Concerns on Amendment
Analysis says that if an amendment to the Commercial Law pursued by the opposition parties is passed, foreign hedge funds will be able to appoint their men as auditors of six of the ten largest Korean companies including Samsung Electronics.
On February 14, the Korea Economic Research Institute (KERI) said that if the Separated Auditor Appointment System is introduced and foreign investors join forces, they will be able to appoint their men as auditors of six Korean companies -- Samsung Electronics, Hyundai Motor, LG Electronics, Kia Motors, SK Innovation, and Hyundai Mobis -- among Korea’s ten largest companies (excluding state-run companies and financial institutions). The highlight of the Separated Auditor Appointment System is that the system limits the voting rights of the largest shareholder to 3% when selecting auditors. Generally, a company has three to five auditors.
If the law is enacted and the voting rights of insiders such as owners, executives and Korean institutional investors such as strategic investors, and pension funds are combined, the combined voting rights cannot outclass those of foreign institutional investors at general shareholders meetings of Samsung Electronics among others.
In the case of Samsung Electronics, the combined shares of insiders, strategic investors, and Korean institutional investors stand at 29.7%. But if the Separated Auditor Appointment System goes into effect, the percentage will slide to 17.5%. On the other hand, the foreign ownership of voting rights remains at 28.7% and will not change even after the introduction of the system. In the case of SK, its domestic stake will tumble from 56.2% to 15.6%. Hanwha and Lotte Shopping will also lose more than 40% of their shares for voting rights.
In the case of foreign institutional investors, no change will be made in the number of voting rights at six companies and the change in voting rights at the remaining four will be a maximum two percentage points, having a little impact on the four. "If a voting right duel is had in the election of auditors, fair competition will not be realized as Korean investors such as the largest shareholders will be subject to the 3% voting rights restriction, said Yoon Yoon-kyung, a research fellow at the KERI.
The KERI also analyzed that the Concentrated Voting System could unfairly help foreign investment institutions advance into boards of directors (BODs). The Concentrated Voting System allows voters to concentrate their votes on a specific candidate when a director is elected. The think-tank claimed that if the Concentrated Voting System is introduced and foreign institutional investors band together, one director (excluding audit committee members) can be unconditionally appointed at each of four of the ten biggest Korean companies -- Samsung Electronics, Hyundai Motor, Kia Motors, and Hyundai Mobis.
"Recently, hedge funds often acquire only a minimum amount of equities to influence a target company and often advance their one or two men into the board of directors,” said Shin Seok-hoon, director of corporate research at the KERI. "Hedge funds usually use the strategy to raise stock prices by selling off companies’ main assets or business and take profits via this way."