What are the primary sources of laws and regulations relating to shareholder activism and engagement? Who makes and enforces them?
South Korea’s main laws regarding shareholder activism include:
- the Commercial Act;
- the Financial Investment Services and Capital Markets Act (hereinafter ‘the Capital Markets Act’);
- the Act on Corporate Governance of Financial Companies
The Commercial Act and the Act on Corporate Governance of Financial Companies state a shareholder’s right to:
- request copies of company documents for inspection (eg, articles of incorporation and the shareholders’ register (Article 396 of the Commercial Act), and shareholder and board meeting minutes (Articles 396 and 391-3 of the Commercial Act));
- propose agendas for the shareholders’ meeting (Articles 363-2(2) and 542-6(2) of the Commercial Act);
- call a temporary shareholders’ meeting (Articles 366(1) and 542-6(1) of the Commercial Act and Article 33 of the Act on Corporate Governance of Financial Companies);
- inspect and copy accounting books (Articles 466(1) and 542-6(4) of the Commercial Act and Article 33 of the Act on Corporate Governance of Financial Companies);
- file a derivative lawsuit (Articles 403(1) and 542-6(6) of the Commercial Act and Article 33 of the Act on Corporate Governance of Financial Companies);
- request the court to remove managing directors (Articles 385(2) and 542-6(3) of the Commercial Act and Article 33 of the Act on Corporate Governance of Financial Companies);
- request the court to appoint inspectors (Articles 367(2), 467(1) and 542-6(1) of the Commercial Act and Article 33 of the Act on Corporate Governance of Financial Companies);
- request cumulative voting (Articles 382-2(1) and 547-7(2) of the Commercial Act and Article 33 of the Enforcement Decree of the Commercial Act); and
- file an injunction suit to stop director misconduct (Articles 402(1) and 542-6(1) of the Commercial Act and Article 33 of the Act on Corporate Governance of Financial Companies).
The Capital Markets Act provides shareholders the right to solicit other shareholders to exercise voting rights by proxy (Articles 152 to 158).Shareholder activism
How frequent are activist campaigns in your jurisdiction and what are the chances of success?
Shareholder activism in South Korea commenced in the late 1990s with the minority shareholder movements driven by non-governmental organisations (NGOs), such as the People's Solidarity for Participatory Democracy (PSPD). The PSPD filed a suit to revoke shareholder resolution against Cheil Bank in 1997, and a shareholder derivative lawsuit against Samsung Electronics in 1998. In 1998 the PSPD raised numerous minority shareholder campaigns (the five largest chaebol minority shareholder movements), which included shareholder movements against Samsung Electronics and SK Telecom, as well as ’10 shares for the people’, aiming to reform chaebols.
Shareholder activism in South Korea:
- In 1997, with the inflow of foreign capital, foreign activist investment fund campaigns began.
- In 1999 a global hedge fund, Tiger Fund, acquired 6.66% of SK Telecom’s shares and demanded that the stock be split and the withdrawal of paid-in capital increase.
- In 2003 UK firm Sovereign Asset Management acquired 14.99% of SK Telecom’s shares and demanded the resignation of Chair Choi Tae Won and urged the overall improvement of corporate governance.
- In 2004 the United Kingdom’s Hermes fund acquired 5% of Samsung C&T’s shares and demanded the retirement of preferred stocks.
- In 2005 Carl Icahn (a US investor) and hedge fund Steel Partners together acquired 6.59% of the Korea Tobacco & Ginseng’s (KT&G) shares and demanded the sale of properties and removal of directors.
In KT&G v Carl Icahn, Icahn appointed one outside director, sold part of an affiliated company’s stocks and increased treasury stocks. In 2015 US activist fund Elliott Management opposed the merger of Samsung C&T and Cheil Industries and filed a preliminary lawsuit (Samsung C&T v Elliott).
