Financial Services Commission (FSC) Vice Chairman Kim Yong-beom said on May 20 that now is the time to improve the so-called 5 percent rule in step with the times. Companies expressed their objection to FSC's move to strengthen institutional investors’ shareholder rights and facilitate their participation in corporate management.
The 5 percent rule was introduced in 1992 for protection of listed companies’ management rights. According to the rule, any investor with a shareholding of 5 percent or more in a listed company has to publicly announce shareholding details within five days in the event of any change in stock ownership. Informal reporting is allowed in the case of a change for simple investment whereas formal reporting is required in the case of a change for participation in management.
The rule has recently become an issue as the National Pension Service and many other institutional investors that own at least 5 percent of many companies are taking a bigger part in their management and calling for more dividends with groups such as civic organizations advocating stronger shareholder rights. This has led to side effects such as the exposure of those institutional investors’ shareholding details and investment strategies.
The FSC is planning to improve the rule by applying a narrower definition to management participation. “The purpose of shareholding for influencing management rights that is broadly stipulated in the enforcement decree of the Financial Investment Services and Capital Markets Act needs to be divided into general activities for shareholder participation and activities that can threaten corporate control,” said researcher Lee Shi-yeon at the Korea Institute of Finance, which is conducting a related research project entrusted by the commission. The researcher suggested that the 5 percent rule can be applied without change to activities affecting management rights with shareholder activities for corporate value enhancement no longer regarded as participation in management and informal reporting newly applied to such activities.
“It has been pointed out that the scope of shareholder activities affecting corporate management rights has been rather wide and ambiguous and even shareholders’ opinion expressions related to dividend payment have been regarded as affecting corporate management rights and, as such, this is the right time to redefine the 5 percent rule,” the researcher continued to say, adding, “Non-PEF foreign institutional investors are currently banned from holding shares for management participation in many cases, which means the current rule hinders their exercise of shareholder rights as the case may be.”
The FSC vice chairman’s remark resulted in mixed reactions. Institutional investors welcomed the remark unlike the business community. “The improvement will facilitate the application of the stewardship code,” said one of the investors, adding, “Still, shareholders’ rights will be actually enhanced only after the introduction of a 10 percent rule.” The 10 percent rule is for profits within six months to be returned when the purpose of shareholding of an investor owning at least 10 percent of a company has changed to participation in management.
Meanwhile, a local company complained that the government’s plan is to allow both South Korean and foreign institutions to intervene more in companies based on unfair preferential treatment.