After Simulating the 3% Rule... Samsung and Hyundai Motor Audit Appointment in the Hands of 'Oegwan'

Simulation of the 3% Rule for 15 Major Korean Conglomerates by Korea Industrial Federation
87% of Companies Likely to Appoint Hedge Fund-Nominated Auditors
High Foreign Shareholding Makes Companies Vulnerable to Hedge Fund Attacks
Concerns Over Corporate Information Leakage and Management Interference if Hedge Fund-Nominated Auditors Are Appointed

[Asia Economy Reporter Su-yeon Woo] According to the application of the '3% rule' in the proposed amendment to the Commercial Act, it has been found that in 87% of the top 15 major domestic conglomerates, the appointment of auditors can be influenced by foreign hedge funds. This is because, with the voting rights of major shareholders limited to 3%, if foreign shareholders unite about half of their votes, they can secure 25% of the total voting rights. The ordinary resolution requirement for shareholder meetings, such as auditor appointments, requires a majority of attending shareholders to approve, and those shareholders must hold at least 25% of the total shares. Therefore, if foreign shareholders secure more than 25% of the voting rights, they can threaten management control.

On the 13th, the Korea Industrial Alliance Forum (KIAF) conducted a simulation applying the 3% rule to the separate appointment of audit committee members for 15 major domestic conglomerates. The results showed that in 13 out of 15 companies (87%), it is highly likely that individuals recommended by foreign hedge funds will be appointed as audit committee members. The Industrial Alliance Forum is a private industrial economic forum formed by eight industry associations and economic organizations.

87% of Companies with High Foreign Shareholding Vulnerable to Hedge Fund Attacks

These companies have a relatively high foreign shareholding ratio, ranging from 31% to 56% (as of the 7th), making them vulnerable to activist hedge fund attacks. Furthermore, if domestic institutions and minority shareholders join forces and the major shareholders' voting rights are limited to 3%, companies will have no choice but to comply with the decisions of foreign hedge funds.

Even looking at last year's Hyundai Motor Company shareholders' meeting, where foreign shareholders cast 45.8%, 49.2%, and 53.1% approval votes respectively for three outside director candidates recommended by the activist hedge fund Elliott Management, one can see how strong the cohesion among foreign shareholders is.

Assuming that after the 3% rule is applied, Hyundai Motor puts the audit committee member position, whose term expires in March next year, to a vote with a hedge fund recommended candidate, if only half (50%) of foreign shareholders agree, the voting rights they can secure amount to 21.4% of the total. Adding just 12% support from minority shareholders makes securing 25% of total voting rights a matter of time.

In the case of Samsung Electronics, where foreign shareholding reaches 56%, there are concerns that it will be even more vulnerable to such hedge fund attacks. Even under a conservative assumption that only 40% of foreign shareholders unite after the 3% rule is applied, they are expected to secure 27% of the total voting rights, well over a quarter.

Professor Song Won-geun of Yonsei University (Director of the Future Industry Research Institute) expressed concern, saying, "With the introduction of the Stewardship Code, many domestic investors are likely to follow the opinions of global voting advisory firms that side with overseas hedge funds," and "If the amendment to the Commercial Act passes, the likelihood of appointing audit committee members recommended by hedge funds is very high."

Jung Manki, Chairman of the Korea Industrial Federation Forum, is presenting the simulation results of the '3% rule' application for major domestic companies at the launch ceremony of the Korea Industrial Federation Forum on the 13th. Photo by Korea Industrial Federation Forum Association

High Probability of Hedge Fund Recommended Auditor Appointments under 3% Rule... Concerns over Corporate Information Leakage and Management Interference

The reason the business community reacts sensitively to the 3% rule is that they are aware of the structural vulnerability of Korean companies with high foreign shareholding and the strong cohesion among these shareholders. Moreover, if the amendment to the Commercial Act adds institutional penalties to companies, audit committee members of each company could be filled with individuals favored by hedge funds.

Companies worry that even if individuals recommended by foreign hedge funds enhance the independence of audit committee members in line with the law's intent, there is a high risk of misuse such as leaking internal corporate information, management interference, or intentional corporate value reduction for mergers and acquisitions (M&A).

For example, at last year's Hyundai Motor shareholders' meeting, Elliott recommended Robert Randall McEwen as an outside director candidate. He was the CEO of Ballard Power Systems, a Canadian hydrogen fuel cell developer. This means that in a fiercely competitive environment among Korea, Japan, China, and the United States for hydrogen fuel cell development and market dominance, a CEO of a competitor company could become an outside director. Outside directors or audit committee members hold important positions that can request and collect all corporate information.

Jung Man-ki, Chairman of the Korea Industrial Alliance Forum, pointed out, "Even assuming minimal cooperation from foreign shareholders, the separate appointment system for audit committee members in the amendment to the Commercial Act seems advantageous to foreign hedge funds," and warned, "It will be like an enemy general eavesdropping on the operational meetings of the friendly forces' leadership."

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