It is generally understood that shareholder activism in Korea started in late 1990s with the deregulation of foreign investments in Korean companies. Early shareholder activism in Korea was led by activist funds, mostly foreign hedge funds, and targeted large listed companies. Corporate governance and accounting transparency of these targets was questioned at the time, but there are few such precedents.
Since 2015, two major changes marked shareholder activism in Korea. First, activist funds started to acquire equity interests and actively exert their opinions and shareholders' rights in the course of mergers, spin-offs and split-mergers to reform corporate governance and investment structures of major conglomerates. Second, local activist funds, in addition to foreign hedge funds, became more active in Korea. Detailed examples will follow in Section III.
Shareholder activism is generally subject to the Korean Commercial Code (KCC), the Financial Investment Services and Capital Markets Act (FSCMA) and the Korean stock exchange regulations. Recently, the government has been reinforcing laws and regulations to improve transparency in large business groups' investments structures as well as their corporate management, and to strengthen shareholders' rights in individual companies. Shareholder activism has been on the rise, creating greater demand for improved corporate governance, business structures, financial structures, business environment, corporate social responsibilities and shareholder returns. In this changing landscape of the regulatory environment and the capital market, maintaining effective communication and positive relationships with domestic and foreign shareholders, including sovereign wealth funds, pension funds, other institutional investors and private investors in the capital market space, to reasonably reflect their management input, which in turn will improve the reputation of Korean corporate managers and increase shareholders value, is becoming an important goal in corporate management.
In the following sections, the legal and regulatory framework, key trends and recent campaigns of shareholder activism in Korea are examined.
ii LEGAL AND REGULATORY FRAMEWORK
The legal and regulatory framework for shareholder activism primarily comprises the KCC, the FSCMA and the Korean stock exchange regulations. Additional guidelines are provided in the policy guidelines of proxy advisory firms and the Korean Stewardship Code.
i Laws and regulations
The activities of shareholder activists are mostly based on specific rights afforded to minority shareholders under the KCC, including the rights to request inspection of a company's documents and accounting books, to request convocation of a general meeting of shareholders, to propose agendas, to file a shareholder derivative suit and to request an injunction against a director's misconduct.
A shareholder holding at least 0.1 per cent2 of the total number of issued and outstanding shares of a listed company (0.05 per cent if the company's paid-in capital is no less than 100 billion won) for at least six months may request the inspection or copying of the accounting books and documents of the company, which the company may not reject unless it proves the request is unreasonable.
Right to convene shareholders' meetings
A minority shareholder holding at least 1.5 per cent3 of the total number of issued and outstanding shares of a listed company for at least six months may exercise its right to request convocation of a general meeting of shareholders by submitting a written statement or electronic document specifying the agenda and the reason for convening the meeting.
Right to propose agendas
A shareholder holding at least 1 per cent4 of the total number of issued and outstanding voting shares of a listed company (0.5 per cent if the company's paid-in capital is no less than 100 billion won) for at least six months may propose agendas for a general meeting of shareholders by submitting a written statement or electronic document at least six weeks prior to the meeting.
When a shareholder proposes an agenda, the board of directors cannot refuse and must present it at the general meeting of shareholders, unless presenting the proposed agenda would violate any applicable laws (including certain cases described in the presidential decrees of the KCC) or the articles of incorporation of the company.
Where an agenda proposed by a shareholder is presented at a general meeting of shareholders, the shareholder must be given an opportunity to explain the agenda during the meeting, if so requested by the shareholder.
Right to file a derivative suit
If a director violates any applicable laws or the articles of incorporation, or neglects his or her duties by wilful misconduct or negligence, the shareholders have the right to file a derivative suit against the director to compensate for damage suffered by the company. A shareholder holding at least 0.01 per cent5 of the total number of issued and outstanding shares of a listed company for at least six months may request the company to file a lawsuit against the violating director in writing. If the company does not file the lawsuit, the shareholder may directly file the derivative suit against the director on behalf of the company.
The current KCC has not adopted a multi-step derivative lawsuit claim. However, on 11 June 2020, the MOJ issued a pre-announcement of the proposed amendment to the KCC, which will allow a shareholder of a parent company that holds at least a certain number of shares to file a derivative lawsuit against a director of a subsidiary if, for example, the director of the subsidiary causes damages to the subsidiary due to dereliction of his or her duties.
