Concerns Over Violation of the '5% Rule' by Small Shareholder Platform

When Intended to Influence Management, Ownership Status Must Be Reported

There are concerns that minority shareholders who have secured more than a 5% stake through minority shareholder platforms may violate the so-called 5% rule, such as the obligation to report large shareholdings. This is due to the increasing frequency of minority shareholders consolidating through minority shareholder platforms to hold more than 5% of shares in listed companies and exercising shareholder rights.

[Photo by Beopryul Sinmun]

According to the electronic disclosure by Ihwa Electric on the 6th, the Ihwa Electric Minority Shareholders' Coalition jointly holds 17.8% of Ihwa Electric shares for the purpose of influencing management rights. As of the 6th, the total number of minority shareholders who have entered into a joint holding agreement is 2,224, and they gathered through the minority shareholder platform ACT. The coalition stated, “We plan to exercise influence over management rights through shareholder proposals, convening general meetings, and other means using the secured shares.” ACT has made disclosures of holding more than 5% of shares for the purpose of influencing management rights for six companies, including Ihwa Electric, Etron, EID, Cellivery, KH Construction, and Daeyu.

When a minority shareholder coalition jointly holds more than 5% of shares for purposes such as exercising management rights, they are subject to the obligation to report large shareholdings, which requires reporting stock changes and related parties to financial authorities.

According to Article 147 of the Capital Markets Act and related regulations, if a person holds 5% or more of stocks or if the holding ratio changes by more than 1% thereafter, or if there is a significant change in the purpose of holding, the holding status and changes must be reported to financial authorities within five business days. Additionally, if the combined holding ratio of spouses and family members who are special related parties exceeds 5%, the stock ownership status must also be reported.

An official from the Financial Supervisory Service (FSS) said, “If there is an intention to jointly hold corporate shares, the obligation to report large shareholdings applies in principle until the joint holding purpose is resolved,” adding, “If the joint holders buy or sell shares causing a change of more than 1% in the stake, they become subject to reporting.” The official also emphasized, “It does not matter whether there are dozens or thousands of joint holders,” and “If the reporting obligation is violated, sanctions will be imposed after considering factors such as intentionality and whether there is a management rights dispute.”

Within the industry, there are concerns that minority shareholder coalitions with joint holding agreements are at high risk of violating the ‘5% rule.’ Minority shareholders who have entered into joint holding agreements are subject to disclosure obligations, but it is practically difficult to monitor and report the stock changes of some 2,000 minority shareholders individually.

A representative from a minority shareholder platform explained, “It is practically difficult to establish a system that can check the shareholding status of minority shareholders in real time,” and added, “We considered disclosure proxy services through joint holding agreements, but judged the legal risks to be high and have not implemented them.”

Since management rights disputes often lead to intense legal battles, there are also opinions that violations of principles such as the obligation to report large shareholdings should not be treated lightly. An FSS official said, “Depending on whether the violation was intentional or negligent, warnings or cautions may be issued, or cases may be referred to the prosecution.”

A lawyer who mainly handles capital market cases said, “In management rights disputes, even minor legal violations can become a problem that causes the entire management rights to be lost,” and “In the case of large shareholding reports, criminal penalties may follow, so it is necessary to carefully review and approach the relevant laws.” In fact, Kakao’s Chief Investment Officer Bae Jae-hyun, who was indicted and detained for market manipulation in the SM Entertainment case, is also charged with violating the obligation to report large shareholdings. If mishandled, voting rights may be restricted, and penalties such as fines, imprisonment of up to three years, or fines of up to 100 million won may be imposed.

Meanwhile, in March this year, Helixmith restricted voting rights due to the minority shareholder coalition’s violation of the large shareholding reporting obligation. The minority shareholder coalition filed an application for evidence preservation with the court in response, but it was not accepted.

Reporter Lim Hyun-kyung, Legal Times

※This article is based on content supplied by Law Times.

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