The Korean Commercial Code enumerates five forms of companies: Chusik Hoesa, Yuhan Hoesa, Yuhan Chaekim Hoesa, Hapmyung Hoesa, and Hapja Hoesa. Shareholders or members of a Chusik Hoesa, Yuhan Hoesa or Yuhan Chaekim Hoesa enjoy limited liability to the amount of respective invested capital, while members of a Hapmyung Hoesa or Hapja Hoesa are exposed to unlimited liability except for limited members of Hapja Hoesa who enjoy the limited liability. Chusik Hoesa, which is a type of corporation, is the most typical company, followed by Yuhan Hoesa, which is a type of limited liability company.
There is no investment restriction based on shareholder’s nationality or residence, except for limits on foreign investment in certain industries including educational institutions, air transportation printed-media publishing, and broadcasting.
Chusik Hoesa may issue different classes of shares while Yuhan Hoesa and Yuhan Chaekim Hoesa, another type of limited liability company, may issue only one class. As a minimum, Chusik Hoesa issues common shares, which are not subject to any restriction or preference in respect of voting rights, dividends, and liquidation distributions. Other classes of shares issued by Chusik Hoesa give variations to the voting rights, dividends or liquidation distributions or add repayment, conversion or other features.
More details on how these varying rights may apply to different classes of shares are as follows:
Shareholders’ rights, including the matters that require shareholders’ resolutions and minority shareholders' rights, are provided primarily under the Korean Commercial Code.
Main shareholders’ rights are largely divided into economic rights and public rights at the general shareholders' meeting. Economic rights are the rights of shareholders to receive economic benefits from the company and public rights are the right to participate in the operation of the company. Economic rights mainly consist of the rights to claim dividends, determined at the general meeting of shareholders, and the right to claim distribution of the remaining assets upon dissolution. Public rights mainly consist of voting rights and various minority-shareholder rights, such as the right to request a general meeting of shareholders and the right to file a representative lawsuit.
Voting rights allow shareholders to vote on matters stipulated in the Korean Commercial Code at the general meeting of shareholders, including:
Although rights of shares may vary with respect to voting rights, dividends, and claims for remaining asset distribution, such shares may not vary solely based on an agreement between shareholders without relevant provisions under the articles of incorporation.
There is no general obligation for a company to disclose the articles of incorporation specifying varied voting rights and dividend rights, but the contents of the articles of incorporation on voting rights and rights to dividends shall be included in the corporate register, which is publicly disclosed. However, in the case of listed companies, the articles of incorporation shall be attached to the business report which is published annually.
While civil claims in respect of shareholders’ agreements and joint venture agreements are recognised in Korea, although there is some uncertainty over the enforceability of specific performance. Under Korean law, there is no established legal rule on whether it is possible to seek specific performance of an agreement through provisional injunction in case of a breach, and only claims for damages are generally recognised.
With the foregoing in mind, there are no requirements for, or limitations on, the effectiveness of shareholders’ agreements and these agreements are entered into by shareholders when there is a need to specify the rights and responsibilities amongst them.
Exercising minority shareholder rights such as shareholder proposal rights, right to convene a meeting of shareholders etc, require equity ownership, such as holding at least 1% or at least 3% of the total number of issued shares. However, these requirements are for private companies and, for listed companies, there are regulations that require lower equity ownership percentages.
Rights of a Shareholder Holding 1% or more
Rights of a Shareholder Holding 3% or more
When a shareholders’ meeting is convened and the agenda for such meeting includes the election of two or more directors, any shareholder holding 3% or more of the total number of issued shares may, unless otherwise specified in the articles of incorporation, demand that the directors be elected using cumulative voting.
If a proposal for the removal of a director or a statutory auditor is rejected at a general meeting of shareholders, despite an impropriety or violation of law or the articles of incorporation in connection with his duties, any shareholder holding 3% or more of the total number of outstanding shares may apply to the court for removal of the director or statutory auditor. Similarly, if a liquidator is clearly unfit to administer the affairs of liquidation or has acted in material violation of his duties, any shareholder holding 3% or more of the total number of issued shares may apply to the court for removal of the liquidator from office.
Other Rights of Minority Shareholders
Petition for dissolution
Any shareholder who holds 10% or more of the total issued and outstanding shares may petition for a court order to dissolve the company when:
Sell-out rights of minority shareholders
Minority shareholders may request controlling shareholders owning at least 95% of the shares of a company to purchase the shares owned by him or her at any time, and the controlling shareholder shall purchase the shares of minority shareholders within two months of receiving the request.
Shareholders may request to view or copy the meeting minutes of the board of directors, the articles of association of the company, the meeting minutes of the general meeting of shareholders and the list of shareholders, regardless of the number of shares held. However, for listed companies, the shareholders list is kept at the Korea Securities Depository and in order to read or copy such shareholders list, a separate and complicated request procedure must be taken and even then the access may be subject to some limitations.