Right to request an injunction against a director's unlawful conduct
If a director is in breach of any applicable laws or the articles of incorporation, which may cause irreparable damage to the company, the KCC allows shareholders to demand the immediate cessation of the unlawful conduct. A shareholder holding at least 0.05 per cent6 of the total number of issued and outstanding voting shares of a listed company (0.025 per cent if the company's paid-in capital is no less than 100 billion won) for at least six months may make such demand directly against the director on behalf of the company.
KCC special provisions on listed companies
The KCC has a number of 'special provisions' applicable to listed companies that relax the shareholding ratio requirement for minority shareholders to exercise their rights. To prevent abuse of these provisions, they typically add a minimum holding period requirement (e.g., six months). Ambiguity exists as to whether a minority shareholder of a listed company may exercise its right when it satisfies the requirement under KCC's general provision (e.g., shareholding ratio) but not the special provisions (e.g., holding period) applicable to listed companies.
On this issue, a district court has previously held that the holding period requirement should in principle be complied with for listed companies as their shares can be easily traded, which may result in abuse (e.g., in the judgment concerning Elliott Management's request for an injunction against misconduct by directors of Samsung C&T).7 The Seoul High Court took a similar stance in the case concerning KCGI's8 request for a preliminary injunction for presentation of agendas against Hanjin KAL.9 However, the trial court of the Hanjin KAL case10 held that minority shareholders satisfying the shareholding ratio may exercise their rights, even if they do not meet the six-month holding period requirement, because the special provisions on listed companies should not preclude the application of KCC's general provisions. The Supreme Court is yet to render a judgment on this issue.
Significant shareholding disclosure
Under the FSCMA, if a shareholder comes to own at least 5 per cent of a listed company, changes its shareholding ratio thereafter by at least 1 per cent, or if there are changes in its purpose of shareholding or any other material matters, the shareholder must report its shareholding status and a detailed account of any changes to the Financial Services Commission (FSC) and the Korea Exchange (KRX) within a set period. In the past, the FSCMA had classified the purpose of shareholding based on whether or not the holder(s) of such shareholding intends to influence corporate management. However, with the amendment to the Enforcement Decree to the FSCMA (FSCMA-ED) in January 2020, the purpose of shareholding is now further divided into:
- management influence (in cases where its purpose is to influence corporate management as described in the FSCMA-ED11);
- general investment (in cases where its purpose is to implement active shareholder engagement without an intent to influence corporate management); and
- simple investment (in cases where its purpose is to exercise voting and other rights that are irrespective of the shareholding ratio), and disclosure obligations are imposed on a differentiated basis, reflecting the latest trends toward increase in shareholder engagement by the NPS and other institutional investors.12
For any person intending to purchase shares of a listed company, if the aggregate number of shares acquired from 10 or more persons in the preceding six-month period (including the number of shares it intends to purchase) amounts to at least 5 per cent of the total number of shares of a company, the share purchase must take the form of a tender offer.
In calculating the threshold shareholding ratios that trigger the above obligations, a shareholder may be deemed to have 'possession equivalent to ownership' over shares that it does not directly own, if the shareholder has voting rights or a right to claim the shares in law or by contract (and the shares will count toward calculating the threshold). Furthermore, shares held by related parties or their joint holders are counted together in calculating this threshold. These rules should be considered in determining whether a shareholder has any disclosure obligations.
Use of material non-public information and obligation of fair disclosure
The FSCMA prohibits insiders from obtaining material non-public information (i.e., information that may materially influence an investor's judgement in making an investment) of a listed company and using, or enabling others to use, this information in a transfer of securities. The regulations further require listed companies to make its disclosures impartially. Listed companies should use caution in communicating with activist shareholders so as not to violate these requirements.
Under the FSCMA, to solicit proxy of a listed company (i.e., to exercise multiple votes in the general meeting of shareholders), the proxy solicitor must deliver to a proxy the relevant form and related documents before or simultaneously with its solicitation to the shareholders (and submit the same to the FSC and the KRX two business days prior to the solicitation).
