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SK Innovation

Financial authorities have begun careful deliberation following SK Innovation's announcement of its plan to absorb its loss-making subsidiary, SK IE Technology (SKIET). Shareholders of SK Innovation, in particular, are growing concerned over potential losses driven by a decline in enterprise value due to new share issuance and the reabsorption of a deficit-ridden unit. Amid a drop in share prices following the merger announcement, the Financial Supervisory Service (FSS) is highly likely to review various corrective measures regarding the merger registration statement, citing issues surrounding shareholder communication.

Under the current administration, statutory revisions to the Commercial Act have placed a priority on the interests of general shareholders over controlling shareholders. The FSS views that SK Innovation and SKIET lacked sufficient efforts to communicate with and persuade general shareholders in reaching their merger decision. Although both companies noted in their filings that they established special committees composed of current outside directors three months prior to the merger agreement date to review its fairness and validity, market observers interpret the merger news as closer to a one-sided notification from the standpoint of general shareholders.

A similar precedent involving the share swap between E-Mart and Shinsegae Food has also been raised. Critics point out that SK Innovation is repeating the practice of communicating only after the fact—initiating shareholder dialogue only after resolving the transaction and following the effective date of the securities registration statement.

According to the financial sector on the 27th, the FSS is widely expected to demand revisions to SK Innovation's merger registration statement for SKIET. The most contentious issue is the timeline for shareholder communication.

SK Innovation and SKIET resolved to merge on the 25th and signed the merger agreement on the 26th. Both companies formed special committees comprising board members in May. While each company attached reports stating that they ensured the fairness and legality of the merger through more than six meetings, evaluations suggest that mentions of or communication efforts toward general shareholders were inadequate.

According to the merger registration statements of both companies, the merger contract was signed on the 26th, and SK Innovation held an online briefing for shareholders on the same day at 10:00 a.m. Authorities point out that a abruptly arranged online session can hardly be recognized as a genuine shareholder briefing. The issue lies in the fact that the merger registration statement takes effect on September 5, whereas the in-person meeting with shareholders is scheduled for September 14. Financial authorities view holding an in-person shareholder meeting only after the merger filing has already taken effect as a unilateral notice rather than procedural communication.

A comparable case is the share exchange between E-Mart and Shinsegae Food. Those companies also received requests for revision from the FSS after scheduling shareholder meetings subsequent to the effective date of their share swap. Financial authorities have consistently maintained that when corporate governance changes such as share exchanges or mergers take place, companies must go through an adequate persuasion process with general shareholders. The underlying principle is that the interests of minority shareholders must be considered, rather than solely those of controlling shareholders at the top of the governance hierarchy.

Authorities emphasize that because it is difficult to satisfy shareholders of both entities during such corporate mergers, holding face-to-face meetings with shareholders is essential.

SK Innovation shareholders, faced with absorbing a loss-making subsidiary, could not avoid a drop in stock prices. SK Innovation's stock price fell from 125,000 won on the 25th, the day of the merger announcement, to 112,000 won today. Conversely, SKIET's share price rose slightly from 15,360 won to 18,220 won over the same period. However, on the 28th, approximately 10.49 million shares of SKIET are set to be released from mandatory lock-up, potentially flooding the market with volume equivalent to 13% of its total issued shares.

The FSS is also expected to examine whether the boards of directors and special committees of both companies properly considered the interests of general shareholders. SK Innovation's board viewed the dilution of existing shareholders' stakes as limited, given that the newly issued merger shares account for less than 10% of total issued shares. The board particularly noted that applying the same merger ratio to all shareholders minimizes potential conflicts of interest, asserting that the merger aligns with the interests of the company and all shareholders. Nevertheless, financial authorities are likely to review whether the special committees and boards sufficiently assessed the risks of the merger to truly represent minority interests, as well as the rationale behind concluding that the deal serves everyone's interests without first hearing opinions from general shareholders. The statutory deadline for the FSS to demand revisions to such merger statements is within 10 business days.

An FSS official stated, "Both SK Innovation and SKIET held only online briefings immediately after submitting their merger registration statements, which does not constitute genuine shareholder communication. Scheduling an in-person shareholder meeting only after the registration statement takes effect is closer to a unilateral notification."

                                                                                                        Yoon Seo-young