The Korean political community and economic ministries are raising their voices to better protect managerial rights of Korean corporations as US activist hedge fund Elliott Management attempts to intervene in the management of the Hyundai Motor Group by demanding the adoption of cumulative voting.
Liberty Korea Party lawmaker Kwon Sung-dong recently tabled an amendment to the Commercial Act to introduce measures that can protect the managerial control of corporate owners. Kwon's proposal includes poison pill, golden parachute and dual-class share.
The amendment also includes the principle of business judgment, which is already statutory in the U.S. and Germany.
It also calls for excluding the total number of issued shares from voting requirements at shareholders meetings.
Under the current laws, decisions can be made at a shareholders' meeting with the approval of a majority of the shareholders present and a quarter of the total number of shares issued.
Kwon proposed to remove the second criterion as the abolition of shadow voting has made it difficult for corporations to meet it.
Previously, corporations had no difficulty in attaining the quorum for decision-making at a shareholders' meeting, but they can no longer rely on it.
Kwon's move was motivated by Elliott Management's assault on Hyundai Motor Group and the South Korean government’s attempt to revise the Commercial Act to further restrict the managerial right of corporate owners.
The activist hedge fund demanded on April 23 that Hyundai Mobis, Hyundai Motor Company and Kia Motors change their articles of association so that cumulative voting is not ruled out. Hyundai Motor Company said the demand is unrealistic, given that few companies around the world have adopted cumulative voting.
Additionally, Elliott Management demanded that Hyundai Motor Group adopt a holding company structure through a merger between Hyundai Motor Company and Hyundai Mobis.
Its demands also included treasury stock retirement, a dividend payout equivalent to 40% to 50% of the net profit, and additional appointment of three outside directors.
According to experts, what the hedge fund is aiming for are high dividends and profits rather than reform of Hyundai Motor Group's corporate governance.
“It seems that, after the Hyundai Motor Group recently released a governance reform plan, Elliott Management reached a conclusion that it has nothing to gain from the scheme as it has no statke in Hyundai Glovis. So it came up with a plan aimed at maximizing its profits,” one analyst said. He added that Elliott's strategy is similar to that it used in 2015 regarding the merger between Samsung C&T and Cheil Industries.
The Korean business community is also concerned about the Justice Ministry's push to amend the Commercial Act so that major shareholders’ voting rights can be limited by means of compulsory cumulative voting, compulsory electronic voting, multiple derivative suits and separated audit committee member election.
If the act is revised as envisioned by the Justice Ministry, South Korean companies’management rights could be exposed to external threats. Some analysts note that such a situation is not desirable as corporate owner will be forced to spend more time and money to defend their rights instead of making new investments.
KFTC Chairperson Explains Elliott’s Demand is Violation of Law
In the meantime, Kim Sang-jo, head of the Korea Fair Trade Commission (KFTC), said on April 26 that Elliott Management’s demand that Hyundai Motor Group adopt a holding company structure is inappropriate.
Kim said, "If Hyundai Motor Group creates a holding company by merging Hyundai Motor Corp. and Hyudai Mobis, it would violate the fair trade laws."
He explained that if a holding company is created in that way, it would control the group's financial subsidiaries such as Hyundai Card and Hyundai Capital, which is a violation of the current laws that prohibit an industrial holding company from owning financial subsidiaries.
Reuters recently reported that the Hyundai Motor Group’s plan is a rational solution given the law, noting that Hyundai's adoption of a holding company structure will require additional restructuring due to the presence of the law.
It added that Elliott has traditionally demanded more than what it actually anticipates in order to get the upper hand in negotiations.
Those in the automotive industry are also saying that Elliott’s move is not a shareholder act for improving the group’s governance structure. “The purpose of the hedge fund, which owns Hyundai Motor Group shares worth more than one trillion won, is to get high dividends by instigating the other shareholders or take profits by raising the stock prices,” one of them mentioned.