Shareholders who hold more than 3% of the total number of issued shares of a private company may request, in writing, the access to, or copying of, books and documents, which cannot be unreasonably refused unless it can be proved that the request has been made in order to disturb the company’s business.
Shareholder approval is required via the general meeting of shareholders for matters specified under the Korean Commercial Code such as:
Such approval is made when each shareholder exercises voting rights at a general meeting of shareholders and the number of votes on the agenda meets or exceeds certain thresholds.
Shareholders holding more than 3% of the total issued shares (0.015% for six months for listed companies) may make a request to the board of directors to convene a general meeting of shareholders. If the board fails to carry out the procedures for convocation of the general meeting without delay, the requesting shareholder may convene a general meeting with the court's permission.
When convening such a general meeting of shareholders, a notice of convocation containing information such as the agenda, date and place shall be sent to each shareholder two weeks before the date on which the meeting is to be held.
The types of shareholders resolutions under the Korean Commercial Code are ordinary resolutions, special resolutions and unanimous resolutions. An ordinary resolution is adopted at a general meeting of shareholders by an affirmative vote (whether in person or by proxy) of a majority of the voting shares represented at such meeting. This vote shall also account for at least one quarter of the total issued and outstanding voting shares of the company. A special resolution is adopted by an affirmative vote (whether in person or by proxy) of at least two thirds of the voting shares represented at such meeting. This vote shall also account for at least one third of the total issued and outstanding voting shares of the company. The matters that require such resolutions will be specified below.
It is generally understood that the above voting requirements set forth in the Korean Commercial Code can be strengthened, but not diluted, by specifying additional requirements in the relevant company’s articles of incorporation.
Matters that Require an Ordinary Resolution of Shareholders
Matters that Require a Special Resolution of Shareholders
Matters that Require Unanimous Resolutions of Shareholders
Shareholders holding 3% or more of the total number of issued shares (0.01% of the total number of issued shares for the past six months for listed companies or 0.005% for listed companies which have KRW100 billion as capital) may propose a certain agenda for a general meeting of shareholders six weeks prior to date of the general meeting of shareholders. Unless exercising such right is deemed to be unfair or improper, the company is required to propose the agenda at the general meeting of shareholders.
There is no explicit way for shareholders to directly participate in the company's management, such as attending board meetings. Shareholders can exert an indirect influence only through the exercise of voting rights in the general meeting of shareholders regarding the appointment of an individual to the board of directors with the authority to make decisions on major matters of the company. In some cases, the right to appoint a director is secured through a shareholders' agreement or joint venture agreement.
Shareholders may elect or dismiss directors through the resolution of the general shareholders' meeting. For election, an ordinary resolution is required, adopted by an affirmative vote (whether in person or by proxy) of a majority of the voting shares represented at such meeting This vote shall also account for at least one quarter of the total issued and outstanding voting shares of the company. For dismissal, a special resolution is required, adopted by an affirmative vote (whether in person or by proxy) of at least two thirds of the voting shares represented at such meeting. This vote shall also account for at least one third of the total issued and outstanding voting shares of the company.
However, unlike the agenda of the general meeting of shareholders, the agenda of the board of directors can be submitted only by directors and it is not possible for shareholders to propose an agenda. Additionally, unless the resolution (or the process in reaching such resolution) of a board of directors violates the law, there is no method by which a shareholder may invalidate a resolution passed by the board of directors.
Shareholders may elect or dismiss a statutory auditor (not to be confused with an external accounting auditor) through the general meeting of shareholders. For election, an ordinary resolution is required, adopted by an affirmative vote of a majority of the voting shares represented at such meeting and this vote shall account for at least one quarter of the total issued and outstanding voting shares of the company. For dismissal, a special resolution is required, adopted by an affirmative vote of at least two thirds of the voting shares represented at such meeting, and this vote shall account for at least one third of the total issued and outstanding voting shares of the company.
However, under the Korean Commercial Code, shareholders who hold more than 3% of the shares issued at the time of election may not exercise voting rights pertaining to the shares in excess of 3%. On the other hand, no such restriction exists for the dismissal of an auditor.
Shareholders are not generally required to disclose their interest in a company. However, in the case of listed companies, the shareholders whose holdings are above a certain shareholding threshold (called 'substantial shareholding') must disclose their shareholdings through various disclosure procedures. In addition, pursuant to the Monopoly Regulation and Fair Trade Act, in case of a large corporate group, if certain criteria are met shareholding percentages must be disclosed regardless of whether the invested company is listed or private.
Shareholders have the right to transfer freely shares unless the articles of incorporation require board approval.
