[Activism on the Rise] ① Funds Target Other Funds

Activist Funds: "Do Not Discriminate Between Major and Minority Shareholders"
25 Years of Rapid Growth for Domestic Activist Funds

Editor's NoteShareholder activism refers to actions taken by shareholders to enhance corporate value through active engagement and influence. Activist funds, which first appeared in Korea after the Asian financial crisis, have surfaced at dozens of companies each year in recent years. Their demands range from shareholder returns such as dividends and share buybacks to more proactive governance improvements, including the appointment of directors and auditors. This three-part series analyzes the expanding influence of domestic activist funds, particularly in the wake of amendments to the Commercial Act.

The passage of the amended Commercial Act, which includes the fiduciary duty of directors to shareholders, has amplified the presence of activist funds in Korea. Recently, new developments have emerged, with activist funds making public demands to private equity funds that are major shareholders.

Must Asset Management has publicly demanded an explanation from CVC Capital, the second-largest shareholder of PharmaResearch, a private equity fund. Similarly, VIP Asset Management has called on Affinity Equity Partners, which signed an acquisition agreement for Lotte Rental, to provide a public explanation. In addition, at Stick Investment, tensions are rising as the combined stake of US-based Millie Capital and domestic activist fund Align Partners has surpassed that of related parties.

Activist Funds: "Do Not Discriminate Between Major and Minority Shareholders"

Last month, PharmaResearch announced that it would spin off its core pharmaceutical business, including Rejuran, to establish a new entity named PharmaResearch, while the existing company would be converted into a holding company (tentatively named PharmaResearch Holdings) responsible for mergers and acquisitions (M&A), new business development, and investment management. In response, Must Asset Management publicly questioned the company, stating that a physical spin-off without a subsidiary's dual listing, rather than the proposed equity spin-off, would better align the interests of major and minority shareholders. Must Asset Management also addressed CVC Capital, which has dispatched two outside directors to the board, demanding disclosure of future plans regarding conversion rights and redemption rights, noting that in the anticipated scenario where the parent company's stock price falls sharply and the subsidiary's stock price rises significantly after the spin-off, CVC Capital holds both the right to benefit from the upside and the right to protect against downside risk.

In February, the board of Lotte Rental resolved to sell a majority stake and simultaneously conduct a third-party allocation capital increase. Specifically, 56% of Lotte Rental shares held by Hotel Lotte and others were sold to Affinity at 77,115 won per share?2.6 times the then-current price of 29,400 won?while also issuing new shares to Affinity at 29,180 won per share via a third-party allocation. Last month, VIP Asset Management responded by demanding that Lotte Rental either withdraw the capital increase or conduct it at a price no lower than the public offering price of 59,000 won, arguing that Affinity received two benefits?an increased stake and a lower average purchase price?while existing ordinary shareholders suffered dilution. VIP Asset Management also called on Affinity to clarify its position regarding concerns about unfair mergers, potential delisting, and the continuity of its value-up policy following the acquisition.

In the case of Stick Investment, US asset manager Millie Capital increased its stake to 12.46% last month, raising the possibility of an "activist alliance." The combined stakes of Millie Capital, domestic activist fund Align Partners (6.64%), and a minority shareholder coalition (6%) now exceed the 19% held by Chairman Do Yonghwan and related parties. The minority shareholder coalition has demanded that the company retire a portion of its treasury shares to enhance shareholder value. However, some observers note that Stick Investment could defend its management rights by utilizing its 13.54% treasury shareholding.

25 Years of Rapid Growth for Domestic Activist Funds

Activist funds first appeared in Korea in 1999, following the Asian financial crisis of 1997 and the subsequent expansion of foreign investment limits in the stock market in April 1999. At a time when the concept of hedge funds and their diverse investment strategies was still unfamiliar, global hedge fund Tiger Fund acquired a 6.6% stake in SK Telecom. Combined with the then foreign ownership ratio of approximately 33%, this posed a threat to SK Group's management control. Tiger Fund demanded the appointment of outside directors and the withdrawal of a capital increase, but ultimately sold its stake to SK Group the following year, realizing a profit of about 630 billion won. Over the next two decades, foreign activist funds dominated the scene, including Sovereign Fund’s campaign against SK Corp. in 2003, Icahn Partners’ engagement with KT&G in 2006, and Elliott’s involvement with Samsung C&T in 2015.

The emergence of domestic activist funds became evident in 2019 when KCGI, known as the "Kang Sungboo Fund," secured a 10.8% stake in Hanjin KAL and submitted a shareholder proposal to appoint directors. The following year, KCGI allied with Cho Hyun-ah, the sister of Chairman Cho Won-tae. However, they failed to secure management control at the regular general meeting, and with Korea Development Bank acquiring a 10.7% stake, the KCGI alliance was effectively defeated. KCGI sold its stake to Hoban Construction in 2022.

Since KCGI, activist fund activity has become commonplace in Korea. According to the "2025 Regular Shareholders' Meeting Review" report published in April by the Aju Institute of Corporate Management, which analyzed 801 listed companies, the number of companies with shareholder proposals increased by 65.4% compared to 2021, while the number of shareholder proposal items rose by 82.6% over the same period. As activist fund activity has intensified, some companies have responded proactively to their proposals. For example, in 2022, Align Partners demanded that SM Entertainment appoint an auditor and improve its contract with Chairman Lee Sooman's private company, and the company accepted these demands.

With the immediate enactment of the amended Commercial Act, which provides activist funds with a variety of "negotiation cards," their activities are expected to become even more vigorous. In the Lotte Rental case, VIP Asset Management has already claimed a "breach of directors' fiduciary duty to shareholders." In addition, the "3% rule," which limits the voting rights of the largest shareholder and related parties to 3% when appointing audit committee members, is expected to lead to more audit committee members supported by activist funds. The introduction of electronic general meetings is also expected to become a powerful tool, making it easier for activist funds and minority shareholders to coordinate their activities.