[Opinion] The Urgent Need to Introduce a Korean Version of the Elliott Law

Choi Jun-seon, Honorary Professor at Sungkyunkwan University School of Law

Looking back, 2020 will be remembered as the worst year in the history of Korean companies when politics destroyed the economy. Among the three regulatory laws, companies say the amendment to the Commercial Act is the most feared. Although it is justified as an improvement of corporate governance, it has only resulted in a disaster by leaving companies vulnerable to hedge funds as prey. Overseas capital will avoid Korea, which enforces a specific governance structure, and the outflow of Korean capital abroad will accelerate. Large corporations will become playgrounds for foreign funds, and small and medium enterprises will be playgrounds for domestic funds. Good governance is undoubtedly governance that produces the greatest performance. The companies themselves know best how it should be. Politicians who have never paid a single wage in their lives have no business giving inappropriate advice beyond their means. It is expected that at the general shareholders' meetings this March, shareholder proposals requesting the separate election of one audit committee member will emerge at dozens of companies.

Currently, strengthening investment regulations by foreign capital is a global trend. In the United States, the "Foreign Investment Risk Review Modernization Act" has been fully enforced since February 2020. In the European Union (EU), not only has foreign investment regulation been strengthened at the member state level, but the "EU Regulation on Cooperation and Information Sharing System on Inward Direct Investment" between the EU and member states has been applied since October 2020. Japan also amended the "Foreign Exchange and Foreign Trade Act" (Foreign Exchange Act) in 2019 and revised its ordinances and notifications in 2020.

Japan's Foreign Exchange Act is called the "Japanese version of the Elliott Prevention Act." This law strengthens the prior notification system for foreign inward direct investment not only in Japanese listed companies but also in major unlisted companies. The industries subject to prior notification are selected from the perspective of national security, public order, public safety, and the smooth operation of the national economy. Investment in listed companies that may threaten national security, etc., requires prior notification even if only 1% is acquired. Acquisition of shares in listed companies without such concerns is subject to post-reporting, and the threshold (currently 10%) remains unchanged. There are 2,170 listed companies subject to prior notification industries, and 1,584 companies subject to post-reporting, accounting for 56.6% of all listed companies (3,713 companies) being protected. Violators of the law may be ordered to sell their shares, among other measures.

Meanwhile, an exemption system from prior notification has been introduced for foreign investors conducting portfolio investments that do not involve management participation in the target companies. Investors such as government-funded investment funds (sovereign wealth funds) or pension funds recognized as unlikely to harm national security can also use this system. The conditions for applying the exemption system are: ① the foreign investor or its closely related parties will not assume executive positions, ② will not propose the transfer or prohibition of transfer of important businesses at shareholders' meetings, and ③ will not access confidential technical information related to national security, etc. In other words, no notification is required for sound investors. However, if prior notification is made, all the above activities can be conducted. Even foreign funds can invest without restrictions if they do not assume executive positions or propose business transfers and thus do not interfere with management. This is completely opposite to the Korean amended Commercial Act, which forcibly requires appointing at least one audit committee member from funds who are also directors.

Watching Korean lawmakers, whose eyes are bloodshot from constantly scheming how to harass companies, is not only pathetic but also heartbreaking. Companies say they are speechless at the nonsense that "reforming the outdated corporate governance will be an opportunity to leap to global standards." In a survey on the amendment of Japan's Foreign Exchange Act, 81% of respondents outside Japan and 60% of respondents inside Japan opposed it, showing a 70% opposition rate. There were also claims that it negatively affects foreign investment attraction. However, the Japanese government passed the bill. Japan, which does not care about the opinions of foreign funds if it helps companies, is enviable.

[Choi Jun-seon, Honorary Professor, School of Law, Sungkyunkwan University]