Shares are transferred by delivery of the share certificate. If the share certificate is not issued, in principle, the shares may not be transferred. However, if share certificates are not issued six months after the establishment of the company or the date of subscription for new shares, share transfer without the share certificates is possible. In this case, transfer by recording the transfer on the shareholders list may be completed by:
Certain regulated businesses (finance, defence, etc) are required to obtain approval from the competent authorities. Although contractual transfer restrictions under the articles of incorporation or shareholders agreement are generally accepted as valid, there are no clear rules of law regarding whether it is possible to seek an injunction based on shareholder agreements.
Although it is general practice to recognise damages caused by a breach of a shareholders' agreement, it is difficult to prove damages in practice. To overcome this it is common that liquidated damages or penalties are prescribed in shareholders' agreements. However, Korean courts are allowed to ex officio reduce liquidated damage or penalty if the amount is unreasonable, and there are numerous cases where the courts have exercised such authority.
In the event a company becomes insolvent, each shareholder has the right to receive residual assets, being the assets remaining after completing distribution and repayment to creditors of the company. Generally, there are rarely any remaining assets.
A company may be dissolved, by a special resolution, without particular cause or reason. This is enacted by a special resolution at the general meeting of shareholders (ie, an affirmative vote of at least two thirds of the voting shares represented at such meeting, and this vote accounting for at least one third of the total issued and outstanding voting shares of the company). Additionally, without a special resolution, a shareholder with 10% or more of the issued shares may request a court to dissolve the company when the company’s business operation continues to be in deadlock and, as a result, irreparable damage to the company is or is likely to be caused.
In Korea, there is no specific provision governing Shareholder activism. The Korean Commercial Code however, separately provides for minority shareholder rights such as the right to make a proposal at the general meeting of shareholders, right to convene a general meeting of shareholder, the right to view account books, and the right to appoint and dismiss officers, directors, and statutory auditors and to request dismissal and suspension of performance of any of them. Activist investors are doing so in the manner of seek to exercise minority shareholder rights in the Korean Commercial Code.
Shareholder activism in Korea has not been active and influential, but it is increasing. In particular, the shareholder proposal right was exercised at a number of annual meetings of shareholders that took place in 2019, particularly by asset managers and activist private equity funds.
The expansion of shareholder activism has been caused by:
The most recent issue of shareholder activism, starting in 2018, has been the management dispute case between Hanjin KAL and activist private equity fund KCGI, focusing on management direction and appointment of directors. There was controversy and dispute between the company’s existing controlling shareholders and management and the activist fund, including passing the agenda for reappointment of the incumbent director at the general shareholders' meeting of Hanjin, a subsidiary of Hanjin Group, the 13th largest business group in Korea, and Hanjin KAL, the parent company of Hanjin Group.
At the general shareholders' meeting, a number of shareholder proposals were made, including the appointment of outside directors, and a request for a shareholder proposal was filed with the court. In order to implement its demands on the company’s management policies, the activist fund launched a number of litigations, including access to books and records and appointment of investigator, that were held concurrently with the dispute of the general shareholder's meeting.
This case was seen as a milestone in shareholder activism as a court decision clarifying the requirements for the shareholder proposal right was issued and the incumbent director failed to be reappointed.
Activist investors focus on securing their own stakes through stock accumulation. Then, it focuses on exercising the right to convene a general meeting of shareholders or making a shareholder proposal, and collecting proxies. There are also tender offers in Korea but, for a variety of reasons, activist investors do not use them as a means of securing ownership. Activist investors seek to take control of a company by appointing a number of directors at the general meeting of shareholders so that they will comprise a majority of the board of directors, to appoint an outside director or auditor to indirectly participate in the management, to amend the articles of incorporation or to cause the company to declare dividends.
In most of these cases, the appointment of directors is usually possible by an ordinary resolution of the general meeting of shareholders, in accordance with the Korean Commercial Code, while the removal of directors requires a special resolution of the general meeting of shareholders . In general, attempts to achieve management involvement goals features appointing additional directors rather than dismissing an existing director due to the lower voting threshold for ordinary resolution.
The success or failure of shareholder behaviour can ultimately be said to result from the exercise of voting rights at the general meeting of shareholders. From a procedural point of view, this consists an activist investor first securing equity stakes and friendly shareholders in advance so that it is possible to win the vote at the general meeting of shareholders. Thereafter they exercise their rights by commencing procedures for convening a general meeting of shareholders. After the general meeting of shareholders has begun, it is common to achieve the goal by securing additional voting rights by soliciting proxies.
At the same time, activist investors often use the method of filing a lawsuit seeking an injunctive relief when the company does not convene a general meeting of shareholders or accept a shareholder proposal, or when it is necessary to gather information about the company.
