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(News Focus) Commercial act revision, a necessary change or risky revenge?

All Headlines 15:49 February 22, 2017

By Byun Duk-kun

SEOUL, Feb. 22 (Yonhap) -- South Korea's opposition parties are seeking to change the country's commercial act through a revision that they say will allow better and proportionate representation of small shareholders, but one that many others believe is aimed at punishing large shareholders at the expense of all the rest.

The opposition-proposed revision largely seeks to limit to 3 percent the voting rights of the largest shareholder when electing new auditors.

This, if enacted, will help ensure independence of company auditors, especially from large shareholders who, at least in South Korea, often enjoy disproportionately great control over their firms.

Those pushing for the revision insist such independent company officials will help protect the interest of small shareholders while checking and balancing the power of company owners, known here as chaebol.

Chaebol refer to family-run conglomerates, in which families of those who have founded such firms occupy top managerial posts, and thus control the firms, often with a considerable amount, but rarely a controlling amount, of stakes arranged in cross-shareholding schemes.

Local economists and market experts hold a special forum in Seoul on Feb. 15, 2017, to discuss the possible effect of an opposition-proposed revision to the commercial act that would limit the voting rights of large shareholders in local businesses. (Yonhap)

The revision also seeks to require cumulative voting in election of new board members where shareholders will be given multiple, proportionate number of votes, allowing small shareholders to elect one or more of the board members of their choice should they join forces.

The main opposition Democratic Party and two splinter opposition parties earlier vowed to push the revision through the opposition-controlled National Assembly before the end of this month.

Their joint efforts are now facing strong objections from the ruling Liberty Korea Party, but observers believe the opposition parties may try to vote on the revision as early as next Thursday.

The problem, according to many local experts, is that there have not been enough discussions on what good the envisioned changes to commercial codes will do, or even if they may bring evil instead.

"Limiting the voting rights of large shareholders to 3 percent is unprecedented and unheard of throughout the world, while only three countries -- Russia, Mexico and Chile -- currently require cumulative voting in corporate elections," said Kim Yun-kyung, a fellow researcher at the Korea Economic Research Institute (KERI), a private think tank run by the Federation of Korean Industries.

Kim said there have been efforts to introduce such measures in South Korea at least since the 1997 Asian financial crisis, when chaebols and their controlling families were blamed for the collapse of many conglomerates here by making not only bad, but also unwarranted and often illegal business decisions that served only their own interests.

Many legal revisions, such as a ban on cross-shareholding among subsidiaries, have since been made to keep the power of large shareholders proportionate to their stakes in a firm, but the changes that are now sought by the opposition bloc have never been enacted, she noted.

"A law is not easy to make. But it is even harder to change it once it is made. And there clearly is a reason why those provisions had not been legislated despite many attempts and discussions at least since 1997," she said.

(News Focus) Commercial act revision, a necessary change or risky revenge? - 2

To Shin Seok-hoon, a senior researcher from KERI, evils of such provisions are far greater than the good they will do.

Under the opposition-proposed revision, the voting rights of the largest shareholders and their local allies, including local institutional investors, will each be limited to 3 percent when electing a new auditor, while those of foreign investors and hedge funds will not be subject to such restrictions.

This will leave most local firms vulnerable to profiteering or even hostile take-over attempts by hedge funds, Shin noted in an earlier report.

For instance, U.S. billionaire Carl Icahn was allowed to name a board member of South Korea's market dominant tobacco and ginseng company KT&G in 2006 with only a 5.26 percent stake in the company, which at the time had a cumulative voting system.

Eventually, the U.S. billionaire walked away with a 148 billion won (US$129.7 million) profit after his attempt to purchase the South Korean firm in a hostile take-over failed, according to the report.

"Hedge funds are already employing a tactic where they will purchase the minimum amount of stake in a company that will allow them to name new board members, who will then demand the company sell its key assets or businesses, which will in turn lead to a rise in stock prices and allow those hedge funds to cash in their gains," Shin said.

Should the opposition-led revisions be enacted, hedge funds are expected to be allowed to name new board members or auditors in at least four out of 10 largest conglomerates here, including Samsung Electronics Co., according to the report.

Independent lawmaker Jeong Kab-yoon (third from R) holds a press conference at the National Assembly in Seoul on Feb. 14, 2017, expressing his opposition to an opposition-proposed revision to the commercial act, saying the revision will change the law for the worse. (Yonhap)

Many also expressed concerns that the latest and ongoing opposition efforts to legislate the revision may have been prompted by blind anger aimed at large conglomerates currently implicated in a corruption scandal that has led to the impeachment of President Park Geun-hye.

Samsung Electronics and some 50 other companies have been found to have provided nearly 80 billion won in donations to two sports organizations established and controlled by the president's close friend Choi Soon-sil.

Samsung Electronics vice chairman Lee Jae-yong has been arrested after a special prosecution investigating the scandal and a local district court decided part of the money the company donated to the sports foundations could have been bribes offered to the president and her friend in exchange of support for a merger between two Samsung affiliates from the national pension fund that had significant amounts of stakes in the Samsung affiliates.

The merger, believed to be aimed at strengthening Lee's control over his father's entire group, did go through after the state-run pension fund voted in favor, allegedly at an order from the president herself.

"Of course, chaebols are to blame because they themselves prompted this ongoing move by the political circle to restrain them," Kim, the research fellow from KERI, said.

Others, however, say the opposition-led revision, despite its good intentions, may create an adverse or deadly effect for many.

"I am afraid it might become a case of killing a cow while trying to straighten its horns" Park Yong-maan, president of the Korea Chamber of Commerce and Industry, has said.


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