"Demanding Cancellation of Treasury Shares Is Not an Infringement of Management Control" – FSC to Ease the 5% Reporting Rule for Institutional Investors

[Financial News] The financial authorities have moved to support more active shareholder engagement by institutional investors by clarifying what constitutes a "purpose of influencing management control" under the 5% reporting rule for large shareholdings. The FSC indicated that, in principle, activities such as requesting earlier notice of a general meeting of shareholders, calling for the cancellation of treasury shares, or asking for an explanation of the basis for calculating executive pay will not be regarded as attempts to influence management control. Through this measure, the authorities aim to help institutional investors fulfill their fiduciary duties and to encourage listed companies to enhance their corporate value.
On the 6th, the Financial Services Commission (FSC) issued a legal interpretation on the scope of shareholder activities under the Financial Investment Services and Capital Markets Laws and Regulations so that institutional investors can engage in shareholder activities without legal uncertainty. The key point is that the FSC has specified the scope of ordinary investment, for which reporting procedures are simplified, within the reporting obligations that apply when an institutional investor holds 5% or more of a company’s shares under the 5% reporting rule.
The FSC excluded activities aimed at improving the culture around general meetings of shareholders from the category of actions taken for the purpose of influencing management control. This includes requesting that a notice convening the general meeting be sent four weeks in advance, asking the company to introduce electronic voting, and demanding more detailed explanations from directors on agenda items. However, this exclusion applies only where such activities do not involve amendments to the articles of incorporation concerning the company’s governing bodies, such as the board of directors.
In addition, under the amended Commercial Act of the Republic of Korea that took effect on the same day, all joint-stock companies must cancel newly acquired treasury shares within one year, and must cancel existing treasury shares within one year and six months from the effective date of the law. The FSC interpreted that when an institutional investor asks a company to cancel its treasury shares, or requests the implementation of an already approved plan for holding or disposing of treasury shares, such actions also do not constitute activities for the purpose of influencing management control.
The FSC further clarified that shareholder activities related to executive remuneration are likewise not considered to have the purpose of influencing management control. In connection with the Enhanced Executive Remuneration Disclosure Regime that will take effect in May, institutional investors will be allowed to request explanations on whether the company’s executive pay limits or policies are appropriate in light of corporate performance, including Total Shareholder Return (TSR), or to submit written opinions on the matter.
Until now, institutional investors have been concerned that submitting shareholder proposals and similar actions could be deemed attempts to influence management control, thereby increasing their disclosure burden, such as having to file detailed reports within five days under the 5% reporting rule. In response, the FSC plans to follow up this legal interpretation by revising Korea’s stewardship code, which has remained unchanged since it was introduced in 2016, within the first half of this year. The FSC also intends to update the compilation of legal interpretations that was first published in 2017.

elikim@fnnews.com Reporter Kim Mi-hee Reporter