PSPD in English Archive 2001-04-03   1671

How PSPD Has Used Legal Measures to Strenthen Korean Corporate Governance

A Review of How PSPD Has Used Legal Measures to Strenthen Korean Corporate Governance
co-auther
Jooyoung Kim 
Managing Partner of Hannuri Law Offices 
Vice-Chairman, Participatory Economy Committee, PSPD 
Joongi Kim 
Assistant Professor of Law of Yonsei University 
Vice-Chairman, Participatory Economy Committee, PSPD 
* This article is an abridged version of an original that appears in the Journal of Korean Law, Vol. 1, No. 1 (2001) 
I. Introduction 
Shareholder activism has begun to play a role in reshaping the corporate governance of Korean companies.Shareholder activism is a way that shareholders can claim their power as company owners to influence a corporations behavior. Shareholder activism is generally classified into two categories (socially-oriented shareholder activism and corporate governance activism). In the 1970s, religious investors formed a shareholder coalition called the Interfaith Center for Corporate Responsibility, and started using the shareholder proposal process as a way of working for peace and social justice. They began organizing and filing resolutions on South African Apartheid, community economic development and global finance, environment, equality, international issues, health and militarism. One of the more basic issues addressed through shareholder activism is the topic of corporate governance, or how a company structures and compensates its leadership, particularly vis-a-vis shareholders rights. Shareholder Activism Handbook, Friends of the Earth, June 1999. In advanced countries, institutional investors or financial intermediaries serve the function of active shareholders. 
By contrast, in Korea, shareholder activism was nonexistent until it was initiated in 1997 by the Peoples Solidarity for Participatory Democracy (PSPD). More specifically the Participatory Economy Committee within PSPD is in charge of these activities. 

PSPDs minority shareholder campaigns first target was Korea First Bank and has since then expanded its activities to premier companies such as Samsung Electronics, SK Telecom and Hyundai Heavy Industries. These companies were chosen because as Koreas leading companies it was critical for them to reform their corporate governance because of their enormous role in the Korean economy and because they serve as models for other companies. 
PSPD has been at the forefront of leading shareholder activism in Korea. PSPDs shareholder activities have contributed to increased transparency between business and political relations. But more significantly, PSPDs initiatives will have a lasting influence of implanting a sense of rule of law with regard to investor protection. Through PSPDs activities, various minority shareholders rights that had remained dormant for most of Koreas modern history were utilized. 
This Article will summarize how PSPD has been able to use legal measures to try to improve corporate governance. It will first review the basic legal measures that can be used to participate in the corporate decision making process. Next, the Article will review how legal measures can be utilized to monitor the behavior of management. 
Third, it will examine how legal measures can be used to hold management accountable for their decisions. It will also offer some possible policy recommendations. In the end, this Article will attempt to show how shareholder activism has affected corporate behavior and strengthened corporate governance in Korea. 

II. Participating in the Corporate Decision Making Process 
Shareholders delegate the detailed and day-to-day decision making of the corporation to the board of directors. Shareholders can nevertheless participate in significant corporate decision making process through various legal measures. For a review of how legal measures affecting corporate governance have changed in recent years see, Joongi Kim, Recent Amendments of Korean Commercial Code and Their Effect on International Competition , Vol. 21, University of Pennsylvania Journal of International Economic Law (2000), p. 273. They can attend shareholders meetings, can make shareholder proposals, can solicit proxies, and can convene extraordinary shareholders meetings. Based on PSPDs experience, these are the most fundamental and basic methods by which shareholders can contribute in the decision-making process. 
A. Attending Shareholders Meetings 
Shareholders meetings are the institutional forums where shareholders can participate in the general corporate decision making process. At the shareholders meetings, the members of the board of directors and auditors are elected, the articles of incorporations (AOI) are adopted or amended and major decisions such as mergers, business transfers or dissolutions are decided by the shareholders. Commercial Code, Art. 374, Art. 382. 
Financial statements are also presented to the shareholders for their final approval. Commercial Code, Art. 449. In addition, shareholders meetings are an occasion where all shareholders can meet the management, appraise their performance and raise questions regarding their decisions. Despite the potential importance of shareholders meetings to minority shareholders, in the past these meetings were largely formalities and shareholders rarely attended. 
PSPD engaged in a variety of activities at General Shareholders Meetings (GSM). The most important activity by PSPD was to attend and to raise various questions at the GSM. It was significant because this simple, but most basic shareholder right was exercised in a meaningful manner for the first time. The presence of shareholder activists such as PSPD, for instance, caused companies to actually prepare their responses in earnest. 
After it announced its plan to attend a companys GSM, PSPD would first gather available public information such as public disclosure documents, media reports and financial statements. In certain cases, materials produced by governmental authorities such as the Fair Trade Commission or Financial Supervisory Service provided useful sources. Unfortunately, these regulatory authorities were often reluctant to share information they obtained. PSPD then sent its question lists to the management before the GSM to give them time to respond. 
PSPD members attended GSMs and raised questions on a variety of issues. Questioning is useful in several aspects. First, shareholders can obtain important information through questioning. Surprisingly, the management has sometimes openly admitted its negligence or malfeasance. In other cases, the management provided important clues for further investigation. 

