As politicians and financial regulators train their focus on the duplicate listing of Solidigm, decisions on the initial public offering of SK hynix's (000660) second-tier subsidiary and its fundraising have become significantly more difficult, analysts said. Even for an overseas listing, if the board of the domestic parent company fails to carry out shareholder protection duties equivalent to obtaining shareholder consent, the parent could face penalties and a trading suspension from the Korea Exchange, raising the prospect of shareholder lawsuits.
Shareholder protection duties for domestic parent company boards apply even to a U.S. listing of Solidigm, financial regulators said on the 19th. The duplicate listing framework, revised by the Financial Services Commission in July around a principle of prohibition with exceptions, imposes five duties on parent company boards: conducting a shareholder impact assessment and drawing up protection measures, communicating with shareholders or confirming their consent, passing a board resolution and notifying the subsidiary, and making disclosures at each stage. Prior review and approval are also required from an independent special committee within the board, chaired by an independent director or composed of independent directors and outside experts making up at least two-thirds of its members.
The parent companies bearing these duties are not limited to those directly holding stakes in the subsidiary. The duties also apply to the listing of a company indirectly controlled by a listed firm that holds 20% or more of an affiliate, with each subsequent tier linked by stakes exceeding 50%. In the case of Solidigm, which sits within an ownership chain running from SK Square (402340) to SK hynix to AI Company, a U.S. investment entity, and then to Solidigm, the boards of both SK hynix and SK Square must each fulfill the duties.
If a subsidiary is listed without these duties being met, the exchange can impose a listing agreement penalty of up to 1 billion won on the parent. A one-day trading suspension and public disclosure of the violation may follow. The structure leaves the domestic parent exposed to sanctions separately from the listing review by the U.S. exchange. SK Group (034730) could, of course, accept such sanctions and push ahead with the Solidigm IPO, but doing so would run entirely counter to regulators' intentions and inevitably carry political costs. An IPO executive at a large domestic securities firm said listings by large conglomerate affiliates are effectively blocked at the source. "Even if SK hynix follows shareholder protection procedures, the issue has come up in the parliamentary audit and grown large enough that it is questionable whether a Solidigm listing is possible," the executive said.
Because the five duties imposed on boards give concrete form to directors' fiduciary duty to shareholders under the Commercial Act, claims that a parent company director breached that duty and caused losses to the company could be contested through shareholder derivative suits or similar action. The burden of delayed decision-making and document preparation in anticipation of disputes arises from the stage of deciding whether to list at all. Because SK hynix is listed on the Nasdaq through American depositary receipts, the possibility cannot be ruled out that exchange sanctions would give ADR investors grounds for a class action. An IPO executive at another large securities firm said it is difficult for a company as large as SK hynix not to follow guidelines set by domestic regulators. "The key will be how far it goes in protecting shareholders to win their consent," the executive said.
For SK Group, which had been drawing up additional fundraising plans, controversy is also expected over being hamstrung by a regulatory environment that changed after it made a long-term investment. SK hynix first signed an agreement to acquire Intel's NAND and solid-state drive business in 2020, while the current duplicate listing framework was finalized in July this year and took effect on Aug. 3. A person who asked not to be named said that with shares of SK hynix and SK Square tumbling, regulators have gone so far as to block fundraising at an overseas subsidiary acquired five years ago.
Whether Solidigm must file a securities registration statement in South Korea is another variable. Under current rules, even when a foreign company issues securities overseas, it must file a registration statement with the Financial Services Commission if domestic residents held 20% or more of its shares as of the end of the most recent fiscal year and domestic residents are able to acquire the securities at issuance or within one year afterward.
Solidigm is indirectly controlled by SK hynix through a U.S. intermediate holding entity, and how the 20% resident threshold applies to such an ownership structure is a point of interpretive dispute. That is why Lee Chan-jin, governor of the Financial Supervisory Service, raised the need for an authoritative interpretation, saying the agency is waiting to receive one and will do as much as it can where appropriate action is possible. If the conclusion is that a domestic registration statement is required, the company would have to clear an FSS review in addition to the U.S. listing process. Should the timetable slip because of demands for amendments to the filing, uncertainty over fundraising could grow further.