Though a number of types of conduct (such as direct solicitation, requesting shareholders to vote in a certain manner and sending proxy forms to shareholders) may be deemed an act of proxy solicitation, which triggers the above prior delivery and submission obligations, the following cases are not deemed proxy solicitation:
- soliciting proxy to fewer than 10 persons, provided that the solicitor (including related persons) is not the issuer or its officers (including related persons);
- soliciting proxy to a trustor by a trustee (or other similar legal relationship); and
- soliciting proxy to the public through an advertisement (e.g., newspapers, broadcasts, magazines) that contains only the name of the share issuer, the purpose of the advertisements, the subject matter of the general meeting of shareholders and the place where the proxy form and related materials will be distributed.
ii Other sources of practice guidelines
Korea Stewardship Code
On 16 December 2016, the Korea Corporate Governance Service (KCGS)13 formulated the Principles on the Stewardship Responsibilities of Institutional Investors (the Korea Stewardship Code), which set out key principles and guidelines for institutional investors to comply with their fiduciary duties. Among other things, these principles call institutional investors to:
- formulate and disclose a clear policy to implement their stewardship responsibility;
- formulate and disclose a voting policy; and
- regularly report their voting and stewardship responsibilities.
The Korean Stewardship Code is not legally binding as it comprises principles promulgated by a non-profit organisation (NGO). However, it may become binding on institutional investors who have agreed to the principles and have elected to adopt and implement them.
Guidelines of proxy advisory firms
In many cases, shareholder activism takes the form of a proxy contest to take control of the agenda items submitted to the general meeting of shareholders. In Korea, domestic proxy advisers such as KCGS, Sustinvest and Daishin Economic Research Institute, are offering those services. Institutional Shareholder Services (ISS) and Glass Lewis, major global proxy advisers, are also offering similar services by analysing agendas for general meetings of shareholders of Korean companies with foreign shareholders. Korean institutional investors take the recommendations made by proxy advisory firms as important reference in exercising their voting rights.
iii Defences available to companies
Korean law does not recognise poison pills, or stocks with unequal voting rights (other than non-voting shares that are issued as different class shares), and thus, they are unavailable as defences in corporate raids.
In practice, when activist shareholders propose agendas, a company may consider issuing new shares to a third party (who can serve as a white knight) or disposing of its treasury stock. However, if such judgements do not serve any business purpose and are used merely as defence against activist shareholders, they may be deemed to breach the director's fiduciary duties and be nullified by the court.
In sum, corporations may defend themselves against activist shareholders by securing sufficient voting rights through proxy solicitation and from friendly shareholders, adopting shareholder-friendly policies, securing a favourable impression from general shareholders and the market by disclosing financial or non-financial (environmental, social, governance – ESG) information in an open manner and actively conducting IR activities, and effectively communicating with institutional investors.
iii KEY TRENDS IN SHAREHOLDER ACTIVISM
i Activist shareholders
Shareholder activists are mainly divided into civic groups and activist funds. Until the mid-1990s, shareholder activism was almost non-existent in Korea. After the mid-1990s, however, shareholder activism was initiated by civic groups (NGOs) amid a growing social movement and drive for corporate social responsibility (e.g., a lawsuit filed by the People's Solidarity for Participatory Democracy to revoke a resolution by Korea First Bank in 1997 and a shareholder derivative suit instituted against Samsung Electronics in 1998).
Shareholder activism by activist funds has been emerging in Korea since the late 1990s, when it opened up its stock market to foreign investors in earnest, beginning with the Tiger Fund. Foreign hedge funds, such as Sovereign Asset Management and Hermes Investment Management, were active in Korea in the 2000s. Elliott Management, a foreign hedge fund, has made headlines with its activities since 2015. Lately, Korean activist funds such as KCGI, Platform Partners Asset Management and KB Shareholder Value Focus Fund have become increasingly active.
