[The Two Faces of Shareholder Activism]①This Year’s 47 Shareholder Proposal Targets... Exploiting Weak Links in Undervalued Stocks

Increased Demand for Auditor Appointment in 2021 Due to '3% Rule' and Others
Strong Moves to Enhance Shareholder Value Including Dividend Expansion
Expectations for Governance Improvement Amid Growing Shareholder Activism

Leading with Samsung Electronics, the key focus of this year's regular shareholder meetings for December fiscal year-end companies, which begin on the 15th, is the wave of shareholder activism. In this round of shareholder meetings, 47 companies are targeted by shareholder proposals and other actions. The number of companies subject to shareholder activism among domestic listed companies has surged from 10 in the 2020 fiscal year to 27 in 2021 and 47 in 2022. This increase is a result of the strengthened influence of activist funds since 2021, following the implementation of regulations such as the 'separate election of audit committee members' and the '3% voting rights cap for major shareholders.' In the lead-up to the shareholder meetings this month, courts have increasingly sided with activist funds in provisional injunction lawsuits filed against listed companies demanding that share repurchases be included as agenda items at shareholder meetings. According to the Korea Securities Depository, 76 out of 2,509 listed companies with December fiscal year-ends will hold shareholder meetings this week (13th?17th).

Policy Changes as Catalysts for the Spread of Activism

The increase in shareholder activism campaigns since 2021 is linked to the introduction in December 2020 of regulations on the 'separate election of audit committee members' and the '3% voting rights cap for major shareholders.' These rules require audit committee members to be appointed separately from other directors to strengthen their independence. Additionally, for agenda items concerning the appointment or dismissal of audit committee members, major shareholders and their related parties can exercise voting rights on only up to 3% of shares held. By limiting major shareholders' voting rights to 3%, activist funds have been able to check major shareholders by recommending candidates for auditors and audit committee members.

The starting point of the management battle at SM Entertainment (SM) was also a shareholder proposal by an activist fund. In March last year, Align Partners Asset Management recommended an audit candidate through a shareholder proposal at SM's regular shareholder meeting, marking the beginning of the current acquisition battle. The audit candidate recommended by Align Partners, Kwak Junho, was appointed as a new auditor with support from institutional investors including the National Pension Service and general shareholders. Since then, Align Partners has consistently demanded improvements in SM's governance. Ultimately, SM's current management announced in October last year that it would terminate the contract with Like Planning, a personal company of Lee Soo-man.

The 3% rule plays an important role in enabling shareholder activism campaigns to achieve visible results. At regular shareholder meetings of companies such as Taekwang Industrial, Namyang Dairy Products, and BYC, voting battles over the appointment of audit committee members are expected. KB Securities researcher Kim Jun-seop explained, "Recently, shareholder activism campaigns have expanded. Some companies influenced by these campaigns have accepted shareholder proposals and seen stock price improvements, increasing overall market expectations for activism."

Since the 2021 amendment of the Capital Markets Act, more asset management firms have pursued shareholder activism as an investment strategy. Previously, private equity funds aiming to exercise shareholder rights and participate in management were required to acquire at least 10% of a target company's shares and hold them for more than six months. The amendment removed this obligation, allowing management participation to enhance corporate value even with minority shareholdings. The introduction of the Stewardship Code (guidelines for institutional investors' voting rights) and the emergence of funds advocating 'Korean-style activism,' including KCGI, have further energized shareholder activism.

Attacks Targeting Undervalued Listed Companies... Gaining Support from General Shareholders

Funds advocating shareholder activism aim to maximize investment returns by improving governance and increasing corporate value. They may realize gains when stock prices rise due to expectations of governance improvements. Activist funds tend to be more vocal in relatively underperforming listed companies because it is easier to gain support from general shareholders by highlighting problems and proposing solutions. Since SM's stock price was weak, Align Partners was able to garner support from institutions and general shareholders. Dissatisfied shareholders favored Align Partners as JYP Entertainment, with smaller sales and operating profit, surpassed SM's market capitalization.

In addition to active management participation, there are many activist demands for concrete shareholder value enhancement measures such as increased dividends and share buybacks. Calls for strengthening shareholder return policies targeting listed companies with abundant free cash flow are growing louder. As regular shareholder meetings for December fiscal year-end companies continue, not only SM but also Namyang Dairy Products, KT&G, Taekwang Industrial, BYC, and Osstem Implant have received shareholder proposals from activist funds.

Last month, Cha Partners demanded that Namyang Dairy Products conduct a public tender offer for 50% of general shareholders' shares at 820,000 KRW per share, as well as proposals for auditor appointments, a 5-for-1 stock split, and cash dividends at market average levels. Namyang Dairy Products closed at 537,000 KRW the previous day. Cha Partners holds a 3.07% stake in Namyang Dairy Products.

