[Activism Gathers Strength]② Private Equity, Minority Shareholders, and Foreign Funds... Activism Expands Across the Board

Buyout Funds Like MBK and Minority Shareholder ACT Step In
A Wide Range of Topics: From Shareholder Returns to Board Entry
"Confrontation with Owners Is Not Always the Answer"
Rise of 'Moderate' Activism

Editor's NoteShareholder activism refers to actions taken by shareholders to enhance corporate value through proactive influence. Activist funds, which first appeared in Korea after the 1997 foreign exchange 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 active improvements in corporate governance, including the appointment of directors and auditors. This series analyzes domestic activist funds, which have been expanding their scope before and after the revision of the Commercial Act, in three parts.

Shareholder activism in the Korean capital market has entered a "growth phase." Whereas it used to be dominated by a handful of foreign hedge funds, it has now expanded into a broad ecosystem that includes private equity funds (PEFs), specialist activist funds, institutional investors, and individual investors. The topics of activist activity have also diversified, ranging from demands for increased dividends and share cancellations to the appointment of directors and proposals for business strategies. While early activism was "aggressive," directly threatening management control, there is now a growing number of "moderate" activists who consistently negotiate with controlling shareholders.

Activism is now becoming established as a legitimate investment strategy for enhancing corporate value. The institutional framework for activism has also been strengthened. The introduction of the Stewardship Code in 2016, which emphasized the fiduciary duties of institutional investors, paved the way for more active exercise of shareholder rights. This was followed by the introduction of separate election of audit committee members, the 3% voting rights cap (the "3% rule"), and corporate value-up programs. Last week, the National Assembly passed amendments to the Commercial Act that include the expansion of directors' fiduciary duties to shareholders and the extension of the 3% rule, which is expected to further broaden the scope of activist activities.

Even Buyout Funds Join the 'Activism Boom'

Activism first appeared in Korea when foreign hedge funds threatened the management control of major domestic conglomerates in the aftermath of the 1997 financial crisis. For a time, it remained largely the domain of foreign players. However, after the activist private equity fund KCGI entered the Hanjin KAL management dispute in 2018, domestic activists such as Align Partners, Truston Asset Management, and Must Asset Management became increasingly active. In particular, MBK Partners, Asia's largest PEF renowned for its buyout activities, shocked the market by deploying activist strategies at Korea & Company in 2023 and at Korea Zinc last year. Lee Kyungyeon, a researcher at Daishin Securities, pointed out, "As we enter the era of third- and fourth-generation chaebol owners, the expansion of activist PEFs is accelerating. This is because the traditional growth model has reached its limits due to limited economic growth prospects and a saturated market."

The activities of minority shareholder alliances, supported by 14 million individual investors, have also become more vigorous. At the end of last month, during Taekwang Industrial's attempt to issue exchangeable bonds (EB), a minority shareholder alliance made its presence felt. Truston Asset Management, the second-largest shareholder, filed for an injunction against the Taekwang Industrial board, citing "violation of the Commercial Act," and the minority shareholder alliance joined by filing a criminal complaint against the directors for breach of duty. Subsequently, the Financial Supervisory Service instructed the company to "specify the parties subject to the disposition," and on July 2, Taekwang Industrial officially announced that it would postpone follow-up procedures, stating, "We will communicate closely with minority shareholders and other stakeholders and listen to their opinions."

On June 23, the proxy voting platform "ACT" gathered a 3.36% stake in Stick Investment, a listed private equity firm, and requested an extraordinary general meeting, proposing a share cancellation as a shareholder proposal. Under the Commercial Act, shareholders holding more than 3% of the total issued shares can request an extraordinary general meeting, and for listed companies, those holding more than 1.5% for at least six months can do so. On June 16, ACT also submitted a petition to the Korea Exchange and the Financial Supervisory Service opposing the planned separate listing of LSE, a subsidiary of LTC, a semiconductor and display materials company. As of June 11, the minority shareholder coalition formed around ACT had secured 9.61% of the total shares.

Foreign funds also remain highly active. Dalton Investments of the United States acquired a 5.02% stake in Kolmar Holdings at the end of last year and increased its stake to 5.69% by March this year, changing its investment purpose from "simple investment" to "influencing management control." Subsequently, Lim Sungyoon, head of Dalton's Korea office, was appointed as an outside director at the regular general meeting of shareholders. This created a rare case of an activist fund participating directly on the board.

Activism Shifts from 'Attack' to 'Persuasion'

Opinions are divided on whether the rise of activism is an "attack on companies" or a "value-up" strategy. Hong Jiyeon, a senior researcher at the Korea Capital Market Institute, stated, "Positive effects can be expected, such as improved capital efficiency and better corporate governance," but also noted, "Balanced responses are needed to address side effects such as demands focused on short-term profits or disputes over management control."

In fact, in Korea, the image of activism as a "short-term profit grab" became entrenched after aggressive interventions by foreign funds following the financial crisis. Notable examples include Sovereign Asset Management's purchase of a 14.9% stake in SK Corp. in 2003 and its demand for a CEO change, and Carl Icahn's acquisition of a stake in KT&G in 2006, which led to calls for asset sales and a company split. These incidents deepened the negative perception of "activist funds = corporate attack" in Korea. Although these funds failed to seize management control, they sold their shares at high prices, realized significant profits, and withdrew.

In contrast, in advanced capital markets such as the United States, activism initially took the form of value-oriented management participation and later diversified into more aggressive forms. Lee explained, "Cases of 'value-investing activism' by Benjamin Graham and Warren Buffett in the United States were relatively moderate and value-oriented, focusing on underappreciated companies and pushing for appropriate dividends and restructuring." He added, "In the 1960s, activism evolved into much more aggressive mergers and acquisitions (M&A), and in the 2010s, it developed into stewardship codes and ESG (environmental, social, and governance) responsible investment."

Recently, however, a social consensus has been forming in Korea around the need to enhance corporate value, leading to the spread of "moderate activism" that prioritizes compromise and persuasion with management. In 2021, Lee Chaewon, a first-generation value investor, founded Life Asset Management, explicitly advocating for friendly activism for the first time in Korea. VIP Asset Management, which recently publicly opposed Lotte Rental's rights offering, stated, "In principle, we have pursued non-public, friendly activism, but since Lotte repeatedly expressed its intention to proceed despite several private letters, we had no choice but to express our position publicly."

The head of an activist fund commented, "Making unreasonable demands of companies is no longer the answer. The essence is to introduce and persuade companies of rational ways to increase corporate value." He added, "There are also more cases where companies accept the fund's proposals and form amicable relationships."