Korea’s biggest tobacco and ginseng producer KT&G agreed to distribute $2.9bn to shareholders over the next three years. The distribution is the result of threats by US shareholders, Mr. Icahn and his ally Warren Lichtenstein. Using their investment vehicle, Steel Partners hedge fund, they purchased 7.68 per cent stake in KT&G. As the company’s second largest shareholder, they were able to push through the changes to increase shareholder value. At one time they even threatened to launch a $10bn hostile bid for KT&G. The bid would have been Korea’s first foreign hostile takeover battle.

In a seemingly unrelated event, China Ministry of Commerce recently published new rules on foreign take-overs of local companies. The new rules are supposed to be part of a "reform" of the legal environment in China for foreign companies. Under the new rules, foreign companies are required to report in advance any acquisition "where there is a possibility that it would affect national economic security, or lead to a change in control over a famous trademark or old Chinese brand." Of course, no one knows what effects "national security." So the control of acquisitions by foreign companies remains where it always has been, firmly in governmental control.

The contrast between Korea and China is striking. While South Korea moves its economy further into a regulated market system, China’s government solidifies its discretionary control over its economy. What is even more interesting is that the legal environment and corporate governance in Korea is taking place in a political environment that is hostile to foreign take overs. Such an environment is not new is Asia or for that matter throughout the world. Economic nationalism is a common denominator. It exists everywhere. The only thing that limits it is the fair administration of a legal system. What Korea has done and China has not is to insure that foreign investors will be treated fairly. In contrast, China will treat foreign investors as it always has, well when it needs them, badly when they are no longer useful.

William Gamble

EMERGING MARKET STRATEGIES

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