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Legislation proposed to foil activist hedge funds

May 17,2018
Groups representing public companies in Korea called for measures to prevent hostile takeovers or assertive actions by activist hedge funds Wednesday amid an intensifying battle between U.S. hedge fund Elliott Management and Hyundai Motor.

The Korea Listed Companies Association and KOSDAQ Listed Companies Association urged the government to embrace defensive measures such as poison pills and to repeal a rule limiting the voting rights of top shareholders to 3 percent.

“Korean companies tried to improve their corporate governance in a voluntary manner…But some activist investors keep threatening and interfering with management,” the associations said in a joint statement.

The Korea Listed Companies Association has companies on the main Kospi bourse as members while KOSDAQ Listed Companies Association represents firms on the tech- and bio-heavy junior index.

They went on to advocate two defensive tactics - poison pills and a dual-class shareholder structure.

A “poison pill” strategy makes a hostile takeover financially prohibitive by allowing shareholders, except for the acquirer, to purchase shares at a discount. A dual-class shareholder system refers to a structure of different types of shares with varying voting rights. Typically, founders of a company are entitled to own shares with higher voting rights.

The demands are in line with a bill proposed by Rep. Yoon Sang-jick of the opposition Liberty Korea Party on Tuesday aimed at introducing the two measures. The National Assembly has rejected similar proposals in the past out of concerns that they will be exploited by families that control big business groups through very small stakes.

“We’ve worked with Yoon to come up with the bill,” said Lee Jae-hyuk, head of public relations for the Korea Listed Companies Association.

“To push forward the bill, we will reach out to other lawmakers to convince them,” he said.

The associations pointed to the previous cases in which activist hedge funds attempted to shake up the management of Korean companies.

A subsidiary of Sovereign Asset Management, Crest Securities Limited of Monaco, amassed a 15 percent holding in SK Corporation in 2003. After becoming the single largest shareholder of the SK affiliate, Sovereign began agitating for changes in management, including the resignation of Chairman Chey Tae-won and other board members.

Another example is U.S. investor Carl Icahn forcing changes at KT&G, the country’s big tobacco and ginseng firm, in 2006.

Meanwhile, the fight between Hyundai Motor and Elliott is intensifying after two major U.S. proxy advisers urged investors to reject the company’s plan to revamp its corporate governance structure.

Glass Lewis and Institutional Shareholder Services came out with their recommendations against the move on Tuesday, saying that the plan would not favor minority shareholders of Hyundai Mobis.

They added that the deal would undervalue the shares of Hyundai Mobis and said a strategy for the merger of one of its divisions and Hyundai Glovis is unclear.

Foreign investors consult the proxy institutions’ recommendations when voting at shareholder meetings.

Elliott is also against the structural change in which Hyundai Motor Group will spin off its module and after-sales service businesses from Hyundai Mobis and merge the division with Hyundai Glovis.

Hyundai Motor and its affiliate Hyundai Mobis refuted the advisers’ stance, saying that the proposal will strengthen the interests of Hyundai Mobis shareholders.

“The change in corporate governance will benefit the shareholders of Hyundai Mobis,” Hyundai Motor said in a statement, “since the plan will enable the affiliates to bolster value chains and specialize in their businesses.”

As for the merger ratio between the Mobis division and Glovis, Hyundai Motor said that Mobis shareholders can benefit.

“In accordance with the ratio of 1:0.6, existing Mobis shareholders will also receive shares of Glovis,” Hyundai Motor said, “Let’s say a shareholder has 100 shares in Hyundai Mobis, then the shareholder would get 79 shares in Mobis and 61 shares in Glovis under the plan. That gives additional profits to Mobis shareholders when calculated with the current market prices.”

The company also accused the U.S. advisers of ignoring Korean regulations on cross holdings and capital market laws.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]