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Activist funds to watch in Korea proxy season

Another battle round between Hanjin, KCGI likely to draw market attention

Activist fund managers at home and abroad are expected to play a bigger role in the forthcoming proxy season this year in South Korea that starts in March.

Seoul-based proxy advisory services firm Korea Corporate Governance Service said in a report Tuesday the shareholders of the companies subject to proxy battle needs closer monitoring, as their results are “unpredictable.”

Homegrown private equity firms including Korea Corporate Governance Improvement and HYK Partners are expected to zero in on the lax governance of its respective targets -- flag carrier Korean Air‘s parent company Hanjin KAL and logistics firm Hanjin Transportation.

Meanwhile, US hedge fund Whitebox Advisors in December opposed LG Corporation’s plan to spin off five affiliates into a new holding company this year, as a minority shareholder that is believed to have held some 1 percent stake.

Their engagement aims to prevent the target company from undermining value of minority shareholders, to exercise their rights to nominate or veto board members or to influence the management of the target company.

For example, HYK Partners has openly proposed Hanjin KAL‘s logistics affiliate Hanjin Transportation to expand its boardroom, to name head of HYK Partners as Hanjin Transportation’s outside board member and increase dividend payout.

The PEF, which became a blockholder of Hanjin Transportation since October 2020 with 9.79 percent voting rights, will be entitled to offer a shareholder proposal in the annual shareholder meeting this year, which leaves the possibility that the proxy war might ignite a feud over the business management, according to KCGS.

Starting this year, a change of the commercial rule reduces the eligible voting rights of Hanjin KAL and its friendly shareholders to 18 percent, from what is physically 38 percent, narrowing down the gap between the owner family and the activist PEF. This highlights the decision of other Hanjin Transportation shareholders, including the National Pension Service, over which it would side with.

On the other hand, attention is also on how the KCGI-led investor consortium -- joined by the owner family‘s estranged sister -- will overcome stock dilution with the advent of the new blockholder, the Korea Development Bank.

The state-run lender’s 800 billion won ($717 million) capital injection into Hanjin KAL brought down the KCGI consortium‘s ownership from 47.33 percent to 40.4 percent, according to an analysis by KCGS.

Moreover, the KCGI-led consortium’s bid for influence over the aviation-to-transportation group is likely to be contested by KDB’s shareholder activism that has begun to materialize. The KDB made its first open shareholder proposal on Wednesday as a Hanjin KAL blockholder in a bid to increase the board‘s independence and enhance its social value. The shareholder with over 10 percent Hanjin KAL voting rights called for a separation of the role of its Hanjin KAL board chairman and its chief executive officer -- both currently filled by incumbent Cho Won-tae -- and a gender-diverse boardroom.

The investor group should either buy more than 9.6 percent of stake from the public stock bourse, or carry out more active proxy solicitation to other shareholders before the annual meeting, in order to exert influence over the management.

The KCGI and KDB are also likely to be at odds over the nomination of the three new outside board members and an audit committee member, KCGS also said.

In the meantime, attention is paid to what actions Whitebox Advisors will take during the proxy season, possibly in line with its earlier opposition to LG‘s plan that it sees as “unprecedented discount” that leads to “inferior return to shareholders.” LG is looking to create a separate holding entity that oversees a trading company, a housing interior part maker, display chip maker and chemical manufacturer.

But KCGS said in the report that the public backlash against LG‘s spinoff plan has yet to crystalize.

By Son Ji-hyoung (