The main focus of activist investors in Korea is to improve corporate governance by:
Observing publicly available information on shareholder proposals and shareholder letters, there is no specific industry, sector or market-cap size on which activist investors are concentrated and there is no discernable trend so far.
The most active agent of shareholder activism in Korea is activist private equity funds. In addition, the National Pension Service has recently participated in activities such as shareholder proposals and letters with the introduction of the stewardship code. However, unlike private equity funds, the National Pension Service does not pursue high returns, but rather strives to achieve stable, consistent returns. As a result, its activities appear to be limited. However, in the case of activist private equity funds, shareholder activism is about seeking greater profit. Therefore, activist investors actively use various methods, including shareholder letters, minority shareholder rights and disclosure of information through the media.
In the case of private companies, there is difficulty in grasping the current situation as there is no uniform disclosure regime. In contrast, the frequencies of the general meeting of shareholders of listed companies can be easily identified through the disclosure of the Korean Financial Supervisory Service. Based on this, the number of agenda items proposed by shareholders in 2019 was 111, spread across 35 listed companies. Compared with the 70 cases in 2017 and 72 cases in 2018, demands are increasing.
In relation to shareholder proposals made in 2019,, the following occurred:
This is a significant increase in the approval rate when compared to the seven of 70 (10.0%) approval rate in 2017 and the nine of 72 (12.5%) approval rate in 2018. Both the number of proposed agendas and the rate of approval increased significantly and this is an indicator that the idea of shareholder activism is becoming more prolific in Korea.
When activist investors attempt to participate in company management, the company’s most effective response would be to increase its friendly shareholding vis-à-vis activist investors’ shareholding.
In this regard, the company considers issuing new shares or disposing of treasuring shares to existing shareholders, management or friendly third parties. In relation to new stock issuance, the Korean Commercial Code impose a restriction that new stock issuance to a third party for permitted management purposes only, such as improvement of the financial structure. The issuance of new shares for the purpose of reducing the relative shareholding of activist investors in management disputes is not recognised by the courts as a permitted management purpose.
When a company owns treasury stocks, it is disposed to a party friendly to it. According to the Korean Commercial Code, treasury shares do not have voting rights, but if they are disposed of to a third party, the voting rights are revived. There is no management purpose requirement when disposing of treasury shares.
In addition, the golden parachute (the method of setting excessive severance pay for existing directors, making it harder for activist investors to dismiss them), the golden share (granting a majority of shares voting rights or veto power over important matters, to the extent that they can exclude the control of other shareholders), and the poison pill (if there is a dispute over management rights, the company will give existing shareholders an opportunity to purchase new shares or treasury shares at a discounted price), all of which are recognised in the US, are currently deemed not to be feasible in Korea as they violate the existing shareholders pre-emptive rights or the principle of equality of shareholders under Korean law.
The Korean Commercial Code recognises the separate legal personality of a company as distinct from its shareholders.
There are no comprehensive legal remedies that can be exercised against a company by a shareholder. However, as shown in 3.3 Legal Remedies Against the Company's Directors, there are legal remedies available to shareholders against directors in charge of the execution of the company.
The legal remedies available to shareholders against directors of a company are largely defined as follows:
The rights to injunction allow a shareholder holding 1% or more of the total issued shares of a company (in case of a publicly traded company, 0.5% or more for the past six months and 0.25% for companies with more than KRW100 billion in capital) to request, for the benefit of the company, continued action or suspension of an action of a director when such shareholder deems the director is in violation of the law or the articles of incorporation and that this may cause irreparable harm to the company.
Representative litigation is a system that allows shareholders with more than 1% of the total issued shares (more than 0.01% for six months for listed companies) to file a lawsuit directly against the director of the company. If a director intentionally or negligently acts in violation of the law or the articles of incorporation, or neglects his or her duties and causes damage to the company, the company may exercise the right to claim damages against the director. If the company neglects to exercise such a right to claim damages, a shareholder with a certain stake ratio can bring a claim against the director. If the company's damages are compensated through the litigation, the shareholder's damages will be indirectly compensated by the increase in stock value, etc.
Under Korean law, in principle, there are no legal remedies available to shareholders that can be exercised against other shareholders. However, when an agreement between shareholders is concluded, it is recognised as a contractual duty between the parties, so that a party who is a shareholder can exercise the right to claim damages from another shareholder who is a counterparty.
Under Korean law, the only legal remedy available to shareholders against a statutory auditor is a representative lawsuit. Representative litigation is a system that allows shareholders with more than 1% of the total issued shares (more than 0.01% for six months for listed companies) to file a lawsuit against the statutory auditor directly on behalf of the company.
