[Edaily Reporter Kim Kyung-eun ] SamsungElectronics(005930)As the company has announced its largest-ever shareholder return, a shareholder proposal has been put forward suggesting that the remaining funds should be used to buy back and cancel preferred shares rather than for cash dividends. The argument is that by purchasing and canceling preferred shares—which trade at a discount of nearly 30% compared to common shares—the company can eliminate more shares with the same amount of money, while also avoiding the issue of selling stakes in Samsung Life Insurance(032830) andSamsungFire&MarineInsurance(000810).

Life Asset Management announced on the 15th that it had sent a Seohan containing these proposals to SamsungElectronics’ board of directors and management on the 14th. The gist of the proposal is to request that the board vote at its upcoming October meeting to prioritize allocating this year’s shareholder return funds toward the repurchase and cancellation of preferred shares.

Specifically, it proposed a plan to buy back preferred shares—and immediately cancel them—by the end of December, but only when the preferred shares are trading at a lower price than common shares. Any remaining funds after the preferred share buyback would be allocated entirely to cash dividends.

According to the shareholder return policy announced by SamsungElectronics last month, this year’s shareholder return funds total between 90 trillion and 110 trillion won. Of this amount, approximately 30 trillion won is scheduled to be used for the third-quarter cash dividend following approval by the board of directors in October. The allocation of any remaining funds will be decided at the board meeting in January of next year, taking into comprehensive consideration cash dividends, as well as the repurchase and cancellation of treasury stock.

Life Asset Management estimated that, based on the midpoint of the shareholder return funds—100 trillion won—approximately 63 trillion won would remain after subtracting the third-quarter dividend of 30 trillion won and the remaining regular dividend of about 7.4 trillion won. If the total shareholder return is determined within the range of 90 trillion to 110 trillion won, the remaining funds would be approximately 53 trillion to 73 trillion won.

Life Asset Management argued that it would be more beneficial for enhancing shareholder value to prioritize using these funds for share buybacks and cancellations rather than cash dividends. This is because cash dividends are one-time returns that may decrease in size depending on future performance. In contrast, the firm explained that buying back and canceling shares reduces the total number of outstanding shares, which can permanently increase the value per share.

In particular, the company specified preferred shares—rather than common shares—as the target for the buyback. This is because if SamsungElectronics were to cancel common shares, the ownership limit on SamsungElectronics shares held by financial affiliates would pose an obstacle.

According to the Act on Structural Improvement of the Financial Industry, financial affiliates may not hold more than 10% of the voting shares of non-financial affiliates within the same corporate group without the approval of the Financial Services Commission. Currently, Samsung Life Insurance and SamsungFire&MarineInsurance hold 8.51% and 1.49% of SamsungElectronics’ common stock, respectively, for a combined total of 10%.

If SamsungElectronics buys back and cancels its common stock, the total number of issued shares will decrease, potentially causing the ownership stakes of Samsung Life Insurance and SamsungFire&MarineInsurance to exceed 10%. This is why the financial affiliates would have to resell the excess shares on the market.

Life Asset Management analyzed that if SamsungElectronics were to repurchase and cancel 1 trillion won worth of common stock, the financial affiliates would have to resell approximately 100 billion won worth of shares, resulting in a net purchase effect of only about 900 billion won. In contrast, non-voting preferred shares are exempt from these regulations, so Samsung Life Insurance and SamsungFire&MarineInsurance would not need to sell additional shares after the cancellation, the firm explained.

From a pricing perspective, the company also viewed the cancellation of preferred shares as advantageous. Based on the closing price on the 9th, SamsungElectronics’ preferred shares were trading at a price 26.7% lower than common shares. The calculation shows that the funds required to purchase and cancel one common share could eliminate approximately 1.36 preferred shares.

It was explained that the benefits of the preferred stock cancellation would also extend to common shareholders. Since SamsungElectronics sets a fixed total annual dividend budget, a reduction in the number of preferred shares means fewer shares are competing for the same dividend pool, which could lead to higher dividends per share for common shareholders.

Kang Dae-kwon, co-CEO of Life Asset Management, stated, “The buyback and cancellation of preferred shares allows us to break free from the corporate governance constraints that have previously hindered the cancellation of common shares, while simultaneously using the same funds to increase shareholder value more significantly and permanently.” He added, “This will serve as an opportunity to increase the benefits for all shareholders, including 8 million small investors, while simultaneously raising the standards and credibility of shareholder returns in the Korean capital market to a new level.”