[Companies Raising Defensive Walls] ① Management Control Defense Clauses... Value-Up: Medicine or Poison for Korea?

Business Community Emphasizes Need for Management Rights Defense Measures to Prevent Hostile M&A
Concerns Over Differential Voting Rights and Poison Pill Undermining Competition and Value Enhancement

Following demands for governance improvements by activist funds, recent management control disputes between private equity funds and large corporations have kept South Korea's business community busy building defenses to protect management rights. As the market convention of avoiding conflicts with large corporations collapses, calls are growing for the introduction of management control defense measures such as dual-class voting rights, poison pills (preemptive rights for new shares), and golden shares. Capital market experts observing this trend advise companies to put aside unnecessary concerns and focus on shareholder interests.

Business Community Introduces 'Supermajority Voting, Golden Parachutes, Director Qualification Restrictions, Staggered Terms'

According to the Korea Listed Companies Association and other business groups on the 21st, the types of 'management control defense provisions' stipulated in the articles of incorporation of domestic listed companies include supermajority voting, golden parachutes, director qualification restrictions, and staggered terms.

Supermajority voting sets a very high passing threshold for shareholder meetings in specific situations and agenda items, and 264 domestic listed companies have adopted this system. The golden parachute clause, which sets large severance or compensation payments, is also stipulated in the articles of incorporation of 200 domestic listed companies and is considered a representative anti-hostile takeover (M&A) measure along with supermajority voting.

Restricting the number and qualifications of directors is also regarded as a management control defense method. Director qualification restrictions have been adopted by 54 domestic companies. The staggered term system is one of the common M&A defense measures used by companies facing the possibility of hostile takeovers; it staggers the terms of board members so that even if an invading party takes over, at least about one-third of the previous board remains. Twenty-seven domestic companies have explicit provisions for this in their articles of incorporation.

The business community judges that these provisions in the articles of incorporation do not effectively work in actual management control disputes. There is precedent that supermajority voting is invalid if it imposes stricter requirements than those under the Commercial Act. The golden parachute system also carries the risk of lawsuits for damages based on breach of directors' duty of loyalty, as excessive severance pay provisions can undermine the company's capital soundness. The staggered term clause is evaluated as only delaying replacement timing and unlikely to provide effective defense against hostile M&A.

Business Community Advocates for Additional Management Control Defense Systems such as Dual-Class Voting Rights, Poison Pills, and Golden Shares

Accordingly, recently emerging systems include additional management control defense measures such as dual-class voting rights, poison pills, and golden shares. Dual-class voting rights refer to shares that carry different numbers of voting rights per share. Specific shares held by management may be granted two or more voting rights per share, or conversely, certain shareholders may be denied voting rights.

The poison pill grants existing shareholders the right to purchase new shares at a discounted price if a particular shareholder acquires a certain percentage or more of shares, thereby diluting the acquirer's stake. Golden shares allow the holder to exercise veto power over shareholder meeting agenda items with just a single share.

Arguments for the necessity of introducing such management control defense measures have rapidly gained momentum, intertwined with discussions on amending the Commercial Act to extend directors' duty of loyalty to shareholders and the heightened sense of crisis among major shareholders regarding hostile M&A.

A business community official said, "In places with management disputes or succession issues, companies are increasing treasury stock exchanges or dividends so that major shareholders can increase their stakes by purchasing shares, creating various safeguards. There is a view that funds that should be used for investments to grow future company value are being consumed for management control defense, so additional defense mechanisms are needed."