If a statutory auditor intentionally or negligently acts in violation of the law or the articles of incorporation, or neglects his or her duties and causes damage to the company, the company may exercise the right to claim damages against the statutory auditor. If the company neglects to exercise such a right to claim damages, a shareholder with a certain stake ratio can bring a claim against the statutory auditor. If the company's damages are compensated through the litigation, the shareholder's damages will be indirectly compensated by the increase in stock value, etc.
Shareholders who hold at least 1% of the total issued shares (0.01% for past six months for listed companies) may, if a director or auditor intentionally or negligently acts in violation of laws or the articles of incorporation or neglects his or her duties and, despite the shareholder’s request, the company fails to file a claim against that auditor or director within 30 days of the receipt of the request, directly file a lawsuit against the director or auditor for payment of damages to the company.
It must be noted that the shareholders may file a lawsuit on behalf of the company but not for recovery of the shareholders' own loss. However, if the company's damages are compensated through the litigation, the shareholders damages may also be indirectly compensated.
The most important factors shareholders typically consider when seeking to litigate to obtain remedies are whether the act of director or auditor is an illegal act and whether the fault of the director or auditor will be recognised. In other words, whether the act of the director or auditor violates the law or the articles of incorporation or a fiduciary duty, and whether the intention or negligence of the director or auditor in committing such act is recognised will be the mainly contested factors.
In the case of a right to injunction, the purpose is to prevent illegal activity and therefore once the act of the director or auditor is confirmed to be in violation of the law or the articles of association, or a breach of fiduciary duty, the right may be exercised regardless of whether the act was intentional or based on negligence within the scope of his or her duties.
However, since the right to injunction may only be exercised when it is determined that there is a risk of irreparable harm to the company, whether the potential harm is, in fact, irreparable and the costs for recovery are contested. In the case of a shareholder representative lawsuit, only the amount of damages may be claimed.
Although the Korean Commercial Code provides shareholder rights to bring claims against directors for any direct damages suffered, in practice it is rarely exercised as it is difficult to prove intent or gross negligence of the director and that the shareholder directly suffered damages due to such acts.
Notable recent developments have seen a surge of activist activity throughout Asia, in most cases following the blueprint from the United States and Europe. According to Activist Insight, 111 companies incorporated in Asia were subject to activists’ campaigns in 2018, 11 of which were Korean companies. This is a conspicuous increase compared to 2017 and 2016, when only two and four Korean companies, respectively, became targets of activist funds. This upward trend has continued in 2019, with a total of 71 Asian companies becoming subjects of shareholder activism during the first half alone, including six Korean companies.
Early Stage Shareholder Activism in Korea
While the expansion of shareholder activism in Korea is a rather recent development, it is generally understood that shareholder activism first emerged in Korea after the IMF crisis in 1997. At first, shareholder activism in Korea was led by civic groups (NGOs), mainly to protect the interests of minority shareholders and promote transparent corporate governance, eg, minority shareholder campaigns by People’s Solidarity for Participatory Democracy against Samsung Electronics.
As Korea opened its stock market to foreign investors by abolishing the upper limit on foreign investments after the financial crisis in late 1990s, however, Korean companies increasingly became targets of foreign hedge funds. Shareholder engagement became more active, starting with the Tiger Fund against SK Telecom in 1999, followed by Sovereign Asset Management against SK in 2003, Hermes Investment Management against Samsung C&T in 2004, and Carl Icahn and Steel Partners against KT&G in 2006. In the past, shareholder activism by foreign hedge funds was often negatively perceived in Korea as an intrusion of corporate governance by hedge funds that only focused on realising short-term capital gains.
Evolution of Shareholder Activism in Korea
Since the early 2010s, ‘economic democratisation’ has become one of the principle social objectives in Korea. This social change has also brought about a gradual change in shareholder activism in Korea, with domestic institutional investors beginning to play an increasingly active and pivotal role.
With heightened societal interest and demand towards enhanced corporate governance and minority shareholders’ rights as part of ‘economic democratisation', a societal environment was established, allowing shareholder activism to grow and thrive. As part of this development, the assertion that minority shareholders must actively exercise their rights to improve corporate governance gained popularity and various plans to strengthen minority shareholder rights drew the attention of policy makers. It is also around this time that discussions commenced on institutional improvement for minority shareholders rights by amending Korean Commercial Code (the 'KCC').
In one of the more prominent developments on this issue, the Korean Stewardship Code (the 'Stewardship Code') was established in 2016, in line with the worldwide trend, and may help activist campaigns gain support if their message focuses on enhancing corporate governance and long-term value of the target company. Many institutions and agencies, including the National Pension Service of Korea ('NPS'), adopted the Stewardship Code and announced plans to be more active in exercising their shareholder rights.
In the following sections, we will outline the basic legal and regulatory framework governing shareholder activism in Korea, and examine recent trends, shareholder activism cases and major developments.
