Addressing the Incentive for Expropriation Within Business Groups: The Case of the Korean Chaebol

This Article builds upon prior empirical findings on the prevalence of pyramids and focuses on the financing subsidies derived through the internal capital markets of pyramids–particularly through affiliations with financial institutions. Part I of this Article provides a brief overview of the relevant literature and the role that pyramids can play in separating ownership and voting rights. Part II describes the phenomenon by which the financing advantages derived by firms with financial affiliates, often non-bank financial institutions (“NBFIs”), results in a distortion of the market that contributes to pyramid expansion, thereby exacerbating the risk of minority shareholder expropriation. Part III then proposes a regulatory structure that could help reduce this distortion, drawing upon a recent EU Directive on supplementary supervision of financial conglomerates. Part IV uses the example of Korea to specifically describe how the subsidization provided by NBFIs within business groups can distort the market and lead to expropriation. Finally, Part V explains how the proposed regulatory structure could be concretely applied in Korea to address this distortion.