The Financial Services Commission (the “FSC”) announced official guidance (Link) regarding the permissible scope of shareholder activity under the large shareholding reporting rule (so-called “5% rule”) of the Financial Investment Services and Capital Markets Act (the “FSCMA”), an act with significant implications on the shareholder activity of institutional investors and the conduct of general meetings of shareholders. Following continued comments on the need for institutional investors who manage client assets as fiduciaries to strive to enhance the corporate value of their investee companies and faithfully engage in shareholder activity based on the Stewardship Code, the FSC, as part of efforts to further advance to capital markets, announced that it clarified the scope of permissible shareholder activity to enable institutional investors to play a more active role in enhancing shareholder value.
Pursuant to Article 147 of the FSCMA, a person who holds large amounts of equity of a listed company, whether in shares or equity-linked securities, must report its shareholding status and investment purpose to the FSC and the Korea Exchange (the “KRX”) within five days of acquiring 5% or more stake, or upon subsequent changes of 1% or more in shareholdings or of investment purpose. However, where purpose of shareholdings is not to “influence corporate management,” special exceptions such as eased disclosure timeline and abridged reporting forms apply as outlined below, the applicability of which institutional investors deem critical from an investment practice standpoint, drawing request from institutional investors for clearer guidance on when shareholdings would be deemed to have the purpose of influencing corporate management.
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Shareholding Purpose |
Purpose of Influencing Corporate Management |
No Purpose of Influencing Corporate Management |
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General Investment |
Simple Investment |
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Shareholder Activity |
Exercising de facto influence, such as through shareholder proposals for the appointment/dismissal of executive officers |
Active shareholder participation without the purpose of influencing corporate management |
Exercise of individual shareholder rights only |
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Reporting Timeline and Requirement |
(Retail Investors) |
(Retail Investors) |
(Retail Investors) |
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(Public Pension Funds) |
(Public Pension Funds) |
Public Pension Funds) |
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Accordingly, the FSC clarified that the following shareholder activity related to general meetings of shareholders would not be deemed to be for the purpose of influencing corporate management:
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1. |
Requests to improve the culture of general meetings of shareholders (limited to cases that do not require amendments to the articles of incorporation) |
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(1) |
Requesting compliance with key directives in the Corporate Governance Report, including for issuance of convocation notices four weeks in advance of general meetings of shareholders, implementation of electronic voting, and scheduling of general meetings of shareholders on non-peak dates |
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(2) |
Requesting early disclosure and explanation of materials such as business reports and audit reports in respect of agenda items for general meetings of shareholders |
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(3) |
Requesting the reordering of agenda items to ensure the effectiveness of shareholder proposals |
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(4) |
Requesting directors to explain agenda items for general meetings of shareholders in detail |
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2. |
Requests in respect of dividends and the cancellation of treasury share |
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(1) |
Requesting changes to the policy or standards for determining dividend amounts, or requesting an increase in dividend payouts or yields |
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(2) |
Delivering opinion letters on the position of the institutional investor as to appropriate dividend payouts and yields |
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(3) |
Requesting explanation of the policy or standards for calculation of dividend amounts |
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(4) |
Requesting the buyback or cancellation of treasury shares, or an explanation of plans for the retention or disposal of treasury shares |
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(5) |
Requesting compliance with key dividend-related directives in the Corporate Governance Report, including enhancing cash dividend predictability and providing notification of dividend policies and implementation plans at least once a year |
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(6) |
Making shareholder proposals related to dividends |
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3. |
Requests in respect of executive compensation (limited to cases that do not require amendments to the articles of incorporation with respect to the company’s organization, including its board of directors) |
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(1) |
Requesting explanation of, or change to, the component breakdown, calculation standards, or policies regarding executive compensation |
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(2) |
Delivering opinion letters on the position of the institutional investor as to appropriate executive compensation |
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(3) |
Requesting explanation or change to the performance-based compensation of executives (including stock options and restricted stock units) |
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(4) |
Requesting explanation or change to the caps on executive compensation |
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(5) |
Requesting explanation as to relationship of executive compensation to total shareholder return(TSR) and operating profit |
The FSC plans to continue providing support for institutional investors in their active exercise of fiduciary duties, and will accordingly pursue, in the first half of this year, the revision of the Stewardship Code that remained largely unchanged since 2016. Moreover, the FSC plans to update its Official Guidebook on the Stewardship Code issued in 2017, to address items requiring interpretation further to those items dealt with in this official guidance.
Based on the official guidance of the FSC as set forth above, institutional investors may more freely and actively request explanations and deliver opinions with respect to proceedings of general meetings of shareholders, shareholder returns from dividends and cancellations of treasury shares, and executive compensation decisions, without the burden of heightened disclosure obligations on account of shareholder activity with the purpose of “influencing corporate management.” Accordingly, companies should keep apprised as such regulatory changes may have a profound impact on shareholder communications and IR activities with institutional investors and other shareholders, as well as the conduct of general meetings of shareholders.
Related Topics
#FSCMA #Shareholder Activity #Disclosure #Stewardship Code #FSC
