Safety and M&A Now Subjects of Negotiation... Capital Market on High Alert Over Yellow Envelope Act [M&A Alssulsinjab]

"Repeated Major Accidents Pose Risks to Shareholder Value"
Activist Funds Zero In on 'Safety' as a New Target

"Companies that have experienced repeated serious industrial accidents and fatalities may become new targets for activist investors."

The recently passed Yellow Envelope Law (Amendments to Articles 2 and 3 of the Trade Union and Labor Relations Adjustment Act) is expected to have both direct and indirect effects on the capital market, according to ongoing analyses. In particular, as the 'safety' component of ESG (Environmental, Social, and Governance) risks has emerged as a key factor undermining shareholder value, both domestic and international activist funds are zeroing in on this issue.

Furthermore, with strategic decisions such as mergers and acquisitions (M&A), restructuring, and overseas expansion now included within the scope of union bargaining, there are growing concerns that companies' autonomous decision-making rights are now subject to legal boundaries. On August 29, M&A All About will take a multifaceted look at how the Yellow Envelope Law, combined with the Serious Accidents Punishment Act, could impact the capital market.

"Repeated Fatal Accidents Affect Stock Prices"... Activists Likely to Raise 'Safety' Concerns

The core of the Yellow Envelope Law is the expansion of the definition of 'employer' and the scope of collective bargaining for unions, while limiting companies' ability to claim damages against striking workers. The movements of activist funds are drawing particular attention. Overseas, activist funds have already begun using 'worker safety' as a new point of attack.

The campaign between Japanese company Ando Hazama and activist fund Oasis is a prime example. Oasis demanded that safety and industrial health provisions be explicitly included in the company's articles of incorporation and pressured the board to include safety experts. During this period, the company's stock price rose by more than 40%, demonstrating that ESG issues can directly enhance corporate value.

Elliott, which invested in Canada's Suncor Energy, adopted a similar strategy. Citing the occurrence of 12 fatal accidents at Suncor Energy since 2014, Elliott demanded management changes, increased safety budgets, and business restructuring. The board accepted Elliott's demands, appointing a new CEO and increasing investments in safety. As a result, Suncor's stock price rose by about 31%, and the number of serious accidents dropped sharply.

Park Seyoun, a researcher at Hanwha Investment & Securities, emphasized, "Repeated failures in safety management not only damage financial value but also reveal the incompetence of management and the board, leading to shareholder dissatisfaction."

She added, "In particular, over the past five years, industries frequently exposed in the media or public data due to multiple fatal accidents include construction, steel, transportation, chemical, and shipbuilding. Despite large cash flows, if companies maintain low dividends, passive shareholder return policies, lack independent outside directors, and receive lower ESG scores due to repeated safety risks, they are highly likely to become top targets for activist funds."

Unions May Intervene in M&A... "Due Diligence and Deal Structure Need Complete Redesign"

The Yellow Envelope Law is also expected to have a significant impact on corporate M&A. The fact that unions can now include M&A itself as a subject of dispute is raising concerns among capital market participants.

Most notably, the amendment stipulates that if a 'managerial decision' affects working conditions, it can become a subject of dispute. In such cases, M&A deals could effectively be canceled, or companies may be forced to pay large severance packages as part of negotiations. Additionally, after an acquisition, strategic decisions such as restructuring, integration, plant relocation, or technology adoption may require negotiation with the union, introducing new risks of strikes or lawsuits during the process.

Kim Hanjin, CEO of Lightwood Partners, analyzed, "The Yellow Envelope Law defines managerial decisions like M&A as matters affecting working conditions, so unions can make M&A itself a subject of bargaining and go on strike, even without using existing contracts." Kim added, "This undermines the flexibility of strategic decision-making and could, in the long term, make cost-saving restructuring virtually impossible. From the union's perspective, overseas investments or plant relocations are also highly likely to be interpreted as changes to working conditions."

Accordingly, each investor, including strategic investors (SI) and financial investors (FI), needs to develop new strategies. SIs should review the status of subcontractor unions, histories of illegal dispatch lawsuits, and the potential for being classified as an employer during the due diligence process. Since business decisions that may become subjects of union bargaining (such as layoffs or consolidations) require prior communication with unions, it has become increasingly important to prepare preemptive measures against strike risks.

Private equity funds (PEF) and other FIs must also consider that their exit strategies could be disrupted. Previously, they sought to recover funds through dividends or the sale of existing shares, but now unions may view these as grounds for labor disputes. Kim noted, "It is necessary to include provisions in investment contracts that address uncertainties related to unions. For example, since there may be losses due to union bargaining demands, establishing separate safety mechanisms is one solution. It is also important to communicate and reach agreements with unions regarding the possibilities and scope of restructuring."

There are also concerns that the introduction of the Yellow Envelope Law could undermine the government's push for 'KOSPI 5000' as a core goal and ongoing institutional reforms such as amendments to the Commercial Act. Researcher Park stated, "The Yellow Envelope Law goes beyond a simple revision of labor law and is having a significant impact on corporate predictability and investment sentiment in the capital market. Over the next six months, actual on-site implementation, information disclosure, and social discussions will have a tangible effect on investor sentiment."