Second, questioning can draw public attention to secret transactions such as unfair subsidies to affiliated companies or to family members of the controlling shareholder. Where such issues are not widely known, the meeting provides an important forum through which such details can be shared with shareholders or to the public at large. 
Third, prepared questioning places a substantial degree of pressure on management. Management in performing their duties will deliberate far more as to whether their activities can be justified and will be more reluctant to rubberstamp the decisions of the principal shareholder. 
Since PSPD first attended the shareholders meeting of Korea First Bank in March 1997, PSPD members have attended meetings of Samsung Electronics, Daewoo Corporation, SK Telecom, Hyundai Heavy Industries, LG Semiconductor and Dacom. In one of the most celebrated cases, the Samsung Electronics GSM that was held in March 1998 lasted for more than 13 hours mainly due to thorough questioning by PSPD. 
When PSPD first initiated its minority shareholder campaign, the management of some unenlightened companies even attempted to disrupt the attendance or questioning of shareholders. PSPD brought legal actions on two different occasions to nullify the resolutions passed at meetings where such disruptions occurred. Subsequently, as companies have grown to realize the importance of shareholder value and investor relations such shortsighted policies of disruption have ostensibly disappeared. 

B. Shareholder Proposals 
Another important measure of shareholders has been the utilization of shareholder proposals. Christine L. Ayotte, Reevaluating the Shareholder Proposal Rule in the Wake of Cracker Barrel and the Era of Institutional Investors, Vol. 48, Catholic University Law Review (1999), p.511; Daniel E. Lazaroff, Promoting Corporate Democracy and Social Responsibility: The Need to Reform the Federal Proxy Rules on Shareholder Proposals, Vol. 50, Rutgers Law Review (1997), p. 33 (on the importance of shareholder proposals). PSPD for instance first made shareholder proposals at the GSMs of Samsung Electronics and SK Telecom. In March 1998 and March 1999, PSPD proposed that the AOI of Samsung Electronics be amended to protect the interests of minority shareholders. Also in March 1998, PSPD made similar proposals to SK Telecom to amend its AOI and also proposed the election of two outside directors. At the time, the proposals made to Samsung Electronics failed to obtain majority approval, whereas in contrast SK Telecoms management without even going to a proxy contest accepted many of PSPDs proposals. 
Unfortunately, under Article 84-21 of the Presidential Decree of the SEA, the type of proposals at a GSM that can be made by shareholders are strictly limited. For example, the dismissal of directors or auditors cannot be the subject of a shareholder proposal. The only way that shareholders may propose the dismissal of a director or auditor is for them to convene an extraordinary shareholders meeting. 
C. Proxy Solicitations 
Proxy solicitations are an important legal measure for shareholders to seek support from other shareholders. See generally, Douglas G. Smith, Comparative Analysis of The Proxy Machinery in Germany, Japan, and the United States: Implications for the Political Theory of American Corporate Finance, Vol. 58, University of Pittsburgh Law Review, p.145 (1996); Daniel E. Lazaroff, Promoting Corporate Democracy and Social Responsibility: The Need to Reform the Federal Proxy Rules on Shareholder Proposals, Vol. 50, Rutgers Law Review, p. 33 (1997). PSPD launched several proxy solicitations to gather proxies from other shareholders. Under Article 199 of the SEA, anyone who wants to solicit proxies from 10 or more persons must register the proxy statements in advance with the Financial Supervisory Commission (FSC). Presidential Decree of the SEA, Art, 85. The regulations have many obstacles as explained below. 
A meeting notice can only be dispatched to shareholders two days after a proxy statement has been filed with the FSC. In the course of PSPDs activities, this strict proxy rule prevented PSPD from actively seeking proxies especially from foreign shareholders that shared PSPDs views. This rule therefore needs to be amended so that the delivery of proxy statements can be made simultaneously with the registration filing with the FSC. 
D. Convening Extraordinary Shareholders Meetings 
In close correlation with soliciting proxies and shareholder proposals, shareholders can also convene Extraordinary Shareholders Meetings (ESM). PSPD, however, has not attempted to convene an ESM. It is noteworthy that in the case of SK Telecom, an outside auditor demanded the convening of an ESM under Article 412-3 of the Commercial Code with the support of PSPD. This is the first reported time that an auditor exercised this right under this legal provision. 
E. Policy Recommendations 
First for shareholders to be able to more actively participate in shareholders meetings the voting procedures must be improved. Second, the proxy statement sent to shareholders prior to the shareholders meetings must become more comprehensive. Third, the restrictions concerning shareholder proposals as provided in the SEA should be modified. Shareholders should be allowed to propose the termination of directors. 
III. Preventive Measures and Monitoring the Behavior of Management 
After shareholders have delegated the corporate decision making process to the board of directors, various legal measures are available for shareholders to monitor the actions of management. Preventive measures such as monitoring are important especially to deter illegal or improper management decisions. The threat to bring derivative action has some preventive effect, but this often takes time and is too late or remote. Thus, one of the major actions taken by PSPD was to demand the end of illegal activities of the management or to require relevant materials related to the business decisions to deter management from proceeding on problematic decisions. Shareholders may also inspect the records of the corporation, demand that certain management actions end or seek injunctions to prevent illegal activities. 