In the past, institutional investors were less interested in improving business performance or governance than in realising capital gains.14 In the traditional investment climate of Korea, participation in corporate management was perceived as an intrusion into corporate control,15 and as a result, there were very few cases where an institutional investor actively requested for management information and exercised other minority shareholders' rights. However, since the National Pension Service (NPS), which manages public pension funds directly operated by the Korean government, adopted the Korean Stewardship Code in July 2018, it has aggressively exercised its rights as a shareholder in domestic conglomerates (see table in Section V for major NPS activities in the second-half of 2019 and the first-half of 2020). In addition to the NPS, the Teachers' Pension (TP) and the Government Employees Pension Service (GEPS) each adopted the Korean Stewardship Code in December 2019 and February 2020 respectively,16 signalling the potential commencement of more active exercise of shareholder rights. As such, shareholder activism from institutional investors is likely to increase.
ii Target companies
Shareholder activism in Korea targets businesses in various industries with no concentration in any specific industry.
The following six types of companies are generally vulnerable to and mostly targeted by activist shareholders:
- companies with a weak or no major shareholder;
- companies with a high foreign shareholding ratio that actively participate in the general meeting of shareholders;
- companies with low shareholder returns (e.g., low share prices or low dividends);
- companies with uncertainty of distributable cash or free cash flow according to their balance sheets;
- companies with a controversial agenda pending, such as a restructuring; and
- ones under public criticism due to events such as ongoing criminal or administrative investigations.
iii Shareholders' campaigns
Key objectives of activist campaigns
The objectives of the activist campaigns in Korea do not differ significantly from those of other jurisdictions. They encompass:
- improvement of corporate governance, including recommendation of candidates and appointment of directors, replacement of the management, and limitations on remuneration for directors in terms of corporate governance;
- dividend increase, treasury stock acquisition and optimisation of capital structure; and
- disposal of non-core assets and pursuing mergers and acquisitions as business strategies.
A key notable objective witnessed recently has been campaigns against business and governance restructuring plans proposed by the board in the form of split-offs and mergers, alleging adverse impact on shareholder value. As a case in point, in 2015, Elliott Management vigorously opposed and contested the merger of Samsung C&T and Cheil Industries for reasons of, among others, unfairness in the merger ratio; little or no business benefits or synergies arising from the merger; and increased circular shareholding issue. Despite the opposition from Elliot Management, the merger of Samsung C&T and Cheil Industries was approved by the extraordinary general meeting of shareholders of Samsung C&T.
Another notable objective has been higher dividends (or acquisition of treasury stocks) by using idle cash and achieving greater efficiency in capital structure. For instance, in 2019, Elliott Management proposed that Hyundai Motor Company pay out a cash dividend of 21,967 won per ordinary share, which was about seven times higher than the per share dividend payment planned by Hyundai Motor Company (i.e., 3,000 won).17 The per share dividend payment planned by Hyundai Motor Company was approved by the ordinary general meeting of shareholders. In 2020, KB Shareholder Value Focus Fund proposed that Hyosung TNC increase the dividend rate to 30 per cent to pay out a dividend of 12,500 won per share and demanded that Hyosung TNC justify the basis of the decision by its management to lower the dividend rate from 20 per cent to 9 per cent, but the cash dividend of 2,000 per share (dividend rate: 9 per cent) decided by the management was approved by at the 2020 ordinary general meeting of shareholders of Hyosung TNC.
Activist shareholders also seek to appoint their preferred candidates to serve on the board. For instance, in 2019, Elliott Management proposed an agenda in an attempt to put its outside directors on the board of Hyundai Motor Company. KCGI proposed an agenda to place its preferred outside director on Hanjin KAL's board in 201918 and also proposed an agenda to appoint inside, outside, and other non-executive directors in 2020, together with friendly shareholders with whom it entered into a joint equity agreement, but the proposal was rejected at the 2020 ordinary general meeting of shareholders.
Tactics used by activists
Tactics used by activist shareholders are also similar to those used by activist shareholders in other jurisdictions and they vary depending on their goals or their target companies' circumstances.
Sending a letter requesting private dialogue to the board of directors
As individual shareholders are free to send letters to the board of directors, activist shareholders commonly demand private conversation in their letters to the board of directors as the first step in engaging target companies.
