The Financial Services Commission (“FSC”) announced draft amendments to the Enforcement Decree to the Financial Investment Services and Capital Markets Act (“FSCMA”) (the “Proposed Decree”) on September 6, 2019.  The Proposed Decree includes amendments to ease certain reporting requirements of investors owning 5% or more of the total issued equity securities of a public company (the “5% reporting requirements”), which is intended to facilitate shareholder engagement or “stewardship” activities by institutional investors.  The Proposed Decree is expected to become effective in the first quarter of 2020.

Under the FSCMA and the Enforcement Decree, a shareholder who invests in a public company with the “intent to influence corporate management” is subject to stringent reporting requirements (Article 147 (1) of the FSCMA and Article 154 (3) of the Enforcement Decree).  Institutional investors have raised concerns that the law in its current form does not provide clear guidance as to whether their shareholder engagement activities would fall under the category of the “intent to influence corporate management.”  The Proposed Decree has been introduced to address such criticism.

Details of the Proposed Decree

1.   Clarification and reduction in scope of the “intent to influence corporate management”

Under the Proposed Decree, the following shareholder activities shall not be considered as made with an “intent to influence corporate management” (Article 154 (1) of the Proposed Decree): 

(1) Exercise of minority shareholder rights available under the Korean Commercial Code with respect to misconduct committed by the issuer or its executives, such as the right to request the dismissal of the executives involved in the misconduct, to demand cessation of the misconduct, or to seek an injunction against new stock issuances;  

(2) Initiatives by professional investors such as pension funds to amend the issuer’s articles of incorporation with respect to the issuer’s internal organizations, such as (i) board size and composition; (ii) the creation of board committees; and (iii) matters related to protocols surrounding shareholder meetings, provided that such proposals are in accordance with existing principals to improve corporate governance previously disclosed by the investor.  These initiatives must be general in nature and cannot be tailored to target specific issuers, individual directors or officers. 

(3) Shareholder activities related to the declaration of dividends; and

(4) “Simple” expressions of opinion conveyed to the issuer or expressions of opinion conveyed publicly.  Please note that there is no guidance in the Proposed Decree as to what constitutes “simple.” 

2.   Segmentation of reporting obligations and reinforcement of the special relief available for professional investors

Under the Proposed Decree, activities that are considered to be without the “intent to influence corporate management” are further segmented into two groups with different reporting obligations, as follows: 

(i) Minimum reporting obligations are imposed on “simple investments,” defined as investments/shareholdings maintained with the intent to exercise certain shareholder rights guaranteed under the law regardless of the number of shares held; these would include the exercise of voting rights, preemptive rights upon new stock issuances, or claims for dividends; and

(ii) Relatively robust reporting obligations are imposed on “ordinary investments,” defined as investments/shareholdings maintained with a greater degree of shareholder activities than a “simple investment” but not to the extent of shareholder activism based on an intent to influence corporate management (Articles 154 (3) and 200 (9) of the Proposed Decree).  Examples of shareholder activities as part of an ordinary investment include making shareholder proposals regarding executive compensation or dividends.

Under the Proposed Decree, certain professional investors such as public pension funds and their investment management firms are subject to further mitigated reporting obligations (Article 154 (5) of the Proposed Decree). Investments/shareholdings maintained by professional investors with the intent to influence corporate management are subject to lighter reporting obligations than those applicable to general investors, as shown in the table below.
 

Impact on Public Companies

The Proposed Decree clarifies and limits the scope of an investor’s investment/shareholding maintained with the intent to influence corporate management.  When the Proposed Decree goes into effect, shareholder activities are expected to increase as the related 5% reporting requirements will be relaxed to a certain extent.  As shareholders’ interest in certain activities related to dividends or improving the corporate governance of public companies through amendments to articles of incorporation will not be attributed as an intent to influence corporate management, these types of activities are expected to increase after the Proposed Decree goes into effect.

In addition, pursuant to Article 8 of the Rules on the Disgorgement of Short Swing Profit and Investment and Reporting of Unfair Trade Practices, etc., pension funds are exempt from the obligation to disgorge short swing profits for investments held for six months or less if they do not have the intent to influence corporate management.  

Furthermore, even if professional investors make investments with an intent to influence corporate management, they will be subject to lighter reporting obligations and will no longer be required to report sensitive matters such as the primary terms and conditions of the shareholding, reasons for the change in shareholding, form of shareholding and details of how the acquisition has been funded.  It is expected that institutional investors such as the National Pension Service may engage in a greater degree of shareholder stewardship activities.

The Proposed Decree, if it goes into effect in the first quarter of 2020 as scheduled, will affect shareholder activities at annual general meetings of shareholders held in early 2020.  Public companies will need to closely monitor the legislative process of the Proposed Decree and establish strategic engagement plans in anticipation of robust shareholder activities by analyzing investor profiles by category of investment.