'3% Rule' Likely to Make Major Firms Vulnerable to Hedge Funds
The Korea Industry Alliance Forum recently simulated separate audit committee member appointment based on the so-called 3 percent rule in relation to 15 major companies and announced on Oct. 13 that a person recommended by a foreign hedge fund is likely to be appointed in 13 out of the 15.
The 3 percent rule is a part of the commercial law revision the government is working on. It is to limit the voting rights of major shareholders in auditor appointment to 3 percent.
The 15 major companies are vulnerable to foreign activist hedge funds with the foreign shareholdings in those companies amounting to 31 percent to 56 percent as of this month. If major shareholders’ voting rights are limited to 3 percent and domestic institutions and minority shareholders join forces, those funds will be able to take control of the companies.
Foreign shareholders in those companies are very good at uniting themselves. As an example, three outside director candidates recommended by Elliott Management respectively won 45.8 percent, 49.2 percent and 53.1 percent of their votes in Hyundai Motor’s shareholder meeting last year.
If the 3 percent rule becomes effective and Hyundai Motor votes on a candidate recommended by a hedge fund for its auditor position in March next year, foreign shareholders can secure 21.4 percent of the total voting rights even if only half of them agree. One-fourth of the total voting rights can be easily secured once just 12 percent of minority shareholders side with them.
Samsung Electronics is especially vulnerable in that the foreign shareholding in the company amounts to 56 percent. If 40 percent of foreign shareholders unite themselves with the 3 percent rule effective, they can secure no less than 27 percent of the total voting rights.
South Korean enterprises are expressing concerns in that outside directors and audit committee members are those entitled to demand and collect all corporate information and data and the recommendation by foreign hedge funds in the interest of auditor independence may lead to business information leakage, intervention in management, intentional corporate depreciation for M&A, etc.
For example, Elliott Management recommended Ballard Power Systems CEO Robert Randall MacEwen in Hyundai Motor’s shareholder meeting last year. Ballard Power Systems is a Canadian hydrogen fuel cell developer competing with South Korean companies in the same industry.