Solidigm Nasdaq Plan Faces Shareholder, Regulator Pushback

Solidigm’s SSD. (Photo courtesy of Solidigm) SK hynix is facing intense pressure from both financial authorities and investors regarding the listing of its sub-subsidiary Solidigm on the United States Nasdaq market. Following the statement by Governor of the Financial Supervisory Service Lee Chan-jin during the parliamentary audit that he judges the listing of Solidigm as a “dual listing,” the Korea Corporate Governance Forum, a think tank specializing in the capital market, also urged the SK hynix board of directors to “resolve to suspend the listing” on Oct. 20. On the morning of Oct. 20, the forum issued a commentary titled “The Essence of Solidigm’s Dual Listing is a Conflict of Interest” and strongly criticized the listing. The forum pointed out that this decision is a “structure in which the controlling shareholder, SK hynix unregistered Chairman Chey Tae-won, maintains control over the United States AI Company, which holds a 100% stake in Solidigm, and Solidigm itself, while entirely shifting the cost of stake dilution solely onto the general shareholders of SK hynix.” The forum further raised its voice, stating, “This perfectly aligns with the negative consequences of the ‘split-off listings’ that have frequently occurred in the domestic stock market,” and added, “The act of infringing upon the profits of domestic general shareholders through the detour of listing an overseas subsidiary must be immediately stopped.” Solidigm is a company established by SK hynix after acquiring the NAND flash and SSD business from the United States semiconductor company “Intel” in 2021. As the business was reorganized this year, it became a sub-subsidiary under the AI Company, a United States investment corporation. It is a structure that flows from “SK Inc. to SK Square to SK hynix to AI Company to Solidigm.” Three domestic listed companies overlap in this chain. According to foreign media reports, Solidigm has appointed Goldman Sachs and Morgan Stanley as underwriters and is reviewing a listing on the United States Nasdaq market next year. The corporate value is discussed to be up to $150 billion.  However, SK hynix shareholders are protesting against the listing of Solidigm. The reason is that the share of existing shareholders will decrease. Currently, it is a structure where SK hynix shareholders share the profits earned by the sub-subsidiary Solidigm. However, if Solidigm is listed and external investors take a stake, SK Hynix’s stake ratio will decrease proportionately, thereby reducing the share of existing shareholders. There also arises the issue where the same business value is double-counted in the stock prices of both the parent company and the sub-subsidiary. Amid this intensifying backlash from shareholders, Governor of the Financial Supervisory Service Lee Chan-jin also sided with the shareholders. During the parliamentary audit of the Financial Supervisory Service by the National Policy Committee of the National Assembly on Oct. 19, he responded to an inquiry by People Power Party Representative Park Sung-hoon, stating, “Both the Financial Services Commission and the Financial Supervisory Service judge that (the listing of Solidigm) violates the rules on dual listing.” This means that even if an overseas corporation lists on an overseas stock market, the parent company, which is a domestic listed company, must bear the obligation to protect existing shareholders. In fact, the scope of application for the “principle prohibition and exceptional allowance of dual listing” system, which the financial authorities implemented from August this year, is broad. This is because it includes not only physical division subsidiaries but also subsidiaries created through acquisitions or new establishments, as well as sub-subsidiaries indirectly controlled through equity relationships. Interpreted literally, the United States sub-subsidiary Solidigm, which was created through an acquisition, also falls into this category. In this case, the parent company must fulfill five obligations: conducting a shareholder impact assessment, preparing shareholder protection measures, communicating with shareholders or confirming shareholder consent, resolving the board of directors’ approval or disapproval and notifying the subsidiary, and disclosing information in stages. Of course, a low-weight subsidiary whose sales, operating profits, and assets are all less than 10% of the parent company’s can be granted an exception solely through a board of directors’ resolution, but it is not easy for Solidigm, whose corporate value reaches 200 trillion won (about $150 billion), to receive the “low-weight” benefit. Ultimately, the responsibility has shifted to the SK hynix board of directors, which must directly persuade existing shareholders. The problem is effectiveness. If listing on the domestic stock market, the Korea Exchange can simply refuse to approve the listing if it deems the shareholder protection procedures insufficient during the review process. However, because Solidigm is listing on the United States stock market, it does not undergo a preliminary review. Even if SK hynix fulfills its shareholder protection obligations only formally, the structure makes it difficult for authorities to block Solidigm’s listing itself. Therefore, the card the authorities have drawn is the “Securities Registration Statement.” When establishing the dual listing regulations earlier, the financial authorities set a standard that even for shares issued overseas, a Securities Registration Statement must be submitted to the Financial Supervisory Service if domestic investors can acquire them. The intention is to inspect whether the board of directors has fulfilled its obligations during the statement review stage. However, this is a standard originally created with domestic companies issuing shares overseas in mind. The fact that Solidigm is a United States corporation immediately poses an obstacle. Of course, even for a foreign company not listed on the domestic stock market, the obligation to submit a Securities Registration Statement to the financial authorities arises in cases such as when the stake held by domestic residents is 20% or more. However, the stake in Solidigm is indirectly controlled by SK hynix through a United States intermediate holding company (AI Company). Interpretations are divided on whether the share of domestic investors in Solidigm’s stake can be recognized as a “20% stake held by domestic residents” to consider it a target for submitting a Securities Registration Statement. Earlier, Governor Lee also mentioned this point during the parliamentary audit. Regarding whether Solidigm is a target for submitting a Securities Registration Statement, he initially answered that he was waiting for an authoritative interpretation from the Financial Services Commission. However, during the subsequent answering process, he corrected himself, stating, “The Financial Supervisory Service has not officially requested an authoritative interpretation (from the Financial Services Commission),” and added that it is now at the stage of initiating discussions. Usually, an authoritative interpretation is conducted in a manner where the Financial Supervisory Service requests a statutory interpretation from the Financial Services Commission, and the Financial Services Commission provides an answer. The situation will change significantly depending on the result of the authoritative interpretation. If concluded as a target for submitting the statement, Solidigm must undergo a review by the Financial Supervisory Service separately from the United States listing procedures. Conversely, if the conclusion is that it is not a target, all that remains is the level of sanctions from the Exchange after Solidigm is listed. However, it is currently at the very beginning stage, where the Financial Supervisory Service’s request for an authoritative interpretation has not yet been made. An official from the Financial Services Commission explained,  “We share the concerns about the dual listing and the critical awareness of SK hynix investors with the Financial Supervisory Service,” but added, “There was no request for an authoritative interpretation (from the Financial Supervisory Service). We are at the stage of reviewing related regulations on a practical level.” They also explained, “The dual listing system was originally created with the case of a domestic listed company listing a subsidiary that was horizontally or physically divided in mind,” and added, “We need to examine whether this case of listing a company acquired overseas on an overseas market can be viewed on the same line.”