Domestic activist funds and institutional investors have recently been creating cases of shareholder activism in the Korean market – it is hoped that this will be successful. In 2018 Platform Partners Asset Management demanded Macquarie Korea Infrastructure Fund to remove its asset management company. Although this did not happen, it succeeded in decreasing management fees. In 2019 KCGI, a Korean activist fund, proposed agendas for the shareholders’ meeting and engaged in activist campaigns against Hanjin Kal Corp. In addition, Elliot engaged in activist campaigns against Hyundai Motor and Hyundai Mobis, and HoldCo Asset Management engaged in activist campaigns against Savezone I&C.
How is shareholder activism generally viewed in your jurisdiction by the legislature, regulators, institutional and retail shareholders and the general public? Are some industries more or less prone to shareholder activism? Why?
Numerous foreign activist hedge funds have triggered management disputes and shortly thereafter have sold the stocks to benefit from the increased stock price. Companies therefore often view shareholder activism as means of hostile M&A or invasion of management. In the past institutional investors were not hugely interested in improving companies’ corporate governance structure; however, since 2016, with the introduction of the Stewardship Code, shareholder activism has increased. The minority shareholders’ movement has been thriving since 1997 and has improved retail shareholders’ positive perception of shareholder activism. Nevertheless, cases are not numerous enough to capture the considerable differences in the performance of shareholder activism among industries.
What are the typical characteristics of shareholder activists in your jurisdiction?
There are four main types of shareholder activism in South Korea:
- NGOs – in 1997 after the financial crisis, shareholder activism was brought out in the form of minority shareholder movements and NGOs led the campaigns and demanded companies to improve management transparency;
- foreign activist hedge funds (eg, the Tiger fund, Sovereign Asset Management, Hermes, Carl Icahn and Elliott);
- emerging domestic activist funds (eg, the KCGI, which has demanded that Hanjin Kal improve its corporate governance structure) – South Korea’s activist funds (eg, Platform Partners Asset Management, Value Partners Asset Management, KB Asset Management and Korea Investment Value Asset Management) are demanding that companies increase their dividend payout ratio or publicly announce plans to restore share value; and
- institutional investors – such investors were previously disinterested in improving company management or governance structure, but since the introduction of the Stewardship Code, institutional investor shareholder activism has been spreading.
What are the main operational governance and sociopolitical areas that shareholder activism focuses on? Do any factors tend to attract shareholder activist attention?
Shareholder activism in South Korea spread significantly in 1997 following the financial crisis, mainly due to lack of transparency and competency in companies. Recently, the trend is to correct chaebol family-oriented corporate governance. Unfortunately, there are cases where chaebol chairs degrade company value intentionally, so that the family can easily become the company successor. These issues call for activist funds to improve corporate governance and increase corporate value.
Shareholder activist strategiesStrategies
What common strategies do activist shareholders use to pursue their objectives?
The most commonly used tools are agenda proposals and proxy fighting. A proxy fight is conducted by most activist shareholders because it draws public attention effectively. Shareholders also exercise their rights stated in the Commercial Act, including the right to:
- inspect and copy accounting books;
- request the court to appoint inspectors in order to obtain information;
- call a temporary shareholders’ meeting;
- propose agendas for the shareholders’ meeting in order to adopt certain policies;
- request cumulative voting;
- file injunction suits to stop director misconducts;
- file a derivative lawsuit;
- request the court to remove managing directors; and
- request the return of profits by shareholders who illegally profited from the company.
What are the general processes and guidelines for shareholders’ proposals?
Shareholders who hold no less than 3% of the total number of issued shares may issue a proposal to directors in writing or through an electronic document stating that certain matters be raised as agenda items for a shareholders’ meeting at least six weeks before the date of that meeting. This is also possible for persons who have continued to hold stocks equivalent to no less than 10:1,000 (5:1,000 for listed companies with assets more than W100 billion) of the total number of issued shares of a listed company for more than six months. When requested by a shareholder, the company must publicly open the specifics of the agenda at the convocation letter. As long as the proposed agenda does not violate the law or articles of incorporation, the company must include such proposals as agendas for the general shareholders’ meeting.
