[Editorial] Concern over allowing institutions with stakes below 5% to join forces without disclosure

The Democratic Party of Korea is pursuing a plan to exempt institutional investors, including the National Pension Service, from the “5% large-shareholding reporting requirement” (the “5% rule”) even when they jointly exercise voting rights or solicit proxy votes. The aim is to invigorate shareholder activism by allowing institutions with small stakes to join forces to demand higher dividends and the appointment of independent directors. But concerns are growing in the business community that the measure could increase the risk of encroachment on corporate control, as well as the burden on companies of responding to pension funds and others getting involved in management.
Democratic Party lawmaker Kim Nam-geun introduced an amendment to the Capital Markets Act containing these provisions as lead sponsor on the 7th. Under current law, even institutions with stakes below 5% are deemed to jointly own shares if they exercise voting rights together, and must disclose their shareholdings within five days. The amendment excludes simple consultation or the delegation of voting rights from the 5% reporting requirement. In particular, it would exempt institutional investors from the requirement if they join forces and use shareholder proposals to recommend or appoint no more than two independent directors or audit committee members, without deeming this involvement in management. In effect, it would open the way for institutions with small stakes to act together and gain seats on boards without separate disclosure.
The business community warns that corporate control could become unstable if the amendment takes effect. As the Korea Listed Companies Association (KLCA) and others have pointed out, the “5% rule” is a key safeguard that transparently discloses the intentions of large shareholders, helping investors and companies prepare for changes in corporate control. It is not meant to block shareholder activism, but to ensure that it is conducted transparently and in the open. If the rule is relaxed, two shareholders each holding 4.9% could combine their voting rights to reach 9.8% without filing a report. It would be difficult to respond if they joined forces under the radar and suddenly sparked a control dispute.
The proposal also diverges from the systems of major countries abroad. According to the KLCA, the United States and Japan treat demands to appoint a specific person as an executive as involvement in management. Korea, by contrast, is seeking to exclude even the appointment of directors from that category. Korea also defines involvement in management more narrowly, limiting it to nine types of actions, compared with 15 in Japan, while the United States takes a broader view depending on the purpose and context. The United States, Japan and other countries aggregate shareholdings when there is a certain degree of concerted action, even if the parties do not jointly exercise their voting rights. Easing regulations in this way could increase the risk that activist funds and others exploit gaps in the system to threaten corporate control.
The problem would be compounded when combined with the “3% rule,” which limits the largest shareholder’s voting rights to 3% when audit committee members are appointed. Large listed companies have two audit committee members elected separately from the largest shareholder. Even if institutions with divided stakes joined forces without reporting and took both seats, this would not count as “involvement in management.” Corporate control and the stability of governance structures would inevitably be put at risk.
Shareholder activism by institutional investors under the stewardship code should be encouraged. But the process must not obscure market transparency or unilaterally undermine companies’ right to defend themselves. The National Assembly should revise the bill to allow collective actions that increase corporate value, such as raising dividends or retiring treasury shares, while requiring disclosure as under current rules when actions alter corporate governance, such as appointing directors.