Life Asset Management said Tuesday that it has proposed to Samsung Electronics that funds for shareholder returns this year be allocated toward buying and cancel preferred shares. Samsung Electronics is approaching its board meeting next month.
The asset management firm sent a letter to shareholders on Monday to Samsung Electronics' board of directors and management. The core of the letter suggests that if preferred shares trade at a lower price than common shares by year-end, they should be purchased and immediately cancelled.
Any remaining shareholder return funds would then be used for cash dividends. As of the closing price on Sept. 9, preferred shares were trading 26.7% below common shares.
According to Samsung Electronics' shareholder return policy announced in August, funds for shareholder returns this year are set at 90 trillion to 110 trillion won. Of this amount, approximately 30 trillion won is scheduled to be used for third-quarter cash dividends.
Life Asset Management holds the view that after this dividend, allocating the remaining funds in the range of 60 trillion won toward share buybacks and cancellations would yield greater shareholder return effects.
While cash dividends may result in one-time returns, share buybacks and cancellations are expected to continuously increase per-share value by reducing the number of outstanding shares.
It explained that cancelling preferred shares offers several advantages over cancelling common shares. Preferred shares do not carry voting rights, allowing them to bypass restrictions under the Financial Industry Structural Improvement Act regarding the purchase and cancellation of common shares.
The Financial Industry Structural Improvement Act prohibits financial group companies from holding more than 10 percent of issued shares with voting rights in non-financial affiliates within the same corporate group without approval from the Financial Services Commission.
Cancelling preferred shares is also considered efficient because one preferred share can be cancelled using the funds required to cancel 1.36 common shares.
As the number of preferred shares decreases, per-share dividends for common shareholders will rise accordingly. Samsung Electronics sets its total annual dividend amount in advance; therefore, reducing the number of preferred shares increases per-share dividends for common shareholders.
Kang Dae-kwon, co-CEO of Life Asset Management, said, "Retiring preferred shares would allow Samsung Electronics to break free from the corporate governance constraints that have prevented it from retiring common shares while permanently enhancing shareholder value to a greater extent with the same resources."
He also added that it would benefit all shareholders, including the 8 million retail shareholders, while serving as "an opportunity to raise the standards and credibility of shareholder returns in Korea's capital market to a new level."
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