Nam Hyun-woo has worked as a staff writer at The Korea Times since 2013, mostly covering business and politics. He currently belongs to the Business Desk where he covers topics such as emerging tech, AI, ICT and Korea's chaebol community. Prior to joining the team, he was the paper's correspondent for the presidential office of Korea during the Yoon Suk Yeol and Moon Jae-in administrations.
Business law revision hurts firms fighting hostile funds
Graphic by Bae So-young
By Nam Hyun-woo
By Nam Hyun-woo
A revision to the country's Commercial Act is raising fears that it may end up preventing local firms from defending their management rights against hostile investors, according to industry officials and experts.
They cited a U.S. private investment fund's recent opposition to LG Group's plan to spin off some units as a case that may have become worse since the revision, and many Korean firms having activist funds as shareholders will face similar opposition to their decision-making procedures.
On Dec. 9, the National Assembly passed a number of revisions to the act, aimed at requiring companies to appoint more than one audit committee member from outside the board of directors, decided upon by shareholders. In this process, the respective voting rights of a company's owner and their affiliated persons and organizations ― the largest shareholders ― will be limited to 3 percent no matter how big of a stake they possess in the company.
Initially, the revision was proposed to place a 3 percent cap on the combined voting rights of the largest shareholders, but was changed to respective voting rights, following opposition from businesses.
Though the rule was relaxed slightly, Korea's leading business lobby groups ― the Korea Chamber of Commerce and Industry (KCCI), Korea Enterprises Federation (KEF) and Korea Federation of SMEs ― are crying foul over the revision, as they fear activist funds will wield excessive influence on company management by appointing audit committee members that represent their interests more.
The Commercial Act revision was approved by the government in a Cabinet meeting Tuesday, meaning firms have to embrace the new rules in their next annual general meetings mostly scheduled between February and March next year.
“Though the 3 percent cap is on the respective largest shareholders, placing a limit on voting rights is an excessive regulation on shareholders' rights and, fundamentally, private property,” the KEF said in a joint statement with other business lobby groups. “Especially, since the Commercial Act revision takes effect immediately, firms that have to appoint new audit committee members at next year's annual general meetings are helpless.”
Their fear became a reality less than a week after the revision passed. On Dec. 14, U.S. asset manager Whitebox Advisors sent a letter to LG Corp., the holding firm of LG Group, expressing “serious concerns” about the group's decision to spin off LG Hausys, LG MMA, Silicon Works, LG International and Pantos by creating a new holding company under Koo Bon-joon, a brother of the previous LG Chairman Koo Bon-moo, the father of current LG Group Chairman Koo Kwang-mo.
“We are deeply dismayed that the purported rationale for this transaction is to support Koo Bon-joon in developing his own business group, like others in his family,” the letter read. “That LG has proposed a transaction that appears to prioritize family over minority shareholders is a reason why the Korean Discount persists.”
The Korea Times exclusively reported last week that Whitebox Advisors is considering taking legal action against LG Group, as the conglomerate refused to honor its request.
Experts say Whitebox Advisors' claim appears to be focused on demanding hikes in dividends, rather than opposing the spinoff itself. And similar cases will follow, as the revision gave a “weapon” to hedge funds to extract short-term profits while sacrificing companies' long-term growth.
“The Commercial Act revision seems to be aimed at encouraging hedge or activist funds to exercise excessive influence in corporate management,” said Lee Byung-tae, a professor at the Korea Advanced Institute of Science and Technology (KAIST) College of Business.
“Following the revision, chances are growing that hedge funds will gather minor shareholders and threaten to appoint hostile audit committee members to make excessive demands such as dividend increases. And the largest shareholders will have no tools to protect their management rights.”
According to KEF data, the average stake of the largest shareholders in the top 10 largest Korean firms by market cap stood at 30.41 percent as of November. When the revision takes effect, the average voting rights of the largest shareholders will decline to 5.52 percent.
Samsung Electronics' combined stake of largest shareholders stood at 21.21 percent, but their voting rights in appointing audit committee members will go down to 12.52 percent after the revision. SK hynix and Naver's largest shareholders each have 21.36 percent and 13.05 percent, but their voting rights plunge to 3 percent. Samsung Biologics' largest shareholders have a 75.06 percent stake, but will only be able to exercise 6.13 percent in appointing audit committee members.
“For companies, there's no other option but to follow the new law,” an industry official said. “While some companies have time to prepare for the new rule, others have to embrace the change unprepared. Though firms have to abide by the new law, they still have questions on what is the good in this policy.”
On Dec. 16, the government held an explanation session on the revision, and claimed it will “make corporate management more transparent, thus ruling out the chance that hedge or activist funds will exercising excessive influence.”
The government said the revision will consequently “normalize the audit functions of corporate boards, and improve domestic companies' competitiveness,” but experts and industry officials mostly disagree with the government's explanation.
“The government's claim is nonsense,” Lee said. “It is unclear whether the law is guiding firms to have conflicts with the audit committee or persuade minor investors to agree with its decision. To survive in competition, companies have to use their resources for business, but the revision seems to be encouraging firms to use resources to protect their management rights in unnecessary conflicts.”