Korea Economic Research Institute Releases Report by Professor Jun Sun Choi
Shareholder Activism Targeting Korean Companies Soars from 10 to 66
Diverse Tactics: Open Letters, Proxy Battles, Hostile M&A Attempts
Rise in Individual Investors
Shareholder activism targeting Korean companies has increased nearly sevenfold over the past five years. With the KOSPI index surpassing 4,000 on November 27 and the stock market experiencing a boom, there is growing support for the need for legal and institutional measures to preemptively address the potential side effects of heightened shareholder activism.
The Korea Economic Research Institute announced on the 16th that it had commissioned Choi Joon-sun, Professor Emeritus at Sungkyunkwan University Law School, to prepare a report titled "Trends in Shareholder Activism and Response Tasks."
Citing data compiled by global research firm Diligent Market Intelligence, the report pointed out that shareholder activism targeting Korean companies surged from 10 companies in 2020 to 66 companies last year. The methods of shareholder activism varied, including sending public letters, proxy battles, shareholder proposals, demands for ESG (Environmental, Social, and Governance) policies, strengthening shareholder returns through dividends or share buybacks, as well as lawsuits and attempts at hostile mergers and acquisitions (M&A).
As shareholder activism has increased, shareholder proposals have also become more active. According to disclosures from the Financial Supervisory Service, a total of 164 shareholder proposals were submitted to 42 listed companies at this year's regular general shareholders' meetings. This represents a 20% increase compared to the 137 proposals recorded the previous year.
The expansion of shareholder activism has been attributed to an increase in individual investors. According to data from the Korea Securities Depository, the number of individual investors rose significantly from approximately 6 million in 2019 to 14.1 million at the end of last year. The report also noted that individual shareholders are increasingly gathering through online platforms utilizing IT technology, further promoting shareholder activities. As of the end of July, the combined membership of the two major minority shareholder IT platforms, ACT and Heyholder, reached 165,000. Through these IT platforms, minority shareholders can exchange information at much lower costs than before and effectively consolidate their shares and exercise voting rights.
Professor Choi analyzed, "Depending on the degree of shareholder consolidation, it has become possible for shareholders to stand on an equal footing with the largest shareholder, and there have been cases where they have succeeded in asserting their interests against target companies." He added, "Hedge funds, instead of investing large sums to secure stakes, can now easily carry out activism by aligning with various shareholder groups."
Professor Choi also pointed out that these changes could undermine the function and role of the board of directors. Following the first and second amendments to the Commercial Act-such as the duty of loyalty of directors to shareholders, the parallel holding of electronic general meetings, and the mandatory cumulative voting system-the third amendment currently pending in the National Assembly (mandatory cancellation of treasury shares and advisory shareholder proposals) could, if passed, make it impossible for companies to defend management rights using treasury shares. He further noted that agenda items that should be decided at the board's discretion would have to be addressed at general shareholders' meetings under the pretext of "advisory shareholder proposals," potentially shifting the center of corporate management from the board of directors to the general shareholders' meeting. This could ultimately weaken the authority and autonomy of the board of directors guaranteed by the Commercial Act. He also warned, "The general shareholders' meeting could deviate from its essence as the highest decision-making body of a corporation and become a venue for sharp confrontation among shareholders over social issues."
The business community is calling for legislative improvements to prevent such side effects. There is a need for prior oversight and the establishment of clear regulations in the process of shareholder proposals for director nominations and proxy solicitation.
Regarding shareholder proposals for director nominations, Professor Choi stated that, just as with the largest shareholder, candidates for director nominated by ordinary shareholders should also disclose detailed information. The independence of directors must be ensured regardless of who the nominator is, but currently, candidates nominated by ordinary shareholders are only required to indicate whether there is a "conflict of interest" with the nominator, which is insufficient. He emphasized that detailed information and transaction relationships should be disclosed in advance so that the independence of both the nominator and nominee is clearly demonstrated.
He also argued that prior oversight and clear regulations are necessary to address circumvention and illegalities in the proxy solicitation process. There have been cases where some shareholders collect proxies in the so-called "gray areas" where financial authorities find it difficult to intervene, often without any formal reporting. Given the heavy responsibility of shareholders who secure more than a 5% stake and deeply intervene in corporate management through shareholder proposals, there is growing support for strictly applying the large shareholding reporting system (the 5% rule) and the joint ownership requirements under the Capital Markets Act to shareholder activism involving coalitions of individual investors.
There are also suggestions that when certain shareholders' involvement in management runs counter to the interests of the company or infringes upon the interests of other stakeholders, they should be held accountable for abusing shareholder rights. This is because there may be cases where shareholders obtain important information through activist activities and provide it to third parties for private gain. There is also a demand for a monitoring system to prevent market-disrupting behaviors such as unfair trading or the dissemination of false information via online platforms.
Professor Choi urged, "With legislative improvements, companies should establish or revise board operation rules to clearly define and disclose in advance the requirements that apply to both board-nominated and shareholder-nominated director candidates."
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