S. Korea's Parent-Subsidiary Listing Rate 224 Times U.S. Level, Fueling Korea Discount

SK hynix's headquarters in Icheon, Gyeonggi Province. The proposed Nasdaq listing of its indirect subsidiary Solidigm has renewed concerns over parent-subsidiary listings and minority shareholder protection in South Korea. South Korea has a disproportionately high rate of parent-subsidiary listings compared with major developed markets, highlighting a structural problem widely seen as a key contributor to the chronic undervaluation of Korean equities, known as the "Korea discount." According to the Financial Services Commission (FSC) on Oct. 21, South Korea's parent-subsidiary listing rate stood at 11.2% at the end of last year, 224 times the U.S. rate of 0.05% and 2.8 times Japan's 4.0%. The prevalence of such listings is largely attributed to the practice among major conglomerates with complex ownership structures of raising capital through subsidiary listings while allowing controlling shareholders to retain control over their corporate groups. The practice can create conflicts of interest between controlling and minority shareholders of parent companies. An analysis by the Korea Capital Market Institute of 157 parent-subsidiary listing cases between 2010 and 2021 found that parent-company valuations tended to decline following subsidiary listings. This is partly because investors can gain direct exposure to a subsidiary, reducing the appeal of investing indirectly through its listed parent. Past cases illustrate the potential impact. LG Chem spun off its battery business in 2020 before listing LG Energy Solution in 2022, after which its shares fell sharply. Having traded above 1 million won ahead of the subsidiary's listing, LG Chem has since seen its market capitalization shrink to roughly one-quarter of the value of its stake in LG Energy Solution. Similarly, SK Group listed SK Bioscience and SK IE Technology, while shares of their respective parent companies, SK Chemicals and SK Innovation, remain 79.1% and 46.1% below their pre-listing levels. More recently, the proposed Nasdaq listing of Solidigm, a U.S.-based indirect subsidiary of SK hynix, has emerged as a new flashpoint. The Financial Supervisory Service (FSS) and Korea Exchange have made clear that an overseas listing of Solidigm would still fall within the scope of South Korea's regulations on parent-subsidiary listings. During a National Assembly audit, FSS Governor Lee Chan-jin said regulators considered the proposed listing subject to the relevant restrictions and would convey their concerns if necessary. Under the revised guidelines, SK hynix and its parent company, SK Square, must fulfill five obligations related to shareholder protection before Solidigm's listing. These include assessing the potential impact on shareholders, preparing shareholder protection measures and obtaining a review by an independent special committee. Critics, however, argue that the rules lack teeth. Unlike domestic listings, overseas listings are not subject to clearly defined compliance deadlines, while penalties for violations are capped at just 1 billion won. For SK hynix, a Solidigm listing could provide an additional source of funding for its massive investment plans. The company plans to invest a combined 54.3 trillion won through 2031 in projects including the Yongin semiconductor cluster and a new fabrication facility in Cheongju, alongside broader long-term investment ambitions estimated at 1,100 trillion won. Raising external capital through Solidigm could ease the financial burden associated with its NAND flash business, allowing SK hynix to concentrate more resources on high-bandwidth memory (HBM), a key component in AI semiconductors. Lawmakers and corporate governance advocates, however, have warned of potential damage to shareholder value. Ahn Cheol-soo, a lawmaker from the opposition People Power Party, warned that Solidigm's listing could spell "doomsday" for the Korean stock market and urged the National Pension Service to oppose the move. The Korea Corporate Governance Forum described the proposal as an unprecedented attempt to establish a five-tier parent-subsidiary listing structure, calling for immediate board deliberations and a decision to halt the listing process. The government strengthened shareholder protection rules governing parent-subsidiary listings in August, but significant limitations remain. For acquired or newly established subsidiaries, for example, obtaining shareholder approval remains a recommendation rather than a binding requirement. Experts warn that without more effective safeguards, including shareholder class-action mechanisms and stronger civil liability provisions comparable to those in the United States, it will be difficult to curb capital-raising practices that prioritize the interests of controlling shareholders over those of minority investors.