Activist fund Flashlight Capital Partners (FCP) proposed to KT&G in January the appointment of outside directors, formalizing the evaluation and compensation committee in the articles of association, a dividend of 10,000 KRW per share, and share buybacks. They also requested the separate listing of KGC Ginseng Corporation and share repurchases, but these were not adopted as agenda items at the regular shareholder meeting. FCP recommended former LG Household & Health Care CEO Cha Seok-yong and former Prudential Life Insurance CEO Hwang Woo-jin as outside directors and audit committee members of KT&G.

Truston Asset Management recommended raising the dividend payout ratio to over 20% at Taekwang Industrial and nominated Jo In-sik, former acting Chief Investment Officer (CIO) of the National Pension Service, as a candidate for audit committee member and outside director. Truston Asset Management also sent a shareholder proposal to BYC recommending a legal expert as an audit committee member to eradicate unfair internal transactions. Truston Asset Management currently holds an 8.88% stake in BYC.

Activist fund 'Kang Sung-bu Fund (KCGI)' secured shares in Osstem Implant, which experienced a large-scale embezzlement scandal, and began activities to enhance shareholder rights. Private equity fund MBK Partners and Unison Capital (UCK) consortium launched a public tender offer, and KCGI also agreed to participate, bringing the activism to a close for the time being. KCGI explained, "Changing Osstem Implant's board and management system, which was not independent, to a professional management system centered on global private equity funds is a progressive governance improvement."

Goldman Sachs recently published a report titled 'Korea: Opportunities from Corporate Governance and Shareholder Proposals,' citing low dividend rates as one of the causes of undervaluation in the domestic stock market. Goldman Sachs analyzed, "Stock market valuation can be reassessed as shareholder profits increase. Applying the correlation between dividend yields and price-to-book ratios (PBR) in the Asia-Pacific market, considering Korea's current market PBR of 0.9 times, a 22% valuation reappraisal is possible."

According to the Korea Capital Market Institute, the average PBR of listed companies in the domestic stock market over ten years from 2012 was 1.2 times, only 52% of advanced countries, 58% of emerging countries, and 69% of Asia-Pacific countries. Among 45 countries analyzed, Korea ranked 41st. Eun Kyung-wan, a researcher at Shinhan Financial Investment, explained, "In 2021, corporate disposable income increased about ninefold compared to 1998, while household disposable income only tripled. As polarization between households and corporations deepened, movements to enhance shareholder value through activism have gained social consensus and momentum."

Perhaps due to this changing atmosphere, courts have increasingly sided with activist funds in provisional injunction lawsuits filed against listed companies demanding that share repurchases be included as agenda items at shareholder meetings. Flashlight Capital Partners (FCP), together with private equity funds Pandora Select Partners and Whitebox Multi-Strategy Partners, had their injunction request accepted to include a self-stock acquisition proposal on KT&G's agenda. Value Partners Asset Management also filed a provisional injunction with Changwon District Court on the 3rd, demanding that KISCO Holdings include a share repurchase proposal on the agenda, and the court approved it on the 9th.

The Next Targets of Activist Funds

The financial investment industry has identified Samsung Heavy Industries, EcoPro, Cosmo Advanced Materials, and Cosmo Chemical as listed companies likely to attract interest from shareholder activism funds. KB Securities selected companies among the top 1,000 listed firms by market capitalization based on asset profitability (ROIC), shareholder return rate, and the proportion of non-operating assets, identifying those where shareholder activism campaigns could be persuasive. Among companies with a five-year average ROIC below 70%, those with low dividend payout ratios and high proportions of non-operating assets were singled out. Among these, companies with major shareholder stakes below 36.5% were selected as likely targets for shareholder activism campaigns, considering that institutional investors or general shareholders' support is needed to appoint directors and auditors at shareholder meetings. KB Securities researcher Kim Jun-seop explained, "The 36.5% major shareholder stake threshold was chosen because if the major shareholder does not hold a majority compared to the average 73% attendance rate at regular shareholder meetings, they may face attacks when appointing directors and auditors."

Some in the securities industry also point out that Naver could become a target of shareholder activism campaigns. The National Pension Service, Naver's largest shareholder, holds an 8.45% stake. Last October, the National Pension Service changed its shareholding purpose from 'simple investment' to 'general investment.' While simple investment aims to seek investment returns through stock price appreciation and dividends, general investment implies more active exercise of voting rights.

Naver's founder and Global Investment Officer (GIO) Lee Hae-jin holds only a 3.72% stake, and Naver's stock price fell sharply last year. Although it has rebounded this year, the current stock price is down 46.6% compared to the end of 2021. The fact that Naver is under investigation for allegedly providing illegal sponsorship funds of 4 billion KRW to Seongnam FC also strengthens the argument that shareholder activism funds have grounds to intervene.