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Shareholder voting reform wreaks havoc

No ‘shadow voting’ means companies cannot make a quorum
Feb 23,2018
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A cosmetic company called ACT called on an extraordinary shareholder’s meeting on Feb. 13 to execute a stock split, but it failed to put the agenda to vote due to the lack of a quorum.

A decision to split the company’s stock requires two thirds of the shares in attendance and one third of the entire stocks with voting rights. But the shares of attendees only accounted for 28 percent of total voting shares, which came short of the requirement.

In the past, many listed companies counted on “shadow voting,” or mirror voting, which refers to a proxy voting procedure exercised by the Korea Securities Depository where the result of a vote at the shareholders meeting is extrapolated across all shareholders in order to meet minimum voting requirements.

The end of shadow voting last year, however, has put listed companies on edge as many firms will likely face trouble meeting quorum at shareholders’ meeting without the scheme.

First introduced in 1991, the alternative voting system was widely popular. After the main bourse Kospi reached the 1,000 milestone in 1989, the stock market was quickly absorbing a wide base of retail investors and the listed companies often found it hard to achieve quorum.

But authorities decided to remove the measure in 2013 because the procedure was blamed for undermining minority shareholder’s rights and handing more influence to top shareholders.

Following a grace period that ended at the end of 2017, this is the first year that companies cannot use shadow voting, and the vast majority of listed units are required to hold an annual shareholders meeting by March.

The companies hit hardest by the shift will be those that have a large number of shareholders that each hold small amounts of stock, especially when they need to decide on special issues such as mergers and acquisitions and a share split. The quorum for those decisions is generally one third of the entire voting stock, though appointing directors only requires 25 percent.

The trickiest part happens when companies appoint an auditor. Since the law limits top shareholders’ voting rights to 3 percent, more shareholders are required to vote, either in person or by proxy.

“After shadow voting was abolished, it became really hard to meet the required shareholder votes,” said a source at ACT. “It will be harder when we need to choose an auditor.”

If a company fails to appoint an auditor it will face up to 50 million won ($46,000) in fines and be put on a watch list by the Korea Exchange.

The Korea Listed Companies Association, a group representing listed stock companies, expects 516 firms to struggle to choose an auditor for the next three years because of the change.

The association lodged an appeal with the Ministry of Justice, asking that the rule is relaxed when it comes to appointing an auditor.

“[The rule] is a strict corporate regulation that is not found in any other countries and violates the principle of shareholder equality,” the group said in a statement.

The financial regulators - the Financial Services Commission and Korea Exchange - see electronic voting as a solution to address the absence of shadow voting.

To promote the use of mobile and online voting, the Korea Securities Depository is offering gift certificates worth 5,000 won to users of the digital service.

Despite the efforts, companies and investors have not actively adopted electronic voting. Currently, 46 percent of Kospi-listed companies and 64 percent of Kosdaq companies use the electronic voting system. But the rate of voting on the system is dramatically lower, at 0.21 percent of all investors.

On the investor side, one issue with electronic voting is the use of a complex public authentication system for shareholders to register to vote.

Some experts called on the regulator to lift the quorum requirement as it would take some time for electronic voting to be widely accepted.

“Many countries including Japan don’t have specific rules about quorum,” said Choi June-sun, a law professor at Sungkyunkwan University.

“We need to remove the 25 percent and one third rules and leave it to the decision of attending shareholders,” he said.

A bill to delay the abolishment of shadow voting was proposed at the National Assembly but failed to pass.


BY JOO JEONG-WAN, LEE HYUN, AND PARK EUN-JEE [park.eunjee@joongang.co.kr]