Proposing shareholder meeting agendas and soliciting delegation of voting rights
The shareholders' right to propose agendas is the most frequently exercised right by activist shareholders. By exercising this right, activists submit their agenda items (e.g., dividend distribution or director appointment) for the general meeting of shareholders and engage in proxy contests by soliciting delegation of voting rights. Activist shareholders have frequently filed requests for a preliminary injunction with the court when target companies refuse to honour their request for submitting agendas proposed for the general meeting of shareholders. In South Korea, in order to secure enough shares to compete with the largest shareholder and its friendly shareholders or compete for corporate control at the general meetings of shareholders, some activist funds are moving a step further from a mere proxy fight to an active formation of alliances by signing joint equity agreements early on with major shareholders other than the shareholder that has control over the company.
Other minority shareholders' rights and publicity campaigns
Activist shareholders have also exercised other minority shareholders' rights provided in the KCC, such as the right to request an injunction against a director's misconduct, and the right to request inspection of documents and accounting books of a company, directly as legal rights or as rights secured by a preliminary injunction.
Publicity campaigns or investor communication through the media or the activists' websites19 are also among the key strategies used by activist shareholders.
There are not enough instances of shareholder activism in Korea to derive statistically meaningful inferences on the results of the contests between activist shareholders and their target companies. There are cases where companies conceded to or rejected the demands made by activist shareholders.
When Tiger Fund demanded restitution of undue gains and replacement of the management to SK Telecom, and objected to its paid-in capital increase in 1999, SK Telecom accepted most of those demands, except for the request concerning its paid-in capital increase, and thereafter purchased the stake of Tiger Fund.20 During Hyundai Motor Group's restructuring in 2018, the company voluntarily relinquished its corporate governance restructuring plan in accordance with the opinions and assessments of shareholders, investors and market players, including the objections raised by Elliott Management, ISS and KCGS.
When Elliott Management objected to the merger between Samsung C&T and Cheil Industries in 2015, the major shareholder of Samsung C&T obtained approval of the proposed merger in the general meeting of shareholders by obtaining support of shareholders.
iv RECENT SHAREHOLDER ACTIVISM CAMPAIGNS
i Elliott Management's objection to Samsung C&T and Cheil Industries' merger
On 26 May 2015, Samsung C&T and Cheil Industries announced that their respective board of directors approved the proposed merger between the two companies. The following day, Elliott Management, in its capacity as a shareholder, notified Samsung C&T of its objection to the merger citing unfairness with the calculated merger ratio between Cheil Industries and Samsung C&T (about 1:0.35), which resulted in a low valuation of Samsung C&T, and demanded that the merger ratio be recalculated. On 9 June 2015, Elliott Management filed a request for a preliminary injunction against Samsung C&T to prevent the company from issuing a convocation notification for the general meeting of shareholders at which the approval of the merger was anticipated. On 11 June 2015, Elliott Management additionally filed a request for a preliminary injunction to the court against Samsung C&T's sale of its treasury stock, which had taken place on the preceding day.
On 24 June 2015, Elliott Management obtained Samsung C&T's shareholders register by demanding the company to allow inspection and reproduction of it. On the same day, Elliott Management sought proxies from the shareholders of Samsung C&T. On 25 June 2015, a proxy contest was initiated with Samsung C&T also seeking proxies from its shareholders.
On 3 July 2015, the preliminary injunction requested by Elliott Management was dismissed in its entirety by the Korean courts in spite of recommendation by ISS against the merger between Samsung C&T and Cheil Industries. The NPS, which held an 11.61 per cent stake in Samsung C&T, decided to vote in favour of the merger in its internal meeting. Consequently, on 17 July 2015, the proposed merger was approved at Samsung C&T's general meeting of shareholders with 69.5 per cent of the shareholders present voting in favour (58.8 per cent of the total number of issued and outstanding shares).21
In 2018, Elliott Management filed for an investor–state dispute (ISD) settlement against the Korean government under the US–Korea Free Trade Agreement, claiming that it suffered damage of at least US$770 million22 due to the Korean government's unlawful involvement through the NPS during the process of approving the merger of Samsung C&T and Cheil Industries. The ISD proceeding is currently pending.
ii Elliott Management's objection to Hyundai Motor Group's restructuring
In 2018, Hyundai Motor Group pursued its corporate restructuring plan to spin off certain divisions of Hyundai Mobis to merge them with Hyundai Glovis. However, Elliott Management objected to the plan, calling for a merger between Hyundai Motor Company and Hyundai Mobis instead, and a subsequent conversion of the merged entity into a holding company. Moreover, virtually all global proxy advisory firms, including ISS, recommended against Hyundai Motor Group's restructuring plan (KCGS also opposed the plan). Under the circumstances, it would have been very difficult for Hyundai Motor Group to persuade its shareholders in its favour. On 21 May 2018, about a week before the general meeting of shareholders, Hyundai Motor Group voluntarily withdrew its restructuring plan, noting that it would fully reflect the opinions expressed by the shareholders, investors and market players.
