The Financial Services Commission provided statutory interpretations on the large shareholding reporting rule (so-called “5% rule”) on March 6 to facilitate shareholder activities of institutional investors ahead of the end of March season of annual general meeting of shareholders in Korea.
Background
Shareholder activities of institutional investors to exercise fiduciary duties according to the stewardship code and help enhance corporate value have been growing in importance as part of bringing about further advancement to the capital market.
Under the current capital market law, shareholding of 5 percent or more or a change of 1 percent or more thereafter and changes in the shareholding purpose should be reported to the FSC and the Korea Exchange (KRX) within five days of such changes taking place.
However, when the purpose of shareholding is not influencing corporate management, there are eased disclosure procedures (longer deadline and abridged form for reporting) available. In this regard, there have been legal uncertainties concerning what types of shareholder activities constitute the purpose of influencing corporate management, and there have been requests from institutional investors to provide clearer interpretations on this.
Key Details
a) Improving the culture of general shareholder meeting
A statutory interpretation is provided to clearly indicate that institutional investors’ shareholder activities aimed at improving the culture of general shareholder meetings, such as making a demand for early disclosure of agenda items and requesting detailed explanations on certain issues, do not constitute the purpose of influencing corporate management, insofar as the activities are not aimed at bringing about changes to the articles of incorporation.
In other countries, general shareholder meetings are often used as a venue where companies provide detailed explanations on agenda items to their shareholders and have active engagement and discussions for communication. In this regard, the statutory interpretation provided is expected to help transform general shareholder meetings in Korea to make them a venue for active communication and engagement between companies and their shareholders.
b) Treasury stock
With the recently revised Commercial Act going into effect from March 6 this year, all stock companies are required to cancel newly acquired treasury stocks within one year and existing treasury stocks within one year and six months from the day of the revised law taking effect. In this regard, a statutory interpretation is provided to indicate that shareholder activities making a demand for treasury stock cancellation or requesting the implementation of a treasury stock retention or disposal plan that was approved at a shareholder meeting do not constitute the purpose of influencing corporate management.
c) Dividend
Shareholder activities regarding dividends, which constitute an important part of corporate shareholder return policy, have already been excluded from the scope of influencing corporate management through a legislative amendment in January 2020. As such, a statutory interpretation is provided to clearly indicate that institutional investors are able to request compliance from companies with regard to their dividend policies and implementation plans and to help make their dividend payouts more predictable in line with the dividend related indicators stated in their corporate governance structure reports.
d) Executive compensation
Shareholder activities regarding executive compensation (and pay cap) are also excluded from the scope of influencing corporate management. The disclosure rules on executive compensation have been improved recently as companies will be required to disclose their total shareholder returns and operating profits alongside executive pays with enhanced transparency in the disclosure of restricted stock units (RSUs) as well.
In this regard, a statutory interpretation is provided to indicate that institutional investors are able to demand an explanation or request a comment from companies to ensure that corporate policies on executive compensation are drawn up appropriately.
Further Plan
The FSC plans to continue to provide support for institutional investors to make sure that they are able to actively exercise fiduciary duties. As part of this effort, in the first half of this year, the FSC will seek to revise the stewardship code that has remained largely unchanged since 2016. Moreover, the 2017 guidebook of statutory interpretations on the stewardship code will also be updated after looking into other areas where additional interpretations are necessary.
* Please refer to the attached PDF for details.