May shareholders nominate directors for election to the board and use the company’s proxy or shareholder circular infrastructure, at the company’s expense, to do so?
Shareholders can nominate directors for election to the board. However, there are no legal grounds for shareholders to use the company’s proxy or shareholder circular infrastructure at the company’s expense. Companies generally do not bear the costs arising out of shareholders exercising their rights to elect and nominate directors.
May shareholders call a special shareholders’ meeting? What are the requirements? May shareholders act by written consent in lieu of a meeting?
The Commercial Act provides minority shareholders the right to request convocation of a shareholders’ meeting. According to Articles 366(1) and 542-6(1) of the act, shareholders who hold no less than 3% of the total number of issued shares may request convocation of an extraordinary general meeting of shareholders. For publicly listed companies, any person who has continued to hold stocks equivalent to no fewer than 15:1,000 of the total number of issued shares of the company for more than six months may exercise the above shareholders' right.
Minority shareholders may submit to the board of directors a document or electronic document stating the subject matter of and the reasons for the convocation. When the board concludes them to be justifiable, it will decide to hold a shareholders’ meeting, but when it is deemed unjustifiable, the board may disregard a shareholder’s request.
When the board does not take prompt measures in response to shareholder’s request, the shareholder may convene such a meeting with the court’s permission.
A shareholder may delegate their right to vote at the general shareholders’ meeting to the proxy solicitor by writing a document proving the proxy’s power of representation at the general shareholders’ meeting.Litigation
What are the main types of litigation shareholders in your jurisdiction may initiate against corporations and directors? May shareholders bring derivative actions on behalf of the corporation or class actions on behalf of all shareholders? Are there methods of obtaining access to company information?
In order to impose liability on directors, shareholders with the requisite amount of shares may file a preliminary suit to injunct directors for misconduct and file a suit to remove a director where there are reasonable grounds.
Shareholders may, on behalf of the company, file a lawsuit against directors for damages. However, class actions are possible only on certain claims stated in the Securities-Related Class Action Act. Shareholders may not file a class action on behalf of other shareholders.
Shareholders with the requisite amount of shares may request:
- a copy of the shareholders’ register for inspection;
- board-meeting minutes;
- accounting books;
- the appointment of an inspector to survey the company’s business and financial status; and
- the appointment of an inspector for the general shareholders’ meeting.
Shareholders' dutiesFiduciary duties
Do shareholder activists owe fiduciary duties to the company?
There are no explicit laws regulating shareholder activists’ fiduciary duties.Compensation
May directors accept compensation from shareholders who appoint them?
Yes. There are no statutes that prohibit directors from gaining compensation from the shareholders which appoint them. However, it is difficult to find actual cases where directors are compensated in this way. Although it is not illegal, it may carry the risk of directors breaching their fiduciary duties when they decide in favour of certain shareholders at the expense of the company.Mandatory bids
Are shareholders acting in concert subject to any mandatory bid requirements in your jurisdiction? When are shareholders deemed to be acting in concert?
Joint holders are those who have agreed to:
- jointly acquire or dispose of stocks;
- trade stocks among each other after jointly or solely acquiring such stocks; or
- jointly exercise voting rights.
When the joint holders’ accumulated stock is no less than 5% of the total shares, they must report the status of the stocks that they hold (Article 141(2) of the Enforcement Decree of the Capital Markets Act).Disclosure rules
Must shareholders disclose significant shareholdings? If so, when? Must such disclosure include the shareholder’s intentions?