In February 2019, Elliott Management proposed the expansion of dividends, the appointment of outside directors, and the establishment of compensation and management transparency committees as agenda items for the general meeting of shareholders of Hyundai Motor Company and Hyundai Mobis. However, on 29 March 2019, except for the establishment of compensation and management transparency committees, which was not opposed by Hyundai Motor Company and Hyundai Mobis, all of these agenda items were voted down at the shareholders meeting of the two companies.
iii KCGI's request for improvement of Hanjin KAL's corporate governance
KCGI was established with the objective of enhancing the value of investee companies through improving corporate governance. In November 2018, KCGI became the second-largest shareholder of Hanjin KAL by acquiring a 9 per cent stake in the company.23 KCGI cited 'severe undervaluation owing to idle assets and delay in investment, and great potential for increasing enterprise value through corporate governance improvement' as a reason behind its investment.
In January 2019, KCGI suggested that Hanjin KAL, the holding company of Hanjin Group, which includes Korean Airlines, improve its credit rating by lowering its debt-to-equity ratio, sell undervalued assets as part of improving its business structure and dispose of unprofitable businesses. In addition, KCGI proposed the establishment of corporate governance, compensation and officer recommendation committees. KCGI also suggested that any officer perpetrating a crime against the company or harming its reputation be banned from assuming office. KCGI subsequently proposed the appointment of one auditor and two outside directors as agenda items for the shareholders' meeting.
In February 2019, when Hanjin KAL refused to accept KCGI's proposed agenda, KCGI filed a request for a preliminary injunction to allow presentation of its agenda to the general meeting of shareholders, but this request was ultimately dismissed by the court. In March 2019, KCGI raised objection to the three outside directors nominated by Hanjin KAL in a general meeting of shareholders, but all of them were appointed. KCGI increased its stake in Hanjin KAL to 14.98 per cent in April 2019 and 15.98 per cent in May 2019.24 It has consistently been calling for improvement of Hanjin KAL's corporate governance.
In December 2019, KCGI increased its stake in Hanjin KAL to 17.29 per cent.25 Then, in January 2020, KCGI entered into a joint equity agreement with respect to Hanjin KAL shares with Heather Cho (the older sister of Walter Cho, who is the incumbent Chairman / CEO, and the largest individual shareholder of Hanjin KAL) and Bando Group's affiliates to increase the shareholding ratio to as high as 32.06 per cent26 in order to make a shareholder's proposal in the 2020 ordinary general meeting of shareholders and actively exercise its voting rights. In February 2020, KCGI proposed agenda to appoint eight inside and outside directors and to amend the articles of incorporation, which included the adoption of the electronic voting system and strengthened qualification requirements that were to be applied to directors. In its board of directors' meeting held in March 2020, Hanjin KAL decided to present the whole agenda proposed by KCGI at the 2020 ordinary general meeting of shareholders, but they were all voted down by the 2020 ordinary general meeting of shareholders. In April 2020, KCGI again acquired Hanjin KAL shares to increase its shareholding ratio to as high as 42.74 per cent, signalling further shareholder engagement.27
v REGULATORY DEVELOPMENTS
A number of bills designed to amend the KCC for stronger minority shareholders' rights that were pending at the 20th National Assembly (e.g., separating the election for audit committee member directors from that of non-audit committee member directors; a cumulative voting system; a multi-tiered shareholder derivative suit; a mandatory electronic voting system) failed to ultimately pass at the National Assembly and were automatically abolished with the ending of the 20th National Assembly on 29 May 2020.28
Since the NPS' adoption of the Korean Stewardship Code in July 2018, the TP and the GEPS that are representative public pension funds have each adopted the Korean Stewardship Code in December 2019 and February 2020. As such, a growing number of institutional investors are adopting the Korean Stewardship Code.29 In December 2019, the NPS adopted a resolution to prepare a 'guideline for active shareholder activism' that aims to promote transparent and fair shareholder engagement in compliance with the Stewardship Code.30 The NPS is expected to engage in shareholder activities when there are issues that can undermine corporate value involving, for example, dividend policy and remuneration paid to executives ESG. (See the table below for major activities of the NPS in the second-half of 2019 and the first-half of 2020).
