Shareholder Activism in Korea: A Guide for Foreign Funds

Introduction

Korea's corporate governance landscape is undergoing a historic transformation. Long criticized for the so-called "Korea Discount" --- the persistent undervaluation of Korean equities relative to global peers --- the market is now seeing unprecedented momentum toward shareholder-friendly reforms. For foreign funds considering activist strategies in Korea, the timing has never been more favorable.

This guide provides a practical overview of shareholder activism in Korea, covering the legal framework, recent reforms, and actionable strategies for foreign institutional investors.

The Korea Discount and Why It Matters

Korean listed companies have historically traded at significant discounts to comparable firms in Japan, Taiwan, and the West. Analysts attribute this to:

• Complex chaebol ownership structures that prioritize controlling shareholders over minority investors
• Weak dividend payout ratios compared to global averages
• Limited board independence and insufficient oversight of related-party transactions
• Opaque capital allocation decisions that destroy shareholder value

For activist investors, the Korea Discount represents both a challenge and an opportunity. The valuation gap creates attractive entry points, while growing regulatory and social pressure for reform provides a catalyst for value realization.

The Value-Up Program

Launched in 2024, the Korean government's Corporate Value-Up Program represents the most significant governance reform initiative in a generation. Modeled in part on Japan's successful corporate governance reforms, the program:

• Encourages listed companies to develop and disclose voluntary value enhancement plans
• Introduces a Korea Value-Up Index tracking companies that adopt best practices
• Provides tax incentives for companies that increase dividends and share buybacks
• Promotes board independence and improved capital allocation transparency

The Value-Up Program has shifted the narrative in Korea. Companies that ignore shareholder value now face reputational and market consequences, creating a more receptive environment for activist engagement.

Minority Shareholder Rights Under Korean Law

Korean commercial law provides minority shareholders with several powerful tools:

Shareholder Proposal Rights

Shareholders holding 1% or more of listed company shares (or 0.5% for companies with capital exceeding ~$75 million) can submit shareholder proposals for inclusion on the AGM agenda. Proposals can cover:

• Board member nominations
• Dividend policy changes
• Executive compensation reform
• Amendments to the articles of incorporation

Inspection Rights

Shareholders holding 3% or more can request inspection of the company's books and records. This is a critical tool for building an activist case based on evidence of mismanagement or self-dealing.

Derivative Action (Shareholder Lawsuits)

Shareholders holding 0.01% or more of listed company shares can bring derivative lawsuits on behalf of the company against directors for breach of fiduciary duty. Recent reforms have lowered this threshold, making litigation a more accessible tool.

Right to Convene Extraordinary General Meeting

Shareholders holding 3% or more can demand the convocation of an extraordinary general meeting, enabling activist investors to force votes outside the regular AGM cycle.

Cumulative Voting Rights

Unless the articles of incorporation exclude it, shareholders can request cumulative voting for director elections, giving minority shareholders a better chance of electing board representatives.

The National Pension Service and Stewardship

The National Pension Service (NPS), Korea's largest institutional investor with assets exceeding USD 800 billion, adopted the Korea Stewardship Code in 2018. This was a watershed moment. The NPS now:

• Actively votes against management proposals it deems harmful to shareholder value
• Opposes director reappointments at companies with poor governance records
• Publicly discloses its voting rationale

The NPS's shift toward active ownership has emboldened other institutional investors and created a more supportive environment for foreign activist campaigns. When a foreign fund's governance proposals align with NPS voting policy, the probability of success increases significantly.

Recent Activism Cases in Korea

Several high-profile activism campaigns have demonstrated the viability of shareholder engagement in Korea:

• Chaebol restructuring campaigns: Foreign funds have successfully pressured major conglomerates to simplify holding structures, increase dividends, and improve disclosure
• Board composition challenges: Activist investors have won board seats at mid-cap Korean companies by leveraging cumulative voting and shareholder proposals
• Dividend policy activism: Campaigns demanding higher payout ratios have gained traction, particularly at cash-rich companies with no clear use for retained earnings
• M&A opposition: Foreign funds have blocked value-destructive related-party mergers by rallying minority shareholder votes

These cases demonstrate that activism in Korea can succeed, particularly when campaigns are well-structured and supported by strong legal counsel.

Practical Considerations for Foreign Funds

Regulatory Compliance

Activist investors must comply with Korea's 5% large shareholding disclosure rules, including accurate classification of holding purpose. Filing as a "passive" investor while pursuing an activist agenda creates significant legal risk. See our detailed guide on the 5% rule for more information.

Cultural Sensitivity

Activism in Korea requires a different approach than in the US or Europe. Aggressive public campaigns can backfire. Successful foreign activists in Korea typically:

• Begin with private engagement before escalating publicly
• Frame proposals in terms of long-term value creation, not short-term extraction
• Build coalitions with domestic institutional investors
• Respect Korean business culture while firmly advocating for shareholder rights

Timing Around AGM Season

Most Korean companies hold their AGMs in March. Shareholder proposals must be submitted well in advance. Proxy solicitation requires careful planning, including compliance with Korea's proxy rules and coordination with custodian banks holding foreign investor shares.

Language and Documentation

All shareholder proposals, proxy materials, and regulatory filings must be prepared in Korean. Accurate translation and localization are essential.

How Korea Business Hub Can Help

Our team has deep experience supporting foreign institutional investors in Korean shareholder activism campaigns. We provide:

• Regulatory compliance support, including 5% disclosure and proxy filings
• Shareholder proposal drafting and AGM preparation
• Strategic advisory on engagement approach and coalition building
• Derivative action and litigation support when necessary
• Real-time AGM representation and voting coordination

Whether you are considering your first activist position in Korea or expanding an existing campaign, contact our equity services team to discuss your strategy.