As a task to advance the capital market, the need for institutional investors to work to raise corporations' value and to faithfully carry out shareholder activities based on the "Stewardship Code (principles of fiduciary duty for institutional investors)" has been continuously raised.
In response, the Financial Services Commission said on the 6th that it has provided a legal interpretation of the scope of shareholder activities applicable when filing reports such as large holdings (the 5% rule) so that institutional investors can actively engage in shareholder activities. It will also push to revise the Stewardship Code in the first half of this year.
Under the Financial Investment Services and Capital Markets Act, a person who holds a large number of shares must report to the Financial Services Commission (FSC) and the Korea Exchange (KRX) within five days from the day the shareholding ratio reaches 5% or more, or thereafter when the holding ratio changes by 1% or more or the purpose of holding changes.
If the purpose of holding equity is not "influencing control," special exceptions such as relaxed disclosure deadlines and simplified reporting procedures apply. However, the industry has long requested that the scope of shareholder activities eligible for these exceptions be clarified, citing legal uncertainty over whether they influence control.
The Financial Services Commission (FSC) guided its legal interpretation on this largely in four areas: ▲ improving general meeting culture ▲ treasury shares ▲ dividends ▲ executive compensation.
First, activities related to improving the culture of general meetings of shareholders—such as requesting early disclosure of agenda items to exercise voting rights or asking for explanations on specific details—do not constitute a purpose of influencing control. However, exceptions apply when the content involves amendments to the articles of incorporation related to corporate bodies such as the board of directors.
An official at the Financial Services Commission (FSC) said, "Overseas, companies explain agenda items in detail to shareholders at general meetings, and discussions are active," and added, "We hope that, in Korea as well, general meetings will be reborn as a forum for information exchange between companies and shareholders, spurred by this interpretation."
Under the recently amended Commercial Act, when any stock corporation newly acquires its own shares, it must cancel them within one year, and existing holdings must be canceled within one year and six months from the law's effective date. In this regard, the Financial Services Commission (FSC) said that requesting the cancellation of treasury shares or asking for the implementation of a treasury share holding and disposal plan approved by the general meeting of shareholders is unrelated to influencing control.
For dividends, cited as the most important element of shareholder return policies, they were already excluded from items related to influencing control by the 2020 amendment to the Enforcement Decree of the Financial Investment Services and Capital Markets Act. Through this legal interpretation, the Financial Services Commission (FSC) additionally specified that requests to enhance predictability related to cash dividends, to notify at least once a year the dividend policy and plans to pay dividends, and to comply with key dividend indicators in the corporate governance report are not for the purpose of influencing control.
Lastly, it also provided guidance on executive compensation (limits). While shareholder activities on executive compensation are currently excluded from the purpose of influencing control, improvements to related disclosure systems mean total shareholder return and operating margin will be disclosed alongside executive compensation. Disclosure related to restricted stock units (RSUs), among others, will also be strengthened starting in May.
The Financial Services Commission (FSC) reflected in its legal interpretation that it is also permissible, without relation to influencing control, for institutional investors to request explanations from companies or ask for dialogue so that appropriate executive compensation policies can be established by analyzing the relationship between executives' pay and company performance.
The Financial Services Commission (FSC) plans to continue supporting active fiduciary duty activities by institutional investors and will push to revise the Stewardship Code in the first half of this year. An FSC official said, "We also plan to supplement the legal interpretation compendium of the Stewardship Code distributed in 2017, and, in addition to this interpretation, we will identify and reflect items that require further legal interpretation."