Major activities of the NPS in 2020
|Prior disclosure of voting direction and actual voting||The NPS pre-disclosed its voting direction for the 2020 ordinary general meeting of shareholders of Samsung Electronics, Hyundai Motor Company, Hyundai Glovis and other listed companies. Among 2,617 agendas proposed by the management of its portfolio companies for the 2020 ordinary general meeting of shareholders, the NPS opposed 261 agendas.|
|Change of objective of shareholding||The NPS changed its purpose of shareholding from 'Simple Investment' to 'General Investment' with respect to 56 major listed companies including Samsung Electronics, SK Hynix and Hyundai Motor Company, suggesting more active shareholder engagement going forward.*|
|Announcement of NPS guidelines for active shareholder activism||The NPS prepared a 'guideline for active shareholder activism' that would serve as a criteria for shareholder activism with regard to: (1) dividend policy; (2) appropriateness of remuneration paid to executives; (3) undermining of corporate value/rights and interests of shareholders; (4) failure to make improvements despite the exercise of opposing voting rights; and (5) drop in ESG ratings given by the NPS.|
* Samsung Electronics: Report on stocks and other securities held in bulk, 7 February 2020, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20200207000636; SK Hynix: Report on stocks and other securities held in bulk, 7 February 2020, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20200207000652; Hyundai Motor Company: Report on stocks and other securities held in bulk, 7 February 2020, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20200207000683.
It is expected that shareholder activism in Korea will continue to become more active given that major Korean companies continue to have corporate governance issues and many stakeholders are increasingly demanding more transparency in corporate governance. These factors are further bolstered by the impending amendment to the KCC31 and a proactive adoption of the Korean Stewardship Code. As for mergers and spin-offs to reform major conglomerates' corporate governance, more sophisticated shareholder activism campaigns will likely be launched based on past experience.
It is also expected that shareholder activism targeting medium-sized corporations will increase given the rising number of Korean activist shareholders. Deregulation of investment in Korean private funds will also diversify the investment structures of these indigenous activist funds.
To defend against such increased activities of activist funds, it is anticipated that potential target companies will seek business alliances with other companies and proactively adopt shareholder friendly policies, as well as seek improved transparency with the market and better corporate governance.
However, due to covid-19, the situation for many companies has worsened and the business environment is expected to greatly change amid the prolonged pandemic. This may also change the way activists engage in shareholder activities and types of their activities.
1 Hyeon Deog Cho, and Byoung Kwon Park are senior attorneys, Joon B Kim is a senior foreign attorney and Eun-Young Lee is an attorney at Kim & Chang.
2 For an unlisted company, at least 3 per cent of the total number of issued and outstanding shares.
3 For an unlisted company, a shareholder holding at least 3 per cent of the total number of issued and outstanding shares.
4 For an unlisted company, a shareholder holding at least 3 per cent of the total number of issued and outstanding voting shares.
5 For an unlisted company, a shareholder holding least 1 per cent of the total number of issued and outstanding shares.
6 For an unlisted company, a shareholder holding at least 1 per cent of the total number of issued and outstanding voting shares.
7 Seoul Central District Court Decision No. 2015Kahap80582, rendered on 1 July 2015.
8 Korea Corporate Governance Improvement Fund (KCGI) is a domestic private fund established in July 2018.
9 Seoul High Court Decision No. 2019Ra20280, rendered on 21 March 2019.
10 Seoul Central District Court Decision No. 2019Kahap20313, rendered on 28 February 2019.
11 The amended FSCMA-ED excludes shareholder activities related to, for example, issuance of dividends, amendment to the articles of incorporation to improve corporate governance in line with pre-disclosed principles, and exercise of the right to request dismissal against a director's unlawful conduct from activities 'to influence corporate management'.
