Shareholder activism is changing the corporate landscape in Korea. It has triggered the introduction of a stewardship code by the National Pension Service, Korea Corporate Governance Improvement (KCGI)’s attempt to participate in the management of Hanjin KAL, and the abolishment of the shadow voting system that strengthened minority shareholders’ rights. Many experts say that 2019 will be the first year of shareholders exercising their expanded rights, with the general shareholders meeting season in March becoming a watershed.
Corporations are on edge as they do not know how shareholder rights will be exercised. They feel that they do not enough weapons to protect themselves.
Listed Korean companies’ weak equity structures are the main root of concern over possible mix-ups at general shareholders meetings. This year, more companies are likely to fail to win approval on their auditor and audit committee member appointments at regular general shareholders meetings due to a shortage of votes. The Korea Listed Companies Association says this is due to the so-called "3 percent rule" that limits the voting rights of major shareholders (the largest shareholders plus special interest individuals) to 3 percent.
The appointment of auditors is not the only problem. Many listed companies have vulnerable equity structures. The Korea Listed Companies Association estimates that 408 companies (21.2 percent) do not satisfy requirements for common resolutions even when all equities of their largest shareholders and special interest individuals are combined. In addition, 271 (14.1 percent) companies cannot reach their quorums even when all equities of their largest shareholders, special interest individuals, shareholders with equities of 5 percent or more and institutional investors are combined.
Activist funds exploit these vulnerabilities. As the National Pension Service and KCGI announced their exercise of shareholding rights against Hanjin KAL, those in the Korean business world and the securities industry are already predicting that some companies where major shareholders hold a small equity will be the next targets.
Listed companies assert that it is necessary to come up with measures to address this problem, including the abolition of the 3 percent rule by amending the commercial law. However, the current Korean government maintains that a revision of the Commercial Law should contain content related to "economic democratization" such as the multi-representative litigation and cumulative voting systems. The Financial Services Commission responsible for the capital market, has launched countermeasures such as the spread of an electronic voting system and an autonomous decentralization program to avoid so-called "super-general shareholders meeting days.” But many experts call the countermeasures “stopgaps.”
In the meantime, foreign funds are taking advantage of blind sides. This is why securities industry experts have said that Dalton Investments announced that it would vote against the appointment of outside directors and auditors at the coming general shareholders meeting of Hyundai Home Shopping by taking into account the weakness of the home shopping company’s equity structure and the three percent rule. "We brought up investment in non-core businesses or low shareholder return but outside directors did not oppose constructively and Audit Committee members failed to play their proper roles in monitoring and checking," Dalton Investments claimed.
Dalton Investments joined the Korean-type stewardess code for the first time as a US-based investment company in 2017, and has begun to actively exercise shareholding rights by forming the Korea-US Investment Alliance with Korean and US institutional investors. KCGI and Value Partners participated from Korea while Brandes Investment Partners and Ruane, Cunniff, & Goldfarb from the US. The investment alliance also delivered an open letter calling for strengthening corporate governance standards and increasing dividends to the Korean government and the National Pension Service in February.