[In-Depth Review] Institutional Changes in Corporate Governance and Shareholder Engagement Activities

Ansanghee, Head of the Daesin Governance Research Institute

Since the second half of 2020, institutional changes such as amendments to the Commercial Act, Capital Markets Act, and Fair Trade Act, which are expected to significantly impact the governance of listed companies, have been materializing. In particular, these changes imply considerable effects on some large business groups (hereinafter referred to as groups) where strengthening minority shareholders' rights and improving governance, including succession planning, have emerged as pressing issues. Additionally, despite the introduction of the Stewardship Code since the end of 2016, institutional limitations had hindered institutional investors' shareholder engagement activities, but these are expected to become more proactive than before.

The first of these institutional changes is the revised Capital Markets Act Enforcement Decree’s '5% Large Shareholding Reporting System' and the 'Special Exemption from the Obligation to Return Short-term Trading Gains for Public Pension Funds.' Previously, institutional investors holding more than 5% of shares found it difficult to engage in shareholder activities due to disclosure burdens related to large shareholdings. However, the scope of shareholder engagement activities has been clarified by explicitly stating that the purpose of institutional investors’ stock holdings is not to influence management rights (such as exercising minority shareholder rights, amending articles of incorporation for governance improvement, dividend-related activities, or simply conveying opinions). A basis has also been established for public pension funds holding more than 10% of shares. For cases where the purpose is not to influence management rights, public pension funds like the National Pension Service may apply the 'special exemption from the obligation to return short-term trading gains' only if certain conditions, such as strengthened internal and external information exchange barriers, are met.

Partial amendments to the Commercial Act are also expected to have an impact. These include the 'multiple derivative suit system,' which allows parent company shareholders to file derivative suits against subsidiary directors who cause damage to the subsidiary through neglect of duty; the 'minority shareholder rights-related provisions,' which allow choosing between shareholding thresholds and a six-month holding period for exercising minority shareholder rights; and the introduction of the 'separate election system for audit committee members,' where at least one audit committee member is elected separately from other directors at the shareholders’ meeting. In particular, one of the minority shareholder rights, 'shareholder proposals,' is expected to be more actively exercised by institutional investors than in the past.

The full amendment to the Monopoly Regulation and Fair Trade Act (Fair Trade Act), expected to pass the National Assembly this year, is also anticipated to be influential. Key points include strengthening shareholding requirements for new holding companies (including newly incorporated subsidiaries and grand-subsidiaries of existing holding companies) (listed companies from 20% to 30%, unlisted from 40% to 50%), unifying the shareholding threshold for the controlling family subject to self-dealing regulations to 20% (including subsidiaries with over 50% ownership), prohibiting public interest corporations from exercising voting rights in affiliated companies (allowing up to 15% combined with special related parties for listed affiliates), and excluding mergers between affiliates that are unrelated to hostile M&A defense but raise concerns of self-dealing abuse, such as approving unreasonable merger ratios, from the reasons permitting voting rights. Accordingly, companies requiring governance restructuring such as succession planning will likely find it more difficult than before to convert to holding companies or strengthen controlling shareholders’ power through public interest corporations.

In conclusion, institutional investors’ shareholder engagement activities, which in the past were expressed only through voting rights at shareholders’ meetings, can now also occur at stages prior to the shareholders’ meeting under the premise that they do not affect management rights. Consequently, it is expected that institutional investors will increasingly exercise active shareholder rights. To this end, institutional investors need to establish clear guidelines for shareholder engagement activities and set up internal procedures. From the corporate perspective, unlike in the past, efforts such as careful prior review of governance issues that may harm shareholder interests will be necessary. In the mid to long term, trust that improving corporate governance positively contributes to enhancing corporate and shareholder value is also required.