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Corruption Asia

Corruption Asia

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Published by Vinh Tran

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Published by: Vinh Tran on Apr 29, 2012
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Voting Rights and Practices

Under the Commercial Code, corporations cannot issue common shares
without voting rights. One common share should have one vote. Preferred
shares can be nonvoting and issued up to one quarter of the total number of
shares. About one fifth of the listed firms issued nonvoting preferred shares.
The Korea Securities Depository can exercise the voting rights of
shares left thereto by the investors (beneficial owners) if the owner of the
share does not indicate his or her intention to vote personally. However, the
Depository is subject to “shadow voting,” meaning that it should divide its
votes in accordance with the accept/reject ratio of votes cast by other share-
holders attending the shareholders meeting. Thus, the only purpose of allow-
ing the Depository to vote was to help listed companies to meet the quorum
requirement for the general shareholders meeting. However, voting by the
Depository can influence the outcome of votes because an “ordinary resolu-
tion” of the general shareholders meeting requires a majority of the votes
attending and one quarter of total votes outstanding. A “special resolution”
requires two thirds of the votes attending and one third of total votes out-
standing. Approval of mergers and major divestitures, charter amendments,
and dismissal of directors and internal auditors require a “special resolution.”
The survey shows that the Korea Securities Depository holds
69.21 percent of total shares issued. A total of 326 shareholders per firm, or
10.79 percent of the shareholders, attended the last annual general meeting,
representing 62.77 percent of the shares. The Depository represented
20 percent of the shares attending the meetings. The above results indicate
that, in general, small shareholders do not attend the annual meeting and that,
for some firms, the Depository is instrumental in getting resolutions passed.
About 100 shareholders per firm voted by proxy at the last annual
general meetings (of the 40 firms answering the relevant questions). These
voters represented only 5.93 percent of the shareholders but 26.53 percent
of the total shareholdings. This shows that a relatively larger number of
shareholders send in their proxies. The management is the most important
proxy. The securities companies and banks are the second and third, respec-
tively. Citizens’ coalitions sometimes solicit proxies in order to file law-
suits against a management. No companies have so far introduced voting
by mail, Internet, or telephone.
Under the Commercial Code, amendments of the articles of incor-
poration require a “special resolution.” Companies can increase the number

104Corporate Governance and Finance in East Asia, Vol. II

of votes required for a resolution to amend the articles. Changes in the
authorized capital require an amendment of the articles of incorporation.
However, the board of directors decides on issues of shares within the limit
of the authorized capital. Shareholders have preemptive rights, but these
can be waived by an amendment of the articles of incorporation.
Proposals put forward by management are rarely rejected at the
general meetings. Only two out of 62 respondents to this question have had
cases in which proposals were rejected. Those that are most likely to be
rejected relate to election of directors, dividend proposals, mergers and ac-
quisition plans, and major investment projects (only five firms answered
this question). In four out of 62 respondents, the annual general meeting
passed a resolution that was not proposed by the management nor the board
of directors but rather by shareholders.

Shareholder Protection

Before the economic crisis, laws and regulations were generally very loose
in protecting the rights of minority shareholders. Various measures have
since been taken to improve investor protection. In February 1998 and again
in March, the Securities and Exchange Act was revised to lower the repre-
sentation requirement for shareholder derivative suits from 1 to 0.01 per-
cent. For recommendations for dismissal of directors and internal auditors,
the requirement was lowered from 1 to 0.5 percent, and for access to un-
published accounting books and records, from 3 to 1.0 percent.
Due to the changes in rules for investor protection, an activist citi-
zens’ coalition has brought shareholder derivative suits against several large
listed firms. The charges included self-dealing by a controlling shareholder
and unfair subsidization of affiliated companies by a chaebol firm. This
citizens’ coalition actively contacted the management of selected compa-
nies and negotiated measures to protect shareholders. It also attended the
shareholders meeting of several companies to present the views of outside
shareholders, demand changes in business policy, or block charter amend-
ments considered harmful to minority shareholders. This coalition also at-
tempted to cooperate with domestic and foreign institutional investors to
find their way into general shareholders meetings.
As an example, the Tiger Fund, an institutional investor based in
the US, was able to force a change in the charter of SK Telecom. The amend-
ment included a provision requiring the company management to get prior
approval of shareholders to undertake major investments and raise capital
in international markets. The company also agreed to the right of the fund

Chapter 2: Korea105

to recommend two directors to the corporate board. This was one of the
most significant developments with respect to shareholder activism in the
Korean capital market.

After the economic crisis, controlling shareholders have become
more susceptible to liability claims by other (minority) shareholders. This
has strengthened the accountability of controlling shareholders as de facto
CEOs. The Commercial Code has a new clause that regards the controlling
shareholder as a de facto director if he or she uses personal influence to
affect business decisions of the management. The Code has also been
amended to state more clearly the fiduciary duty (of care and loyalty) of the
management. Before the amendment, managers were considered to be sub-
ject to the duty of care, but it was not entirely clear whether they had the
duty of loyalty as well.

For further protection of investors, the Government had for some
time pushed for the enactment of class action suits on false statements
and omissions in disclosure materials. However, it now appears that it has
backed away from its earlier efforts to introduce legislation on class ac-
tion suits.

The laws and regulations of the country protect shareholders from
interested transactions, affiliated lending or guarantees, loans to directors,
mergers and acquisitions, and transactions with major shareholders. These
have to be disclosed under the Securities and Exchange Act or approved by
shareholders under the Commercial Code and other laws.

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