Demand for additional buybacks persists despite cancellation of 86.96 million shares in April
Precedent set by 1.43 trillion won block deal by financial affiliates; efficacy of U.S. ADR issuance remains a point of contention
While Samsung Electronics has already canceled approximately 87 million treasury shares this year, calls for further buybacks and cancellations of preferred shares are intensifying. Following domestic asset managers, foreign activist funds are now joining the fray, introducing aggressive new demands, including the issuance of American Depositary Receipts (ADRs).
The crux of the debate has expanded beyond the mere scale of shareholder returns to include specific targets for cancellation and methods of financing. The issue sits at a complex intersection of shareholding limits for Samsung’s financial affiliates, the price discrepancy between common and preferred shares, and the company’s valuation in the U.S. market.
Palliser Capital, a U.K.-based activist investment firm, urged Samsung Electronics to conduct additional buybacks and cancellations of preferred shares during the Sohn Investment Conference held in San Francisco on Nov. 13. Palliser, which holds both common and preferred shares and has previously pressured LG Chem for higher shareholder returns, went a step further this time by proposing an ADR issuance.
Palliser’s strategy focuses on the fact that preferred shares trade at a significant discount to common shares. The firm argues that Samsung should secure capital by issuing ADRs at a premium in the U.S. market and use those proceeds to buy back and cancel the discounted preferred shares in the domestic market. ADRs allow U.S. investors to trade foreign stocks locally and, depending on the issuance structure, can be utilized to raise new capital.
87 million shares canceled, 1.43 trillion won block deal: The case for preferred share retirement
On April 2, Samsung Electronics canceled a total of 86,962,775 treasury shares, comprising 73,359,314 common shares and 13,603,461 preferred shares. Based on the share price at the time, the move was valued at approximately 14.6 trillion won.
Despite this massive cancellation, structural governance constraints hinder further reductions in common shares. This is because the combined stake held by Samsung Life Insurance and Samsung Fire & Marine Insurance is near the 10% threshold mandated by the Act on the Structural Improvement of the Financial Industry.
When Samsung Electronics cancels common shares, the total number of outstanding shares decreases, which proportionally increases the stake held by these two financial affiliates. To avoid breaching the legal limit following the planned cancellation, Samsung Life and Samsung Fire sold 7,335,931 shares of Samsung Electronics via a block deal on March 20, totaling approximately 1.43 trillion won.
Preferred shares present a different scenario. Since they lack voting rights, their cancellation does not impact the voting power or the ownership limits of the financial affiliates. Activist funds argue that because preferred shares trade at a lower price than common shares, the company can retire more shares using the same amount of capital.
Life Asset Management noted that as of the Sept. 9 closing price, Samsung’s preferred shares traded at a 26.7% discount to common shares. Essentially, the capital required to buy one common share could purchase approximately 1.36 preferred shares.
Last month, Life Asset Management formally proposed a buyback and cancellation program centered on preferred shares. The firm later clarified it was not seeking exclusive treatment for preferred shareholders but would also support a combined approach of purchasing both common and preferred shares.
Samsung Electronics has previously reflected the preferred share discount in its buyback strategy. In October 2015, when the company announced an 11.3 trillion won buyback and cancellation plan, it allocated approximately 35% of the initial volume to preferred shares.
At the time, Samsung stated it would increase the proportion of preferred shares if the discount exceeded 10%, reasoning that concentrated buying of cheaper preferred shares would maximize the impact of the cancellation for the same budget.
Foreign activists push for ADRs; Samsung maintains caution
Palliser Capital has gone as far as proposing the specific funding mechanism for these cancellations. The firm suggests issuing Samsung ADRs in the U.S. at a higher valuation than domestic shares and using the proceeds to retire the discounted preferred shares in Korea.
Pointing out that preferred shares trade at roughly a 26% discount, Palliser demanded that Samsung explicitly include a target for narrowing this gap in its future shareholder return policy.
“Addressing the preferred share discount will enhance capital efficiency and unlock the intrinsic value inherent in all share classes,” emphasized James Smith, founder and Chief Investment Officer of Palliser.
In August, Samsung Electronics projected its shareholder return for 2026 to be between 90 trillion and 110 trillion won. While the company will distribute approximately 30 trillion won in cash dividends this year, the board is expected to decide on the specific split between dividends, buybacks, and cancellations next January.
Whether an ADR issuance would truly enhance shareholder value remains a matter of scrutiny. A simple listing of existing shares does not raise new capital, while issuing new shares could dilute the holdings of current shareholders. Furthermore, it is uncertain whether the U.S. market would grant a premium over domestic prices, and the significant costs of listing and regulatory maintenance must be factored in.
Samsung remains cautious on the matter. During its Q2 earnings call on July 30, the company stated, “We are not currently considering an ADR issuance.”
The company maintains that given its robust cash generation, the necessity for an ADR listing to raise funds is low. Samsung’s position is that the benefits of expanding its foreign investor base must be weighed against the burdens of additional disclosure and operational costs, as well as whether it provides tangible benefits to all shareholders, including domestic ones.
Preferred share cancellations also involve conflicting interests among different groups of shareholders. If the discount narrows, preferred shareholders gain a disproportionate benefit from price appreciation. Samsung must balance this with equity for common shareholders and the capital required for semiconductor manufacturing facilities and R&D.
While the issue of preferred share discounts was addressed a decade ago, the landscape has changed. Large-scale cancellations have already forced affiliate divestments, and foreign activists are now calling for international listings. Samsung now faces a critical choice: whether to pursue additional cancellations to close the discount gap and how to distribute the resulting costs and benefits.