12 Since the amendment to the FSCMA-ED, the NPS has changed its purpose of shareholding from 'Simple Investment' to 'General Investment' with respect to 56 major listed companies including Samsung Electronics, SK Hynix, and Hyundai Motor Company.
13 The Korea Corporate Governance Service is a non-profit organisation set up pursuant to the KCC. It formulates and revises major codes for capital market development, conducts environmental, social and governance evaluation, offers agenda analysis services and performs policy research in furtherance of public interest. The KRX, the Korea Securities Depository, the Korea Securities Finance Corporation, the Korea Financial Investment Association, the Korea Listed Companies Association, the Korean Institute of Certified Public Accountants, and KOSDAQ Listed Companies Association are its member organisations.
14 Jung-Sik Choi, 'A Role of Institutional Investors on Corporate Governance and Securities Class Action', Business Law Review, Volume 22, No. 4, Korea Business Law Association (2008), pp. 293–294.
15 Sung-Geun Oh, 'Exercise of Voting Rights by Funds and Fund Activism', KLCA Review, No. 55, Korea Listed Companies Association (2007), p. 89.
16 Participation in the Korean Stewardship Code by Pension Funds, http://sc.cgs.or.kr/eng/participation/investors.jsp.
17 Announcement of the general meeting of shareholders, 26 February 2019, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20190226002697.
18 This attempt was frustrated when KCGI lost a lawsuit on the ground that it failed to meet a requirement for exercise of a shareholder's right to propose agendas (i.e., minimum period of stock retention (six months), according to special provisions on listed companies under the KCC).
20 Dae-ik Jung, 'Legal Limits of Shareholder Activism', Journal of Business Administration & Law, Volume 27, No. 2, Korean Academic Society of Business Administration and Law (2017), p. 243.
21 Under Korean law, a merger requires the consent of at least two-thirds of voting rights of the shareholders present and at least one-third of the total number of issued and outstanding shares. For the referenced voting results, see ChosunBiz, 'Merger between Samsung C&T and Cheil Industries is approved' (18 July 2015).
23 Report on stocks and other securities held in bulk, 15 November 2018, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20181115000158.
24 Report on stocks and other securities held in bulk, 28 May 2019, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20190528000308.
25 Report on stocks and other securities held in bulk, 23 December 2019, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20200120000241.
26 Report on stocks and other securities held in bulk, 31 January 2020, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20200316000779.
27 Report on stocks and other securities held in bulk, 1 April 2020, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20200331002668.
28 However, the proposed amendment to the KCC is part of the major campaign pledges of the ruling party, which won majority seats in the 21st National Assembly (see Campaign Pledge Booklet of the Democratic Party); this is why the 21st National Assembly could push ahead with the same amendment.
30 NPS Resolution dated December 27, 2019, https://fund.nps.or.kr/jsppage/fund/fundCms/view.jsp?seq=23738&cPage=1&cmsId=KD860&SK=&SW=
31 On 11 June 2020, the MOJ issued a pre-announcement of the following proposed amendment to the KCC: (1) Separate election of audit committee members of a listed company: One or more directors who will also sit on the audit committee shall be separately elected from other directors, and restriction on voting rights will be applied from the election stage; (2) Strengthening restrictions on voting rights of the largest shareholder when electing audit committee members of a listed company: Regardless of whether the audit committee member elected by a listed company is an inside director or an outside director, the largest shareholder cannot exercise his or her voting rights for shares exceeding 3 per cent (including all the shares held by his or her related parties); (3) Introduction of multi-step derivative suit: Allows a shareholder of a parent company to file a derivative suit against a director of a subsidiary; (4) Relaxation of requirements for passing resolution when introducing electronic voting: Relaxes the requirements for passing resolution at a general meeting of shareholders only if electronic voting is conducted when electing statutory auditors or members of audit committee; and (5) Clarifications of minority shareholders right related provisions: Explicitly stipulates that minority shareholders' rights based on general provisions and minority shareholders' rights based on special provisions may be selectively applied.