Traditionally, foreign investors that acquired shares in Korean companies through indirect or strategic investment were not overly concerned with having direct management involvement, choosing instead to focus on investment returns and regulatory compliance.
However, this attitude is rapidly changing. Strategic foreign investors are becoming more assertive with regard to their rights as shareholders. Investors are increasingly concerned with the opaque management structures that exist in many conglomerates and are demanding more transparency and better corporate governance. This change in foreign investors' attitude is mirrored by growing public discontent with controlling family members of conglomerates managing these companies with little or no regard for minority shareholders' interests.
Other factors driving change include a rise in the number of foreign investors that hold large stakes in Korean blue-chip companies. As of June 17 2003, foreign owners held 54.2% of Samsung Electronics, 42% of SK Corp., 68.2% of Kookmin Bank and 63.3% of POSCO to name but a few examples. Some foreign investors have also emerged as major creditors of Korean companies by acquiring non-performing loans.
One recent case saw Senna Investment, an Ireland-based Goldman Sachs affiliate and a main creditor of Jinro (the largest distiller and vendor of traditional Korean liquor soju), exercise its creditor's right to demand the transparent reorganization of a Korean company. In 1998, Senna Investment became the largest creditor of Jinro by purchasing non-performing loans while Jinro was under a court-mediated debt-rescheduling programme.
When Jinro failed to meet the terms of its debt repayment schedule in early 2003, Senna petitioned the court to place the company under court receivership. Jinro resisted Senna's petition, arguing that Senna used insider information to purchase Jinro's shares and debts and indicating that it had been negotiating a capital injection from a foreign investor. On May 14 2003, the Seoul District Court ruled in favour of Senna. This court ruling marks the first time that a foreign creditor has forced a Korean company into court receivership.
UK-based fund Hermes Investment Management holds a 0.7% shareholding in SK Corp., Korea's biggest oil refiner and de facto holding company of the nation's third largest conglomerate. Hermes recently filed a petition for a court injunction to prevent three SK Corp. directors who were "specially related" to the parent company SK Group from voting in a board meeting to approve a rescue plan for heavily indebted SK Corp affiliate company SK Global. Although the other board members later approved the rescue plan, Monaco-based Sovereign Asset Management, another foreign shareholder of SK Corp., demanded the resignation of the "specially related" directors.
Sovereign became the largest shareholder of SK Corp. by purchasing a 14.99% stake in April 2003. Sovereign has since announced that it plans to gain profits from the investment by enhancing shareholder value and making SK Corp. a model corporate governance case in Korea.
Many observers have interpreted this statement as indicating Sovereign's willingness to take control of the oil refiner. Some people have even floated the possibility of the first-ever hostile takeover by a foreigner of a large Korean company. In August 2003, Sovereign is expected to complete the six-month holding period required before minority shareholders' rights can be statutorily exercised.
While the Korean business community remains concerned about foreign investors actively participating in company management, the government's current policy of promoting reform and better corporate governance of the nation's conglomerates has created an environment that lends itself to greater involvement by foreign investors.
Yoon & Yang
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