A. Inspection of Books and Records, Appointment of Inspectors 
Inspection of books and records as provided in the KCC was utilized to gain information for two purposes. Commercial Code, Art. 466; Randall S. Thomas, Improving Shareholder Monitoring of Corporate Management by Expanding Statutory Access to Information, Vol. 38, Arizona Law Review 331 (1996). First, inspections allow shareholders to gather critical information necessary to prepare for the shareholders meeting. Second, inspections help to get necessary information to pressure management into stopping illegal or unreasonable decisions. Important records for instance can include Board of Directors minutes and accounting records. 
In 1998, PSPD demanded the Board of Directors (BOD) minutes of Samsung Electronics. This request was made in order to find evidence as to whether Samsung Electronics illegally supported Samsung Motors and engaged in improper internal transactions with a related company. Contrary to the shareholders legitimate rights guaranteed under the Commercial Code, Samsung Electronics initially refused this basic request. A court order was sought to exercise this right and on June 12, 1998 the Suwon District Court ordered Samsung Electronics to provide the minutes and pay a fine of three million won for violating the law. 
Under the SEA, shareholders may request in writing inspection of books and records. If the management denies such a request, the shareholders may apply for an injunction order with the court. Furthermore, the shareholders may demand the appointment of an inspector in certain circumstances. Although PSPD has not filed for such an injunction, the existence of the right to inspect books and records functions as an effective threat to press management to produce relevant materials. 
B. Demands to Cease Illegal Activities 
Shareholders can demand that management stop engaging in certain transactions that are illegal or that unreasonably damage their interests. When making such demands, PSPD explained why it was concerned with a particular transaction and urged an explanation from the management. The management has no official obligation to respond to such a demand from individual shareholders. Although the ultimate responsibility for any business decision belongs to the management, a demand letter from a shareholder reminds management to give due consideration to shareholder concerns or they could be subject to legal action. Several cases existed where the management accepted the demands of PSPD. In 1999, for instance, Hyundai Heavy Industries partly agreed to the demands made by PSPD by withdrawing their plan to support Hyundai Motors for their acquisition of Kia Motors and Asia Motors. Similarly, Samsung Electronics decision not to further expand its automobile business was known partly due to objections raised by PSPD. 
Ironically, on some occasions, PSPDs demand letters served as the ostensible reasons for the management of some chaebol companies to refuse requests for help from their sister companies for fear of litigation. In the course of Hyundai Engineering & Constructions financial crisis last year, Hyundai Heavy Industries refused a request for help from the Hyundai Group because PSPD and minority shareholders opposed such a subsidy. Some critics suggest that such interference by PSPD limits the creative and challenging business decisions of the professional managers. But in reality PSPDs involvement grants more authority to professional managers by giving them a means to refuse improper demands of the controlling shareholders. 