Legal and Regulatory Framework
The KCC and the Financial Investment Services and Capital Markets Act ('FSCMA'), including its subordinate rules and regulations, comprise the primary legal and regulatory framework governing shareholder activism. While the Financial Services Commission (the 'FSC') has the authority to enact subordinate regulations to the FSCMA, the Financial Supervisory Services enforces and supervises the compliance of the FSCMA and its subordinate regulations. The Prosecutors’ Office may also enforce the KCC and FSCMA, which may impose criminal sanctions for breaches of the relevant laws and regulations.
Shareholders’ Statutory Rights
The KCC is the principle law on corporate governance of Korean corporations, and stipulates, among other things, a variety of shareholder rights, which mostly forms the basis for the activities of shareholder activists. In terms of exercising minority shareholder rights, the KCC provides a lower shareholding ratio requirement for companies listed on the Korea Exchange (the 'KRX') in relation to non-listed companies, which allows minority shareholders of KRX-listed companies to exercise certain rights more easily.
Major Rights of Minority Shareholders:
When a shareholder exercises its right to propose an agenda, the BOD must present it at the general shareholders’ meeting unless presenting the proposed agenda would violate any applicable laws (including cases set forth in the presidential decrees of the KCC) or the company’s articles of incorporation. Furthermore, the shareholder who proposed an agenda must be given an opportunity to explain the agenda during the meeting, if so requested by the shareholder.
Disclosure and Transparency Regime
The FSCMA is the principle law that governs, among others, the shareholders’ disclosure obligations and the rules on tender offers and proxy solicitations. In addition, the regulations of the KRX provide for fair disclosure requirements for listed companies to ensure their investors have fair access to certain material information by preventing selective disclosure of such information.
Significant Shareholding Disclosure:
The FSCMA requires any person whose direct or beneficial ownership of 'equity securities' aggregated with those held by 'specially related persons' (both affiliated persons and persons acting in concert) is or more than 5% of the total equity securities issued by a listed company (regardless of its form), to report the details of such holdings to the FSC and the KRX (a '5% Report').
There are two forms of 5% Reports, one is filed by investors intending to influence the company’s management and the other is filed by investors making portfolio investments without any intention to influence the company’s management.
A shareholder is required to file a 5% Report with the FSC and KRX when the aggregate 'holding' of the shareholder and its 'specially related persons' amounts to at least 5% of the company’s total voting equity securities. The 'holding' of equity securities for purposes of the 5% Report is inclusive of not only those persons that hold title to the relevant equity securities, but also persons that are deemed to be an 'equivalent owner' of the equity securities. In this context, the terms 'ownership' and 'equivalent ownership' include, among others:
Therefore, if a shareholder intends to acquire listed shares held by other investors, it should review carefully whether such acquisition would trigger an obligation to file a 5% Report.
A shareholder’s failure to file a 5% Report in a timely manner, or the submission of a 5% Report containing false information or omission of any material information, may result in a loss of voting rights exceeding the shareholder’s 5% threshold for a period prescribed by the presidential decree of the FSCMA. The Korean regulators may also issue a disposition order requiring the shareholder to sell its shares exceeding the 5% threshold within six months. A shareholder who violates these obligation may also be subject to criminal sanctions.
If a person holds 10% or more of the total outstanding shares, there is an additional reporting requirement stipulated by the FSCMA (a '10% Report'). Note that, unlike a 5% Report, the 10% threshold for a 10% Report is calculated on an individual basis, not an aggregate basis including shares held by 'specially related persons'. If a shareholder fails to file a 10% Report, the FSC may issue a correction order, warning or caution, or notify investigative authority. Such failure may also subject the shareholder to criminal sanctions.
Proxy Solicitation Rules:
The FSCMA provides that a person who intends to solicit ten or more shareholders of a listed company to exercise voting rights by proxy must submit the proxy form and reference documents to the FSC and the KRX at least two business days prior to any solicitation. The proxy solicitor must complete a proxy form and submit it together with proxy materials containing basic information of the proxy solicitor (including the number and type of shares held), agenda items for the shareholders’ meeting and purpose for soliciting proxy votes.
Though various types of conduct may be deemed an act of proxy solicitation that triggers the above prior delivery and submission obligations (eg, direct solicitation, requesting shareholders to vote in a certain manner and sending proxy forms to shareholders), the following are not deemed proxy solicitation:
The FSC may suspend or prohibit the proxy solicitor from soliciting proxy votes if the solicitor fails to provide the proxy form and proxy materials to the targeted shareholders, if the proxy form or proxy materials contain misrepresentation or omit any material information and if the solicitor fails to correct the failure or defect. The FSCMA also provides criminal sanctions for violations of proxy regulations.
