The Shareholder Rights and Activism Review: South Korea

Overview

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.

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

Shareholders' rights

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.

Inspection rights

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.

Prior to the amended KCC of 29 December 2020, no legal basis existed for multi-step derivative lawsuit claims. The amended KCC allows shareholders of the parent company (ownership in excess of 50 per cent) to file representative actions against directors of its subsidiaries. To file such a lawsuit, for unlisted companies, shareholders must hold 1 per cent or more of the shares, and for listed companies, shareholders must have held 0.5 per cent or more of the shares for more than six months, or hold 1 per cent or more of the shares. With this KCC amendment, shareholders are now able to raise issues regarding the management of subsidiaries by filing multi-step derivative lawsuits even if they are not direct shareholders of subsidiaries.

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 the 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 existed 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.

Prior to the amended KCC of 29 December 2020, there had been no explicit Supreme Court precedent on this issue, but the amended KCC explicitly confirms that minority shareholders can choose to exercise their rights either under the special provisions for listed companies or under the general provisions. Under the amended KCC, as long as minority shareholders of listed companies meet the requirements under the general provisions, they can exercise their rights even if they do not satisfy the six-month shareholding period requirement that is additionally required in special provisions, making it easier for them to exercise their rights.

Disclosure regulations

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 of the shareholding intended 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:

  1. management influence (in cases where its purpose is to influence corporate management as described in the FSCMA-ED7);
  2. general investment (in cases where its purpose is to implement active shareholder engagement without an intent to influence corporate management); and
  3. 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.8

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.

Proxy regulations

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:

  1. soliciting proxy to fewer than 10 persons, provided that the solicitor (including related persons) is not the issuer or its officers (including related persons);
  2. soliciting proxy to a trustor by a trustee (or other similar legal relationship); and
  3. 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)9 formulated the Principles on the Stewardship Responsibilities of Institutional Investors (the Korean 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:

  1. formulate and disclose a clear policy to implement their stewardship responsibility;
  2. formulate and disclose a voting policy; and
  3. 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 (e.g., environmental, social, governance (ESG)) information in an open manner and actively conducting IR activities, and effectively communicating with institutional investors.

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. On 12 December 2019, these major activist funds in Korea established the Korea Corporate Governance Forum in order to establish an active shareholder return system and policies.

In the past, institutional investors were less interested in improving business performance or governance than in realising capital gains.10 In the traditional investment climate of Korea, participation in corporate management was perceived as an intrusion into corporate control,11 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,12 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:

  1. companies with a weak or no major shareholder;
  2. companies with a high foreign shareholding ratio that actively participate in the general meeting of shareholders;
  3. companies with low shareholder returns (e.g., low share prices or low dividends);
  4. companies with uncertainty of distributable cash or free cash flow according to their balance sheets;
  5. companies with a controversial agenda pending, such as a restructuring; and
  6. 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:

  1. 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;
  2. dividend increase, treasury stock acquisition and optimisation of capital structure; and
  3. 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. Recently, Whitebox, a US-based hedge fund, opposed the horizontal spin-off of LG Group's holding company on the grounds that it will lead to declining profit and investment capacity, and negative impact on corporate governance evaluation. However, the agenda was approved at a general meeting of shareholders in March 2021.

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).13 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 201914 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' websites15 are also among the key strategies used by activist shareholders.

iv Outcome

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.16 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.

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).17

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 million18 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.19 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 2019.20 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.21 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 cent22 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.23

Meanwhile, in November 2020, when the Korea Development Bank participated in the capital increase of holding company Hanjin KAL for Korean Air's takeover of Asiana Airlines, KCGI applied for a preliminary injunction to ban the issuance of new shares, which was dismissed by the court. In March 2021, no shareholder proposal was presented at the 2021 ordinary general meeting of shareholders, and in April of the same year, KCGI announced the termination of the joint ownership contract with the Shareholders' Union of Hanjin KAL, which, in effect, appears to have put an end to the dispute over the management control of Hanjin KAL.24

