Listed firms push back against easing of 5% shareholding disclosure rule

Korea Listed Companies Association submits objections to National Assembly, FSC, citing disclosure blind spots

Bill would exclude joint voting pacts without command ties from combined stake calculations

Independent director, auditor appointments also removed from 'management participation' definition

The Korea Exchange's Yeouido office in Yeongdeungpo-gu, Seoul [Korea Exchange]

Listed companies have come out against a proposed amendment to the Capital Markets Act aimed at encouraging institutional investor shareholder activism, warning the bill could create blind spots where stakes exceeding 5 percent move in concert without triggering public disclosure.

The Korea Listed Companies Association submitted its objections to the National Assembly's Political Affairs Committee and the Financial Services Commission on Thursday over a bill sponsored by Democratic Party of Korea lawmaker Park Hong-bae.

Under the existing "5 percent rule," any person and their specially related parties must report their combined stake, along with the purpose of the holding, once it reaches 5 percent or more in a listed company. Shareholders who agree to buy or sell shares jointly, or to exercise voting rights together, are also treated as "joint holders" and their stakes are aggregated.

Institutional investors have long argued the standard constrains legitimate shareholder activity. They say investors can be classified as joint holders simply for expressing the same view on a specific agenda item at a general meeting or for soliciting proxy votes — and that having to report a stake of 5 percent or more held for management participation purposes within five business days quickly exposes their investment targets and ownership levels.

The amendment seeks to ease these constraints by narrowing the definition of joint holders. Merely agreeing to exercise voting rights together would no longer be sufficient to trigger stake aggregation; the bill would require one party to have the authority to direct the other's voting before they are treated as joint holders. Public proxy solicitations would also in effect be excluded from the definition of exercising control.

The Korea Listed Companies Association said the amendment could allow investors to sidestep the 5 percent reporting requirement. Two investors each holding 4.9 percent who agree to vote together would not have their stakes combined under the bill, as long as neither has authority to direct the other. That means they could exercise 9.8 percent of voting rights while remaining outside the 5 percent disclosure threshold.

"Even now it is difficult to know whether shareholders have agreed to exercise voting rights jointly, but if the amendment takes effect, they would be removed from the scope of regulation entirely, creating a gap," an association official said. The association also warned that so-called "wolf pack activism" — where multiple investors coordinate without any command-and-control relationship, dividing up a stake and voting together — could produce the same problem.

An investor relations official who has worked at multiple listed companies echoed the concern. "Companies cannot continuously track who is buying shares — they check ownership when the shareholder register is released," the official said. "Without the 5 percent report, it would be very hard to detect in advance whether multiple shareholders are moving in coordination."

The association also objected to the bill's narrowing of what constitutes "management participation." The amendment would replace the current standard — "the purpose of influencing the issuer's management rights" — with "the purpose of exercising de facto control over major management matters," and would exclude the appointment of independent directors, auditors and audit committee members from the definition of management participation.

The association argued that appointing independent directors and auditors affects a company's decision-making and oversight, and should therefore remain within the definition of management participation. It pointed to international practice as support, noting that Japan defines management participation activities across 15 categories — broader than Korea's nine — and that the United States also treats demands for director appointments as management participation.

"We are concerned that both the scope of joint holders and the definition of management participation are being narrowed at the same time," an association official said. "Shareholders are of course entitled to act on their rights, but information about who is involved in a company's management is something other investors also need to know." The official added: "Shareholders should be free to engage in activism — but they should disclose it when they do."

hajun825@heraldcorp.com