Proxy advisory firms have recently played a critical role in connection with the voting of shareholders of listed companies in Korea and abroad.  Advisory opinions of international advisors such as ISS and Glass Lewis, as well as domestic advisors such as Korea Corporate Governance Service, Korea ESG Research Institute and Sustinvest, have a significant impact on the exercise of voting rights by institutional investors.  In light of this reality, there has been a great deal of discussion both inside and outside of Korea over the introduction of regulations relating to (i) the registration of proxy advisory firms, (ii) conflicts of interest of proxy advisory firms, (iii) proxy advisory firm qualifications and capabilities, and (iv) appropriate disclosures by proxy advisory firms.  The results of these discussions are expected to greatly affect the future path of corporate governance of listed companies, including shareholder voting procedures.

On July 13, 2022, the US Securities and Exchange Commission (the “SEC”) adopted final rules amending proxy rules under Rule 14a of the Securities Act of 1934 (the “Proxy Rules”, and such final amended rules adopted on July 13, 2022, the “2022 Amended Rules”)(link), which repealed a number of amended rules previously adopted by the SEC in July 2020 (the “2020 Amended Rules”)(link).

Under the 2020 Amended Rules, the provision of proxy voting advice generally constitutes a proxy solicitation subject to the Proxy Rules, but a person furnishing proxy voting advice normally covered by the Proxy Rules (a “Proxy Voting Advice Business”) could be exempt from the Proxy Rules if: (i) it provides prominent disclosure of (A) material information regarding any interest, transaction or relationship of it (or its affiliates) that could affect the objectivity of its proxy voting advice and (B) policies and procedures regarding material conflicts of interest arising from such interests, transactions or relationships (Rule 14a-2(b)(9)(i)), and (ii) it has adopted and publicly disclosed written policies and procedures reasonably designed to ensure that (A) the subject listed company receives the proxy voting advice at or before the Proxy Voting Advice Business’s client receives it, and (B) it provides its clients with a mechanism to reasonably enable them to become aware of written statements from the subject listed company regarding the proxy voting advice in a timely manner prior to the shareholder meeting or shareholder vote, consent, authorization, etc., as applicable (Rule 14a-2(b)(9)(ii)).  Item (e) of the Note to Rule 14a-9 of the 2020 Amended Rules made it clear that a Proxy Voting Advice Business could be liable for a misstatement or omission of material facts if it failed to disclose material information, “such as [its] methodology, sources of information, or conflicts of interest.”

The 2020 Amended Rules were initially meant to begin applying to shareholders’ meetings, votes, etc. in 2022, but ISS filed a lawsuit(link) seeking an injunction, alleging that the 2020 Amended Rules were unlawful as they might undermine the independence and timeliness of proxy voting advice, and, in response, the SEC announced that it would re-review the 2020 Amended Rules and refrain from taking enforcement actions with respect to the 2020 Amended Rules during the review period(link).  The 2022 Amended Rules resulted from this SEC review process, the SEC first proposing amendments on November 17, 2021(link) before formal adoption of a portion of such proposed amendments on July 13, 2022.

In response to criticisms of the 2020 Amended Rules, the 2022 Amended Rules repealed the requirements in Rule 14a-2(b)(9)(ii) of the 2020 Amended Rules that, to qualify for an exemption from the Proxy Rules pertaining to proxy solicitations, the subject listed company must receive the proxy voting advice at or before the client receives it, and clients receiving proxy voting advice must be provided with a mechanism to reasonably enable them to become aware of written statements from the subject listed company regarding such proxy voting advice in a timely manner prior to the shareholder meeting or shareholder vote, consent, authorization, etc., as applicable.  Item (e) to Rule 14a-9 was also removed.  However, other portions of the 2020 Amended Rules remain in effect without change, such as the requirement to strengthen the disclosure of information regarding any interest, transaction or relationship of a Proxy Voting Advice Business (or its affiliates) that could affect the objectivity of its proxy voting advice and policies and procedures regarding material conflicts of interest arising from such interests, transactions or relationships.

Please note that, as was observed in connection with the adoption of the 2020 Amended Rules, the 2022 Amended Rules remain subject to change given the possibility of parties filing further lawsuits regarding them.  Nevertheless, it is also important to note that Korean regulations regarding proxy advisory firms may change in response to the SEC’s recent regulatory trends.

[Korean version]