Regulatory developments

There are some noteworthy provisions in the amended KCC of 29 December 2020 with respect to shareholder activism. These include the following: (1) for listed companies, implementation of a separate election system for one audit committee member (two or more if provided as such by its articles of incorporation) who shall be elected at a general meeting of shareholders separately from other directors at the stage of appointment of directors (which was already required by the Act on Corporate Governance of Financial Companies, but now is newly included in the KCC); (2) allowing shareholders of the parent company (ownership in excess of 50 per cent) to file derivative lawsuits against directors of its subsidiaries (for private companies, shareholders must hold 1 per cent or more shares, and in the case of listed companies, shareholders must hold 0.5 per cent or more shares for more than six months, or hold 1 per cent or more shares); and (3) stipulating that minority shareholders can exercise their rights either under the special provisions for listed companies or under the general provisions.

Since the NPS' adoption of the Korean Stewardship Code in July 2018, TP and the GEPS also adopted the Korean Stewardship Code. And most recently, Korea Post adopted the Code in December 2020, making all four pension funds comply with the Code (as of June 2021 and 162 institutional investors adopted the Korean Stewardship Code, and 45 more will introduce it).

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. In accordance with the Korean Stewardship Code, the NPS's stewardship expert committee selects companies and their fund management department that are suspected to have been involved in law-violating activity (embezzlement, breach of trust, unfair support and management fraud of private interests) or undermining corporate value and shareholders' interest activity. After selection, the committee holds a private discussion meeting with suspected companies, making them prepare and implement measures for improvement. Regardless of this significant effort by the NPS, if the NPS ultimately determines that there is no room for improvement, the NPS is now allowed to actively engage in shareholder activities such as shareholder proposals through the review of the stewardship expert committee and the final decision of the fund management committee. See the table below for major activities of the NPS in the second half of 2020 and the first half of 2021.

Major activities of the NPS in 2020–2021
TypeDetails
Prior disclosure and exercise of voting rights at the ordinary general meeting of shareholdersThe NPS disclosed voting direction for approximately 107 companies during the 2021 ordinary general meetings of shareholders. And the NPS exercised its voting rights for 598 companies, exercising a dissenting vote for 9.19 per cent of the total agendas at the ordinary general meetings of shareholders for these companies.
In particular, the NPS voted against the appointment of outside directors of Woori Financial Group on the grounds that incomplete sale of DLF could damage the bank's corporate value. It also voted against Korean Air's appointment of an inside director out of concerns over the airliner's negligence in monitoring of acts that may infringe shareholder rights, including concerns about the contract to acquire Asiana Airlines. The NPS took a 'neutral' stance, instead of voting in favour or against, on the agenda for the reappointment of POSCO's CEO, which was criticised by some media and civic groups that claimed that the NPS should have exercised its shareholder rights more actively.
Exercising voting rights in major restructuring casesAmong recent major restructuring cases, the NPS voted against the merger between Samgwang Glass (currently SGC Energy) and E-tech E&C and the spin-off merger of Gunjang Energy in September 2020 on the grounds that listed company Samgwang Glass was undervalued, and there was a controversy over the fairness of spin-off and merger ratios. In the case of LG Chem's vertical spin-off of LG Energy Solution in October 2020, the NPS also voted against out of concerns about a decrease in the value of its stake and potential damage to shareholder value. On the other hand, the NPS voted in favour of the horizontal and vertical spin-off of Daelim Industrial (currently DL), the horizontal spin-off of LG Corp. and the merger between GS Retail and GS Home Shopping.
Stewardship activitiesThe NPS published and distributed a stewardship activity report in July 2020, which includes its responsible investment, history of exercise of shareholder rights, future plans and statistics on stewardship activities. In addition, the NPS joined the Asia Investor Group on Climate Change (AIGCC) in November 2020 for responsible investment reflecting ESG management.
Expansion of ESG investmentsBeginning in 2021, the NPS started to apply ESG criteria when making investment decisions in domestic stocks and bonds. In accordance with this policy, the NPS has mandated a research agency to introduce a new evaluation system that integrates ESG criteria. Using the results of this research, the NPS will examine its current ESG evaluation system for whether it is applicable to its stock assets. Also, the NPS will establish a new process that includes additional factors and ESG indicators to optimise its ESG processes.