According to Article 147 of the Capital Markets Act, when a person holds no less than 5% of the total share of a listed company, when there is no less than 1% change in the holding share or when there is a change in the purpose of holding or changing an essential term and condition of the contract related to the stocks, that person must report to the Financial Services Commission within five days regarding the status of the holding shares, the purpose of the holding (referring to whether they intend to exercise influence on the issuer's business administration) and details of the change of shares held.
Do the disclosure requirements apply to derivative instruments, acting in concert or short positions?
Yes. In the following cases, the party is obliged to disclose its holding status to the Financial Services Commission (Article 142 of the Enforcement Decree of the Capital Markets Act):
- where a person holds a right to claim delivery of stocks pursuant to a provision of an act, as a result of a transaction or under any other contract;
- where a person holds a voting right (including the power to instruct the exercise of the voting right) of stocks pursuant to a provision of an act or under a money trust contract, collateral agreement or any other contract;
- where a person holds a right to acquire or dispose of the relevant stocks pursuant to a provision of an act or under a money trust contract, collateral agreement, discretionary investment contract or any other contract;
- where a person holds a right to complete a trade by unilateral reservation for trading stocks and acquires the status of purchaser by exercising that right;
- where a person holds a contractual right of derivatives contract for an underlying asset of stocks and acquires the status of the purchaser by exercising that contractual right; and
- where a person holds a stock option and acquires the status of the purchaser by exercising that stock option.
Do insider trading rules apply to activist activity?
Yes. Activists may be regulated under the law related to using material non-public information regarding the acquisition or disposal of stocks in bulk, as well as tender offers (Article 174 of the Capital Markets Act).
Company response strategiesPreparation
What are the fiduciary duties of directors in the context of an activist proposal? Is there a different standard for considering an activist proposal compared to other board decisions?
Where a shareholder's proposal has been made in time by a shareholder with the requisite amount of shares, as long as that proposal is in line with the statutes and articles of incorporation, the board will accept the proposal as an agenda item at the shareholders’ general meeting. If the board fails to do this, it violates the law and the directors’ liability may not therefore be limited or exempt by the business judgement rule.
What advice do you give companies to prepare for shareholder activism? Is shareholder activism and engagement a matter of heightened concern in the boardroom?
It is advisable to listen carefully to shareholder activists’ opinions and positively consider meaningful advice in the board or shareholders’ meetings. If the opinions are found to be unreasonable, it is recommended to inform the shareholders and the media that the demands are unjustifiable and that they will be denied. As the number of shareholder activism cases increases, attention and concern within companies and their boards will rise.Defences
What defences are available to companies to avoid being the target of shareholder activism or respond to shareholder activism?
The main targets of shareholder activism are companies with:
- no eminent major shareholder or low control of the major shareholder;
- devaluated shares and low dividend payouts; or
- poor corporate governance structure.
In order to avoid being a target of an activists’ fund, major shareholders may:
- increase holdings of shares;
- increase dividend payouts;
- reinforce procedural and material contents of management judgement; and
- develop communication with shareholders and proxy advisers.
When activists make demands against a company, the company should positively review such demands as long as they are justifiable and aligned with the shareholders’ interests. However, the company should also observe whether the shareholders have complied with their obligations to disclose shares and fulfil legal requisites to solicit proxies, or indeed whether they have violated the law by damaging the reputation of the company or the management. When the information requested by the activists is material non-public information or subject to regulations regarding fair disclosure, the companies should not share such information. In addition, investor-friendly policies are necessary (eg, strengthening communication through official shareholder communication channels and establishing a management conduct code).Reports on proxy votes
Do companies receive daily or periodic reports of proxy votes during the voting period?
No. All voting is conducted on the day of the shareholders’ meeting and the company is not permitted to receive daily or periodic reports regarding proxy votes.Private settlements
Is it common for companies in your jurisdiction to enter into a private settlement with activists? If so, what types of arrangements are typically agreed?
There are few cases where activists’ demands have been accepted. However, there have been some instances where a company has compromised with shareholders on appointing outside directors, improving corporate governance and increasing dividend payouts, among other things.
