South Korean watchdog stimulates investor activism

South Korea is set to relax its shareholder reporting rules to allow for greater investor activism.

The country’s Financial Services Commission (FSC) is to amend the ‘5% rule’ which will no longer require institutional investors to file reports when they wish to respond to a company’s unlawful activities, improve the principles of the corporate governance code, or respond to a company’s dividend policy.

The current 5% rule states an investor who holds a 5% or more shareholding in a company and subsequently changes its holdings by 1% or more must file a report with the FSC and Korea Exchange (KRX) within five days from the changes.

Under the new rule, the reporting deadline is extended for investors whose shareholding purpose is not intended to ‘exercise influence over the company’s management’, which includes activities in regard to dividend policy and corporate governance. These investors will be allowed to submit a simple report.

The amendment is part of the regulator’s big move to facilitate the application of the Stewardship Code.

South Korea introduced the Stewardship Code in 2016 to make investors more active and engaged in the activities and governance of Korean companies. Before the Code, poor corporate governance had been recognised as a chronic problem within many Korean companies.

“As institutional investors increasingly engage in shareholder activities with the adoption of the Stewardship Code, there are calls for reforms to the 5% rule,” the FSC said.

“Growing shareholder activism in regard with a company’s dividend policy or corporate governance makes it difficult to draw a clear line between activities with the purpose of ‘exercising influence over the management’ and those without such purpose.”

“Institutional investors are concerned that their shareholder activities might lead to unintended violation of the 5% rule, as the scope of ‘exercising influence over the management’ under the current rule is defined broadly and ambiguously,” the FSC added.

Activities regarded as trying to gain influence over company management (including dismissal of an executive officer, and shareholder proposals for M&A) will still be subject to the detailed reporting within five days.

The 10% for the National Pension Service (NPS) will also be partially amended, enhancing shareholder rights.

Under the 10% rule, an investor that owns more than 10% in a company with a purpose to influence management control needs to return any profit gained from stock sales made within six months from their stock acquisition.

While the planned amendments have been welcomed by investors, companies have been sceptical about the changes, fearing it’s a way for the government to interfere in business activities and restrict self-regulation.

The amended 5% rule is expected to take effect in the first quarter of 2020.

Last Updated: 12 September 2019