Truston "Discovering Taekwang Industry's Idle Assets... Will Demand Active Investment and Shareholder Returns"

Activist Fund Truston Intensifies Intent for Management Participation
Commitment to Governance Improvement by Strengthening Audit Committee Independence
Shareholder Activism as a Trend... Will It Resolve Stock Market Undervaluation?

"We will monitor Taekwang Industrial's idle assets to actively invest and demand efficient capital allocation such as increasing the shareholder return rate. We hope small shareholders will raise their voices together."

Lee Sung-won, Head of ESG Investment Division at Truston Asset Management (Truston), who announced a shareholder proposal to enter the board of directors of Taekwang Industrial, recently stated this in a phone interview with Asia Economy.

Truston Asset Management is the second-largest shareholder with a 5.8% stake in Taekwang Industrial. Accordingly, a clash is expected between Taekwang Industrial’s controlling shareholders and activist fund Truston over the agenda to appoint outside directors who will serve as audit committee members, raising voices for efficient capital allocation and shareholder value realization at the March regular shareholders' meeting.

Truston Announces Shareholder Proposal to Recommend Directors to Taekwang Industrial

According to the investment banking (IB) industry on the 28th, Truston announced plans for a shareholder proposal related to director candidate recommendations through a disclosure on the 16th. Truston Asset Management stated, "Taekwang Industrial announced a five-year ESG (environment, social, governance) plan last November, setting a goal of board-centered management," adding, "We share the view that quantitative and qualitative reinforcement of board members is necessary, and therefore plan to propose director candidates through a shareholder proposal in February."

Taekwang Industrial is considered a typical "undervalued stock" in the domestic stock market. At the end of February, the government’s announcement of a corporate value-up program caused Taekwang Industrial’s stock price to surge this year. However, the price-to-book ratio (PBR) remains only 0.15 times.

Lee said, "Taekwang Industrial announced strengthened ESG policies last year and is attempting changes by showing a willingness to improve management," adding, "This year’s shareholder proposal only includes the appointment of directors. If this agenda passes the shareholders' meeting, it will contribute to improving Taekwang Industrial’s governance and increasing shareholder value."

Prior to this regular shareholders' meeting, Truston reportedly demanded the appointment of one inside director and two outside directors who also serve as audit committee members through a shareholder proposal sent to Taekwang Industrial. The terms of inside directors Cho Jin-hwan and Jung Cheol-hyun and outside director and audit committee member Choi Won-jun expire in March.

In particular, regarding the appointment of an outside director who will serve as an audit committee member, one audit committee member can be voted on directly by applying the simple 3% rule without the director appointment procedure under the Commercial Act. The 3% rule limits voting rights to 3% per entity, excluding the combined shares of the largest shareholder and related parties.

Currently, former Taekwang Group Chairman Lee Ho-jin holds 29.48% of shares, and including related parties, 54.53%. However, applying the 3% rule, their voting rights are recognized up to a maximum of 13.34%. Truston, holding 5.80%, is also limited to 3% voting rights, but if the 13.16% of small shareholders holding less than 1% of Taekwang Industrial’s shares add their votes, Truston is analyzed to have a chance of success.

Shareholders' Meeting Season, Government Policy Drive, and Minority Shareholder Coalition: The 'Three Harmonies'

Taekwang Industrial faces challenges such as low PBR, low shareholder return rate, and weak governance. In this situation, Truston’s recent "action" ahead of the March regular shareholders' meeting season is drawing attention as it aligns with the government’s corporate value-up program aimed at resolving Korea discount (undervaluation of the Korean stock market).

Meanwhile, social changes such as the government’s corporate value-up program and minority shareholder coalitions to resolve undervaluation in the Korean stock market are expected to empower shareholder activism.

Kim Ki-baek, team leader of the Small and Mid-Cap Value Team at Korea Investment Management, explained, "The number of companies targeted by shareholder activism and the agendas have significantly increased over the past five years," adding, "While activism demanding excessive funds beyond essential corporate operations such as R&D investment during downturns will not receive support, companies that do not even provide minimal shareholder returns will face pressure from activism."

Kim added, "Now that an environment has been established where minority shareholders can exercise their rights through coalitions, many companies are becoming targets of activism," and said, "The era’s trend of increasing demands for shareholder returns, strengthened alongside the government’s corporate value-up program, will be a strong incentive to change companies’ governance and shareholder return policies."