Requirement for Corporate Governance Report:
On 19 December 2018, the 'KOSPI Market Disclosure Regulation' by the KRX has been amended to require certain KOSPI listed companies (as opposed to KOSDQA listed companies) publish a corporate governance report within two months from the statutory submission deadline of the annual reports. Such corporate governance report requires the KOSPI listed companies to examine their compliance with the 'core principles' of corporate governance as stipulated in the KOSPI Market Disclosure Regulation, and in case of non-compliance with the core principles, the reasons why.
At present, only KOSPI listed companies whose total asset is at least KRW2 trillion are required to submit the corporate governance report. However, the KRX has announced that it plans to expand the the requirement to all KOSPI listed companies from 2022.
Other Sources of Guidelines
Stewardship Code and Shareholder Engagement:
On 19 December 2016, the Stewardship Code was introduced in Korea. The Stewardship Code is a voluntary program that any institutional investor may elect to adopt and requires, among other things, that the institutions that have adopted the Stewardship Code to establish and disclose their policies on how to discharge stewardship responsibilities, periodically monitor investee companies and voting rights, and disclose details on how and why they exercised their voting rights. As of July 2019, 101 institutional investors have adopted the Korean Stewardship Code.
The NPS, the third largest pension fund in the world, is one of such institutional investors and has adopted the Stewardship Code in August 2018. Subsequently, the NPS announced certain issues it intends to prioritise, including dividend policies, adequacy of executive compensation, and matters that raise concerns of potential violation of laws and regulations that could harm the fundamental value of the company or shareholders’ rights.
Influence of Proxy Advisors:
As institutional investors become more prudent about exercising their voting rights and increasingly seek guidance, the significance and influence of recommendations or opinions by proxy advisors are rising. Domestic proxy advisors, such as Korea Corporate Governance Service ('KCGS'), Sustinvest, and Daishin Economic Research Institute, have emerged to analyse meeting agendas and offer voting recommendations. Institutional Shareholder Services and Glass Lewis are also active, particularly for listed companies with significant shareholding by foreign investors.
Recent Trends and Cases of Shareholder Activism
Foreign hedge funds in Korea have engaged in numerous shareholder campaigns, including demand of increase in dividends of companies or improvement in the BOD composition. During the past few years, such activist funds have expanded their reach to reorganisations and restructurings of large group companies, eg, spin-off mergers among affiliated group companies. In addition, domestic private equity funds are becoming more active in practicing their rights as shareholders. This trend is expected to continue as private equity funds are de-regulated.
Lead by Foreign Activist Funds
Elliot Management against the merger of Samsung C&T and Cheil Industries (2015):
Elliot Management ('Elliot'), a US-based hedge fund, claimed that the merger between Samsung C&T and Cheil Industries was harmful to the investors of Samsung C&T, contending that the merger ratio was unfair. While Elliott acquired a 7.12% stake in Samsung C&T and engaged in proxy solicitation, only 30.47% of the shares present at the shareholders’ meeting actually voted against the merger and the resolution for merger was approved. Afterwards, Elliot filed for an Investor-State Dispute Settlement against the Korean government on the basis that the Korean government put undue influence on NPS to vote for the merger between Samsung C&T and Cheil Industries. The case remains pending.
Elliot Management against Hyundai Motors Group (2018, 2019):
In March 2018, Hyundai Mobis and Hyundai Glovis, both affiliated companies of the Hyundai Motor Group, announced their plan for a spin-off merger. Elliot publicly objected to such plan on the basis that the spin-off merger ratio is not fair for the shareholders of Hyundai Mobis and proposed an alternative plan to establish a holding company through a different spin-off merger among Hyundai Mobis, Hyundai Motor and Kia Motors. Following the objection from Elliot and a number of proxy advisors (including KCGS, ISS and Glass Lewis), Hyundai Mobis and Hyundai Glovis withdrew their planned spin-off merger.
In March 2019, Elliot demanded Hyundai Mobis to pay cash dividend of KRW26,399 per share, which amounts to approximately KRW2.5 trillion, and Hyundai Motor to pay cash dividend of KRW21,967 per share, which amounts to approximately KRW5.8 trillion. Elliot also opposed the outside director candidates nominated by the BOD of Hyundai Motor and nominated its own candidates at the shareholders’ meeting. However, proxy advisors and NPS, which is the second largest shareholder in both companies, did not side with Elliot as the cash dividends demanded would have been approximately two-five times each company’s annual net income and therefore excessive. As a result, Elliot’s proposal for cash dividends were not approved at the shareholders' meeting, nor were any of its outside director candidates elected.
Emergence of Domestic Activist Funds
In addition to foreign activist funds, domestic activist funds have recently shown notable activities in respect of corporate governance.
