Have You Forgotten the 'Elliott Nightmare'... Companies Left Defenseless Against Speculative Capital Attacks

Controversy Over Government-Proposed Commercial Act Amendment
Unprecedented Overseas Separation Appointment of Audit Committee Members and 3% Voting Rights Restriction for Major Shareholders
Serious Concerns Raised Over Corporate Management Rights Infringement

[Asia Economy reporters Changhwan Lee and Gimin Lee] The issue that the business community is most concerned about in the government's proposed amendment to the Commercial Act is the separate election of audit committee members and the 3% voting rights restriction for major shareholders.

Audit committee members are not only responsible for auditing companies but also serve as key personnel in the company's highest decision-making body, thus participating in corporate management. Until now, audit committee members have been selected from among directors appointed by major shareholders. Since they were effectively appointed by major shareholders, it was rare for audit committee members to make decisions against the will of the major shareholders.

However, according to the government's proposed amendment to the Commercial Act, companies will be required to elect at least one audit committee member separately from directors at the shareholders' meeting. This means that audit committee members must be elected separately at the shareholders' meeting, not from directors appointed by major shareholders. Additionally, the largest shareholder will be limited to exercising only 3% of voting rights, including those of related parties.

Although ordinary shareholders are also limited to exercising voting rights up to 3%, the regulations regarding related parties are unclear, so if several minority shareholders form an alliance, their voting power could become much stronger than that of major shareholders. As a result, the structure will change in a way that makes it easier for speculative capital or corporate hostile forces to take over the key executive position of audit committee member.

The separate election of audit committee members and the 3% voting rights restriction system is an unfamiliar system with no legislative precedent overseas. Most countries appoint audit committee members through the board of directors, and the 3% voting rights restriction is not even attempted because it could infringe on property rights.

The business and academic communities foresee that this amendment to the Commercial Act will cause Korean companies to be constantly plagued by hostile mergers and acquisitions (M&A) and management interference by external forces. Korean companies have already been exposed to management threats from speculative capital several times in the past, and such incidents are expected to become more frequent. In the worst case, there is even a possibility of losing corporate management rights.

A representative example is the management threats posed by the U.S. activist fund Elliott to Samsung and Hyundai Motor. From 2018 to last year, Elliott held around 3% stakes in Hyundai Motor and Hyundai Mobis, respectively, and declared management participation, demanding the merger of Hyundai Motor and Hyundai Mobis, large-scale dividends, and director appointments. As a result of the shareholder meeting vote, all of Elliott's demands were rejected.

Hyundai Kia Motors Yangjae Headquarters

In 2015, Elliott publicly opposed the merger of Samsung C&T and Cheil Industries, claiming it was unfavorable to Samsung C&T shareholders. In 2016, Elliott demanded that Samsung Electronics separate into a holding company and an operating company and list the operating company on the U.S. NASDAQ. Although most of Elliott's demands were not accepted, if the amendment to the Commercial Act passes, the power of speculative private equity funds like Elliott is expected to increase.

In particular, regarding the appointment of audit committee members, if major shareholders' voting rights are limited to 3%, and several institutional investors like Elliott form a coalition to contest votes, the likelihood of appointing audit committee members they have nominated becomes very high.

A business community official explained, "Audit committee members are key members of the board and can easily access various corporate secrets," adding, "Audit committee members could hand over company secrets to hostile forces and attempt to take control of the board using this as leverage." He continued, "They could also demand high-priced stock purchases (greenmail) under the pretext of withdrawing audit committee director candidates," and said, "If the amendment to the Commercial Act is introduced without sufficient preemptive regulation against such abuses of power, corporate management rights will face significant threats."

In the ongoing management dispute over Hanjin KAL, the 3% rule applies to Chairman Cho Won-tae of the Hanjin Group, but the 'three-party alliance' consisting of former Korean Air Vice President Cho Hyun-ah and activist private equity fund KCGI is not subject to the 3% voting rights restriction, causing controversy over reverse discrimination. If the three-party alliance wishes, they can appoint audit committee members to suit their preferences.

Threats to corporate management rights by activist private equity funds are common overseas as well. The U.S.'s largest chemical company DuPont has long been targeted by private equity funds. In 2015, the U.S. fund Trian acquired some shares of DuPont and became a shareholder, demanding company splits and the sale of non-core business units.

DuPont spent huge sums defending against hedge fund attacks, resulting in business damage and significant turmoil, including the resignation of the CEO. Although the U.S. does not have a separate election system for audit committee members and has various management defense measures, companies are still constantly exposed to management threats from speculative capital.

There are concerns that excessive regulation may lead companies to undermine the audit system itself. For example, there could be side effects such as reducing the total number of audit committee members, including outside directors, or curtailing the authority of the audit committee through changes to the board's articles of association.

Academics also worry that the government's amendment to the Commercial Act could become an irrational regulation. Professor Hong Kiyong of Incheon National University's Department of Business Administration said, "Companies are already struggling due to the novel coronavirus (COVID-19), and introducing systems like separate election of audit committee members or limiting major shareholders' voting rights to 3% could make corporate management even more difficult," adding, "If there is no urgent need, it would be better to discuss and introduce such systems after the economy recovers."

Professor Choi Jun-seon, emeritus professor at Sungkyunkwan University School of Law, emphasized, "Currently, Korea only has regulations limiting management rights but lacks management defense legislation," and said, "Even if the separate election system for audit committee members is introduced, it should be accompanied by the introduction of management defense legislation such as dual-class voting rights or poison pills."

This content was produced with the assistance of AI translation services.