[Inside Chodong] The '3% Rule' That Brought the Entertainment King to His Knees and Minority Shareholders

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[Asia Economy Reporter Lee Seon-ae] This year's shareholder meetings showcased a 'duality.' At one venue, the cause of the 'Korea Discount,' referring to the undervaluation of the Korean stock market, was revealed, while at another, there was a glimpse of hope to overcome it. Some shareholder meetings saw an increase in shareholder value through the victory of minority shareholders, whereas others successfully introduced 'golden parachute' bylaws due to minority shareholders' apathy toward exercising their voting rights.

The spotlight was on SM. Producer Lee Soo-man, who has reigned as the king of SM, bowed to the minority shareholders. A tense standoff unfolded between Lee’s side (holding 19.17% stake) and activist fund Align Partners Asset Management (holding 0.91%) over the agenda to appoint an auditor, resulting in a victory for the minority shareholders represented by Align. The '3% rule' changed the game. This rule, under the Commercial Act, limits controlling shareholders to exercising voting rights on only up to 3% of shares when appointing auditors or audit committee members.

However, the true victory stemmed from minority shareholders actively exercising their voting rights beyond the '3% rule.' Align arrived at the shareholder meeting with three boxes of proxy documents, representing voting rights delegated by shareholders holding about 30% of the issued shares. This means they could have won even without the '3% rule.'

This highlighted the significance of voting rights held by minority shareholders. The increase in shareholder proposals for auditor appointments and the enhancement of shareholder value through active voting are seeds that can overcome the Korea Discount.

It is also a positive sign that shareholder proposals aimed at enhancing shareholder value have become more abundant. This can be interpreted as the beginning of steps toward improving corporate governance. Andaz Asset Management demanded SK Chemicals to increase dividends and expand investments in new businesses, while Cha Partners Asset Management proposed appointing an independent audit committee and introducing quarterly dividends at Sajo Oyang.

On the other hand, the self-interest of major shareholders remains rampant. The golden parachute clause appeared as usual. A golden parachute is a defense mechanism against hostile mergers and acquisitions (M&A), stipulating that if a director of the target company is dismissed without just cause before the end of their term, they receive a large special retirement payment or bonus. While it is used as a strategy to protect management’s control, in the domestic capital market, it is often misused to strengthen the controlling shareholder’s dominance and secure personal gains, which is problematic. It is also a factor causing the Korea Discount.

Peputron, Lapas, Enzychem Lifesciences, and Sungshin Cement succeeded in amending their bylaws to include golden parachute clauses. What made this possible? One factor is the 'indifference' of minority shareholders who are not active in exercising their voting rights. Peputron’s largest shareholder and related parties hold 9.46%, and Enzychem Lifesciences’ largest shareholder and related parties hold only 18.74%. The passage of the bylaw amendments at the shareholder meetings can be attributed to either minority shareholders voting in favor or low attendance rates at the meetings. Who would vote in favor of clauses that provide compensation amounts 20 times the accumulated retirement pay, or pay 20 billion KRW to the CEO and 10 billion KRW to inside directors as retirement benefits? It can only be interpreted that minority shareholders did not exercise their voting rights.

Exercising the voting rights held by shareholders is the first step toward improving corporate governance. The fundamental power that creates corporate value comes from the shareholders. This is why shareholders, as the owners of the company, must exercise their voting rights at shareholder meetings.

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