KCGI’s demand for improving corporate governance of Hanjin KAL (2018-):
At the end of 2018, Korea Corporate Governance Improvement ('KCGI'), a Korean activist fund, became the second largest shareholder of Hanjin KAL, a holding company of Hanjin Group which owns Korean Air Lines. KCGI subsequently called for improved corporate governance of Hanjin KAL, highlighting well-publicised wrongdoings by the Cho family, the largest shareholder of Hanjin Group, including alleged criminal activities and workplace harassment cases.
KCGI filed for an injunction to propose a number of agenda items at the annual shareholders’ meeting in March 2019, including appointments of an auditor and directors and limiting executive compensation. The trial court ruled in favour of KCGI but the appellate court ruled against KCGI, which rendered KCGI unable to present its agenda at the shareholders’ meeting. KCGI acquired additional shares after the shareholders’ meeting and the conflict is on-going.
Platform Partners’ demand for changing asset manager for MKIF (2018):
Platform Partners, a Korean activist fund, argued that the management fee paid from Macquarie Korea Infrastructure Fund ('MKIF') to Macquarie Asset Management ('MAM') was excessive, and demanded MKIF to change its asset manager to KORAMCO Asset Management and cut its management fee. It also requested the convocation of the shareholders’ meeting to seek the shareholders’ approval on their proposals. MKIF announced its plan for an 8% decrease in its management fee as a response. Furthermore, MKIF filed for an injunction against Platform Partners to block it from exercising its voting rights at the extraordinary shareholders’ meeting on grounds of empty-voting, but the trial court allowed Platform Partners to exercise its voting rights. During the extraordinary shareholders’ meeting, however, the proposed agenda – to change the asset manager – was not resolved as only 31.1% of the shares present at the meeting voted for such change, falling short of the majority required.
KB Asset Management (2018 –):
KB Asset Management has launched many activist campaigns against Korean companies such as Com2us, Golfzon, Gwangju Shinsegae and SM Entertainment. Notably, it campaigned against Golfzon in relation to Golfzon’s acquisition of Zoimaru, which resulted in the court decision to cancel the shareholders’ meeting resolution approving the acquisition and consequently led Golfzon to cancel the acquisition agreement.
Recently, KB Asset Management sent a letter to SM Entertainment claiming that the controlling shareholder is funnelling SM’s profits through his private company. It demanded that SM Entertainment merge with the controlling shareholder’s private company, increase dividend payment and reorganise its business sectors, but SM Entertainment refused to accept such demands. SM Entertainment’s refusal drove its share price down and the market is now focused on KB Asset Management's reaction.
Forecast on Future Development
Legislative Efforts for Investor Protection
There are several amendments to the KCC and the FSCMA proposed and pending at the National Assembly. The Ministry of Justice announced in January 2019 that it will endeavour to pass the following amendments to the KCC by the end of 2019 (with a particular focus on the first two items):
A notable amendment proposal to the FSCMA is to relax regulations on private equity funds ('PEFs') by integrating the current two-track regulatory framework for PEFs and private hedge funds into one single regulatory regime for private funds. Under this proposal, PEFs will be allowed to invest with less regulatory restriction (eg, elimination of shareholding requirements).
Outlook of Shareholder Activism Movement
In line with the recent stagnant growth rate and low interest rate, we note that investors have been exercising their shareholding rights more aggressively by participating in business decisions to maximise profit. As some Korean corporations are alleged to be relatively undervalued and have a high cash-in-hand rate for their rather conservative corporation cultures, active hedge funds appear to be increasingly expand their market prominence in the Korean market. Even for traditional institutional investors, recent adoption of the Stewardship Code and the requirement for companies to publish a corporate governance report are also important factors in creating systematic environment that enables active participation of institutional investors as shareholders.
It is expected that the currently pending KCC amendment proposals (ie, mandatory electronic voting system, multi-step derivative action, separate election for audit committee members and mandatory cumulative voting system) will be a factor in the further expansion and growth in shareholder activism in Korea.
Active engagement by NPS is also forecasted to become a major factor as it owns considerable shareholding in many large domestic companies and has become more active in exercising its shareholder rights.
As shareholder activism in Korea will continue to become more active, it is important to ensure that such activism will lead to long term, prospective benefits for the shareholders and companies alike. Additionally, if the purpose of adopting the Stewardship Code is realised among the institutional investors, it would improve how the engagement of shareholders in Korea is generally viewed. Therefore, it is necessary for the companies to initiate environmental, social, and governance ('ESG') related risk management and to be better prepared for more shareholder activism activities.
If companies duly manage ESG risks and attend to the concerns of their long-term investors, the shareholder activism movement could also render an opportunity to unify more amicable shareholders and secure strong support.