To Address Adverse Effects of Hedge Fund Attacks
Honorary professor Choi Joon-seon at the Sungkyunkwan University Law School pointed out that the duty to report applied to those with large shareholdings needs to be adjusted to cover a shareholding of 3 percent or more instead of 5 percent or more so that adverse effects attributable to hedge fund attacks can be reduced.
The Korea Economic Research Institute released his research report on Feb. 11. In the report on responses to shareholder activism and problems related to voting right exercise by institutional investors, the institute and the professor pointed out that hedge fund activism has adversely affected corporate sustainability and shareholder interest by concentrating only on short-term business performances rather than contributing to shareholder value enhancement and agent cost reduction for shareholders and executives. According to them, DuPont reduced costs by cutting back on its R&D investment and shutting down its R&D lab in order to maximize shareholder interest by raising its stock price in the short term after a hedge fund attack.
“The duty to report should be adjusted and the reporting time limit should be changed to within 24 hours so that a balance can be ensured between the freedom of hedge fund activities and adverse effects resulting from the activities,” the institute said in the commissioned research report, adding, “Joint exercise of voting rights must be prohibited at the same time so that hedge funds not subject to the duty to report cannot make a surprise joint attack, which affected no less than 113 listed U.S. companies in the first half of 2016 alone.”
The professor expressed concerns that Asian companies are becoming increasingly vulnerable to hedge fund attacks. “The frequency of hedge funds’ intervention in the business of Asian companies increased more than 10-fold from 2011 to 2018,” the professor explained, continuing, “19 out of the 55 listed companies owned by South Korea’s top four conglomerates, including Samsung Electronics and Hyundai Motors, are vulnerable to hedge fund attacks with foreigners’ shareholding exceeding that of major shareholders.”
According to the professor, South Korean companies’ anti-takeover measures are currently limited to nothing but share repurchase. “In the absence of dual-class stocks, shareholder rights plans, and the like, their share repurchase volume amounted to 8.1 trillion won in 2017 and 3.6 trillion won in the first half of 2018 alone,” he said.