Outlook

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 recent amendment of the KCC and a proactive adoption of the Korean Stewardship Code.

Especially with the amended KCC enforced, shareholder activism can be expressed in more diverse forms. As the amended KCC requires separate election of audit committee members and restricts voting rights, some minority shareholders may interfere with corporate management or attempt to join the board of directors with the ulterior purpose of realising their personal gains by way of capital appreciation. Some also may attempt to participate in management by distributing blocks of 3 per cent of shares each via speculative funds or special purpose vehicles, given that general shareholders (other than the largest shareholder and specially related parties) are only able to exercise up to 3 per cent of voting rights. In particular, since the 3 per cent limit on voting rights is applied at the director appointment stage, in the separate elections of directors and audit committee members, the effective voting rights of the opposing shareholders can increase.

Regarding various minority shareholder rights subject to the Special Cases of Listed Companies (e.g., the right to hold general shareholders' meetings, the right to request an investigator to investigate the company's operations and properties, the right of shareholder's proposal and the right to access accounting books), the amended KCC confirmed that one may choose between minority shareholder rights under the special provisions for listed companies and those under the general provisions. Therefore, if minority shareholders of listed companies meet the requirements under the general provisions, they may exercise their minority shareholder rights even if they do not satisfy the six-month shareholding period requirement that is additionally required in special provisions, making it easier for them to exercise their rights.

As such, minority shareholders now have more opportunities to raise legal claims (e.g., preliminary injunction, disputes over voting rights at general shareholders' meetings, derivative lawsuits and criminal cases concerning director appointment). In order to ward off this risk, it will be necessary to reassure others of compliance in advance when making corporate decisions to improve governance structures and reinforce control systems.

Recently, there has been a growing interest in non-financial indicators that deal with various valuation aspects, especially those different to financial indicators such as revenue and operating profit. It serves as the basis for assessing the company's sustainable business management. Accordingly, the Korea Exchange and the FSC announced that they will actively plan and implement policies to expand the scope of ESG-related information disclosure and public disclosure. As such the NPS, domestic institutional investors and ultimately the general public are expected to utilise ESG evaluation results to incorporate follow-up measures, such as negative screening or exercise of shareholder rights, thereby seeking long-term profitability and stability.

Footnotes

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 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'.

8 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.

9 The Korea Corporate Governance Service is a non-profit organisation set up pursuant to the KCC. KCGS 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.

10 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.

11 Sung-Geun Oh, 'Exercise of Voting Rights by Funds and Fund Activism', KLCA Review, No. 55, Korea Listed Companies Association (2007), p. 89.

12 Participation in the Korean Stewardship Code by Pension Funds, http://sc.cgs.or.kr/eng/participation/investors.jsp.

13 Announcement of the general meeting of shareholders, 26 February 2019, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20190226002697.

14 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).

15 See Value Hanjin (http://valuehanjin.com) opened by KCGI, and Accelerate Hyundai (http://www.acceleratehyundai.com) opened by Elliott Management.

16 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.

17 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).

18 The Korea Herald, 'Elliott initiates ISD suit against Korea, claiming $770m in Damages', 13 July 2018, http://www.koreaherald.com/view.php?ud=20180713000681.

19 Report on stocks and other securities held in bulk, 15 November 2018, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20181115000158.

20 Report on stocks and other securities held in bulk, 28 May 2019, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20190528000308.

21 Report on stocks and other securities held in bulk, 23 December 2019, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20200120000241.

22 Report on stocks and other securities held in bulk, 31 January 2020, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20200316000779.

23 Report on stocks and other securities held in bulk, 1 April 2020, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20200331002668.

24 Report on stocks and other securities held in bulk, 1 April 2021, http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20210401002943.

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