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S. Korea to Ease ‘5% Rule’ to Stimulate Shareholder Activism
Tightening Reins on Chaebol Groups
S. Korea to Ease ‘5% Rule’ to Stimulate Shareholder Activism
  • By Yoon Young-sil
  • September 6, 2019, 09:16
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Kim Sang-jo (right), Cheong Wa Dae chief of staff for policy, speaks at a government-ruling party policy consultation meeting.

South Korea’s financial authorities will ease regulations on shareholder rights, including the so-called 5 percent rule, to activate the “Stewardship Code.” The Stewardship Code refers to a set of principles or guidelines which are intended to direct the exercise of voting rights held by institutional investors. However, they will tighten regulations on chaebol conglomerates, banning their affiliates from jointly investing in their grandson companies and requiring conglomerates to acquire approval from their board of directors for inter-unit deals worth more than 5 billion won (US$4.17 million) and disclose such deals.

Critics say that these measures pave the way for the government to intervene in business activities. “The government has pledged reforms, but what it is doing is to strengthen regulations that stifle business activities,” an analyst said.

The ruling Democratic Party and eight government ministries, such as the Ministry of Economy and Finance (MOEF), Financial Services Commission (FSC) and Fair Trade Commission (FTC), had a government-ruling party consultative meeting on Sept. 5 and unveiled plans to promote measures to achieve a fair economy.

For starters, the FSC will improve the 5 percent rule to promote the Stewardship Code introduced last year. The 5 percent rule stipulates that a shareholder with a stake of more than 5 percent in a listed company needs to disclose within five days every stock transaction involving more than a 1 percent stake. The rule applies to investors whose investment purpose is to exercise management control rather than seek investment returns.

Ruling party policymakers and government officials say that the present rule does not specifically define the scope of shareholder activities that affect corporate management rights, thus making it difficult for institutional investors to actively exercise their shareholder rights.

To address these problems, the latest revision will no longer require investors to file reports when they exercise shareholder rights to respond to the company’s illegal activities or to change the corporate code with an aim to improve the governance structure.

The 10 percent rule for the National Pension Service (NPS) will also be partially amended. Under the 10 percent rule, an institutional investor that owns more than 10 percent in a company with a purpose to influence management control needs to return any profit gained from stock sales made within six months from their stock acquisiton. The FSC and the Ministry of Health and Welfare (MHW) have also come up measures to prevent the NPS from abusing undisclosed information.

The FSC has decided to tighten regulations related to holding companies. From now, subsidiaries of a holding company will not be able to make a joint investment in grandson companies. Furthermore, a holding company must make a public disclosure of a large-scale internal transactions worth more than 5 billion won (US$4.17 million) with its affiliated companies after a vote by a board of directors. It is also obligated tomake a public announcement of business consulting fees between companies and rent fees in order to prevent its owner’s family from defrauding of non-dividend profits from affiliated firms.

The disqualification period of outside directors in a listed company, which refers to the required period to back to work after the retirement, will be extended from the current two years to three years and the long-term term of outside directors will be banned – no more than six years in a holding company and no more than nine years in both a holding company and its affiliates.

Kim Tae-ki, a professor of economics at Dankook University, said, “If institutional investors, including the NPS, intervene in corporate management citing the Stewardship Code, it can undermine soundness of enterprises. It is urgent for the government to come up with systems that administer independence instead of controlling institutional investors’ directions.”