exerting growing clout in key decisions at Korea’s big companies, analysts said.

The move came after some minority investors opposed the group’s plan to absorb unlisted Dongwon Enterprise Co., the current de facto holding company of the group, into Kospi-listed Dongwon Industries Co., which will become the group’s new holding company accordingly.

While announcing a restructuring plan last month, Dongwon estimated the share price of Dongwon Enterprise to be 191,130 won and that of Dongwon Industries at 248,961 won as the basis for the proposed merger.

Dongwon Industries also said at the time that it will conduct a five-to-one share split to make the stock more widely available for retail investors. Considering the stock split, the merger ratio of Dongwon Industries and Dongwon Enterprise was set at 1 to 3.84.

However, the restructuring plan faced investor backlash with some minority shareholders of Dongwon Industries claiming that at the proposed merger ratio, listed Dongwon Industries would be undervalued while overestimating the value of unlisted Dongwon Enterprise in favor of the company’s top managers, who are also the group's largest shareholders.

Disgruntled investors said the current top managers plan to tighten their control over the group through a “backdoor listing,” in which a private company goes public by combining it with a listed affiliate.

Some institutional investors such as Blash Asset Management Co. which hold stakes in Dongwon Industries have said they may take legal action if Dongwon pushes ahead with its merger plan as announced earlier.

OWNERS’ INFLUENCE ON GROUP SET TO DECLINE

Under the revised merger plan announced on Wednesday, the share price of Dongwon Industries has been raised by 53.5% to 382,140 won from 248,961 won earlier. Accordingly, the merger ratio of Dongwon Industries and Dongwon Enterprise will be set at 1 to 2.70.

Dongwon Group founder and honorary Chairman Kim Jae-chul currently owns 24.5% of Dongwon Enterprise, while his second son Kim Nam-jung, vice chairman and de facto leader of the group, holds a 68.27% stake in the current holding company.

After the combination of the two affiliates, the Kims’ stakes in Dongwon Industries were supposed to be 48.43% and 17.38%, respectively, under the previously announced merger ratio. But their stakes will be lowered to 43.15% and 15.49% each under the revised plan.

As a controversy flared up over Dongwon’s merger ratio, Lee Yong-woo, a lawmaker of the liberal opposition Democratic Party, last month proposed a revision to the Capital Market Act to ensure that any company considering a merger will review both share prices and asset values to determine the merger ratio of the companies involved.

Companies, board directors and auditors would be subject to punishment if a merger is found to be conducted in a way that hurts the interest of minority investors, according to the proposed law revision.

Dongwon Group said the proposed restructuring is aimed at streamlining its corporate governance, accelerating decision-making and enhancing its enterprise value.

Under the current structure, five companies, including Dongwon F&B Co., Dongwon Systems Corp., Dongwon Construction Industries Co. and Dongwon Industries, are placed under Dongwon Enterprise as its subsidiaries. Separately, Dongwon Industries has StarKist and Dongwon LOEX Co., formerly Dongbu Express, under its wing.

When the restructuring is complete, all the subsidiaries will be placed under Dongwon Industries, the new holding company.

Write to Soo-Jung Ha and Kyeong-je Han at Agatha77@hankyung.com
In-Soo Nam edited this article.