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Hanjin Group Chairman Cho Yang-ho, who is currently under investigation for embezzlement, professional misconduct and fraud, heads to the Seoul Southern District Court for questioning on July 5. (Kim Seong-gwang, staff photographer)
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First instance of S. Korean activist fund taking part in chaebol management
While the South Korean public’s attention was focused on revelations of fraudulent accounting at Samsung BioLogics, another significant event occurred in the domestic capital market. For the first time in history, a South Korean activist fund threw down the gauntlet with an announcement of plans to take part in a chaebol group’s management. The organization in question was the private equity fund management company Korea Corporate Governance Improvement (KCGI). Created by former LK Partners CEO Kang Sung-bu – considered by the securities community as one of the leading experts on corporate governance structures – KCGI acquired the shares of Hanjin KAL, parent company of Korean Air. A holding company for the Hanjin Group, Hanjin KAL announced on Nov. 15 that the KCGI-created special purpose entity Grace Holdings possessed a 9% share as of Nov. 14. KCGI became the second-largest shareholder after the category of special relations (28.95%), including Hanjin Group Chairman Cho Yang-ho. Hanjin KAL owns a 29.96% share of Korean Air and a 60% share of Jin Air. Explaining the reasons for its acquisition of the shares, KCGI explained, “While we do not have detailed plans for each item in Article 154-1 of the enforcement decree of the Financial Investment Services and Capital Market Act, we plan to consider actions to conform to company management purposes in accordance with the scope and methods allowed by related laws in the event of future matters related to the company’s operations.” Article 154-1 of the Financial Investment Services and Capital Market Act enforcement decree encompasses a majority of management activities including the appointment and dismissal/suspension of executives, changes to the board’s articles of association, decisions on company dividends, and mergers and demergers. Although it has not yet stated what it intends to do, the private equity fund KCGI plans to be a part of the Hanjin Group’s management. It marks the first time a domestic fund has taken on a chaebol in this way. In the past, the only activist funds that have made shareholder proposals or threatened management rights for major domestic corporations have been overseas companies like Elliott and Sovereign. Observers in the securities world said KCGI picked a better time than the past to challenge Cho Yang-ho. The bad behavior of executives who were able to take on their positions simply because of their family relationship to him has emerged as a major social issue – including an incident early this year involving his daughter, Emily Cho Hyun-min, former Korean Air senior vice president, throwing a cup of water at an employee, and accusations of verbally and physically abusive behavior by his wife, Lee Myung-hee, former Ilwoo Foundation director. “In addition to the societal attention it has received with the candlelight demonstrations calling for its managers’ resignation and the issues involving the ruling family, Hanjin KAL is also company that has been subject to ongoing calls for group governance structure reorganization,” said eBEST Investment and Securities analyst Song Chi-ho. The fact that the fund is South Korean also means Hanjin Group cannot resort to patriotic marketing campaigns. On Nov. 14, the Ministry of Land, Infrastructure and Transport (MOLIT) announced plans for institutional improvement to the airline industry, including stripping airlines of their eligibility to request new traffic rights for a period of up to two years in the event of social controversies caused by their executives’ behavior. The new system would increase the likelihood of problematic executives being switched out – if only to protect company and shareholder profits. KCGI likely to push for replacement of the board KCGI appears to have taken full advantage of the situation. Other Hanjin KAL shareholders include the National Pension (8.35%), Credit Suisse (5.03%), and Korea Investment Management (3.81%). Both the National Pension and KIM are already signed on to the stewardship code. The securities community is now predicting KCGI will attempt to push for a replacement of the board at next year’s general shareholder meeting. Three of the seven board members and auditors are scheduled to be replaced next year. If KCGI is joined in its push by small shareholders angry over the continued blows to company value from the Cho family’s antics, it could well pose a challenge to Cho Yang-ho’s management authority. “The odds are against them in terms of getting Cho Yang-ho to step down as chairman, but if we do get a case where a chaebol family manager is forced out, that would represent a huge change for the South Korean capital market,” said Bruce Lee Won-li, head of Zebra Investment Management. A Hanjin Group source avoided giving a direct response. “We have nothing to say at present. We’ll state our official position after observing how things proceed,” the source said. By Lee Wan and Hong Dae-seon, staff reporters Please direct comments or questions to [english@hani.co.kr]