Shareholder communication and engagementRules on communication
Is it common to have organised shareholder engagement efforts as a matter of course? What do outreach efforts typically entail?
Although few, there have been cases of shareholder engagement where both shareholders and the company were involved. For instance, Korea Tobacco & Ginseng established a shareholder council, recommended outside directors, suggested shareholder meeting agendas and collected opinions regarding such agendas.
Are directors commonly involved in shareholder engagement efforts?
No. Cases where directors are involved in shareholder engagement efforts remain rare. Although shareholders do not directly participate in company organisations, recently some companies have had committees within the board gather shareholders’ opinions to improve shareholder value. For instance, Samsung Electronics and Samsung C&T established a governance committee under the board and appointed a shareholders’ rights protection commissioner to handle communication between the board and shareholders. The commissioner reported meaningful feedback and opinions from the shareholders to the board.
Must companies disclose shareholder engagement efforts or how shareholders may communicate directly with the board? Must companies avoid selective or unequal disclosure? When companies disclose shareholder engagement efforts, what form does the disclosure take?
If shareholder engagement effort-related matters occur through committees within the board, such matters must be disclosed. According to the annual, biannual and quarterly business report disclosure forms provided by the Financial Supervisory Service, under the item ‘board and other company organisations’, companies must disclose the name, director’s name, chair’s name, purpose and activities concerning the committees.
Sometimes shareholders directly contact the board. However, directors are not obliged to respond unless it is otherwise stated in the law as the minority shareholders’ right. Direct communications are therefore rare.
South Korea has adopted a fair disclosure policy through the Securities Market Disclosure Rule. According to Article 15 of the rule, when information subject to fair disclosure (eg, information regarding companies’ future business or management plans) is provided selectively to company-related persons subject to fair disclosure, it must be reported to the Korea Exchange. The company is not obliged to disclose communication with shareholders unless it constitutes information subject to fair disclosure.
What are the primary rules relating to communications to obtain support from other shareholders? How do companies solicit votes from shareholders? Are there systems enabling the company to identify or facilitating direct communication with its shareholders?
In order to solicit proxy for more than 10 shareholders of a listed company, a proxy form and reference documents should be submitted to the Financial Services Commission and the Korea Exchange. A proxy solicitor may provide the proxy form and reference documents to the voting rights holder by:
- delivery in person;
- mail or facsimile;
- dispatching them together with a notice to convene a general meeting of shareholders; or
- publishing them on a website.
Meanwhile, there are no systems enabling a company to identify or facilitate direct communication with its shareholders.
Must companies, generally or at a shareholder’s request, provide a list of registered shareholders or a list of beneficial ownership, or submit to their shareholders information prepared by a requesting shareholder? How may this request be resisted?
According to Article 396(2) of the Commercial Act, any shareholder, even with only one share, may request, at any time during company’s business hours, to inspect or copy the shareholder register. The company is obliged to provide the shareholders’ register or beneficial shareholders’ register at the shareholders’ request. However, the company may deny such a request when issued with improper purpose.
Update and trendsRecent developments
What are the current hot topics in shareholder activism and engagement?
Since 2018 domestic activist fund KCGI acquired 16% shares in Hanjin Kal Corp (the holding company of Hanjin Group) and 10% shares in Hanjin (an affiliate company) – KCGI:
- demanded improvements to corporate governance;
- demanded that shareholder proposals be pushed through;
- requested the inspection of the shareholders’ register, board-meeting minutes and accounting books; and
- filed a derivative suit.
Around the same time, minority shareholders of Korean Air (an affiliate of Hanjin Group) went through a proxy fight in the 2019 shareholders’ meeting and blocked then Chair Cho Yang-ho’s re-appointment. Shareholder activism by KCGI is likely to reach its apex in the Hanjin Kal Corp's annual shareholders’ meeting in March 2020.