Nevertheless, in many cases the management of companies would not accept the demands of PSPD. In most of these cases where shareholder demands are rejected, however, the management would at least make changes to their original plans to avoid the risk of a shareholder challenge or legal action. Hence, the demand did have an effect on the management. In the case of SK Telecom, PSPD and outside directors raised objections to the managements plan for the purchase of certain real estate from one of its sister companies. Although PSPD and outside directors could not prevent the purchase of the real estate, the outside directors did force the management to modify the terms and conditions for the purchase. 
C. Injunctions to Prevent Illegal Acts of Management 
Shareholders demands can also develop into more formal legal proceedings. In the case of PSPD, it has filed injunctions to prevent management decisions from being implemented. On March 24, 1997 Samsung Electronics had a private placement of convertible bonds ( CB ) worth 60 billion won of which Samsung Group Chairman Keon-Hee Lees son Jae-Yong Lee purchased 45 billion won and the Samsung Corporation purchased 15 billion won. The private placement of CBs are different from public issues because the issuing company can sell the bonds to particular designated individuals. 
PSPD believed that the private placement of CBs was not only a means to pass on the management control of the Samsung Group to Jae-Yong Lee but also violated the preemptive rights of minority shareholders to purchase Samsung Electronics shares and diluted their voting power. In addition, it argued that the conversion price was set lower
than the market price at the date of issue. This lower price further violated shareholders interests because it was transferring company wealth to an individual. Samsung claimed that the CBs were issued to Jae-Yong Lee because they needed the capital and he was an accessible source under the circumstances. 
As a result, PSPD filed a legal action on June 24, 1997 against Jae-Yong Lee and Samsung Corporation to nullify Samsung Electronics issue of convertible bonds, and filed a request for a temporary injunction against their conversion, sale or other disposition. On September 30, the court approved the request for a temporary injunction against Samsung Electronics. However, the day before the courts ruling, Samsung Corporation made a sudden move to convert the CBs to shares. In response, on October 7, PSPD requested a temporary injunction against the disposition or listing of Jae-Yong Lee and Samsung Corporations newly converted shares, and modified the compliant to one that sought to nullify the issue of convertible bonds to one that sought to nullify the issue of new shares. On December 17, 1997, the Suwon District Court ruled in favor of PSPDs claim with regard to the temporary injunction against the disposition or listing of Jae-Yong Lees shares. In the opinion issuing the temporary injunction, the court stated that for a private placement of convertible bonds to a third party or a particular shareholder, there must be an objective legitimate reason. 
Furthermore, the court announced that in issuing the convertible bonds to Jae-Yong Lee as an individual in this case, the need for capital was only a superficial reason and the only reason was for the interests of the dominant shareholder; hence, it should be void. The Suwon District Court, however, ruled against the actual nullification of the newly issued shares.The Seoul High Court subsequently affirmed the decision not to nullify the newly issued shares. see, Seoul High Count, 98 na 4608. (Ed. Note: This decision is provided in the materials section in this issue). 
D. Policy Recommendations 
For shareholders to prevent the malfeasance and misappropriation of managers, information concerning the corporation must be provided promptly. At the same time, the courts must respond more quickly to injunctions. Otherwise, it often becomes too late to correct or retract such illegal activities because they have progressed too far. 
One solution is to strengthen the disclosure requirement. The injunction process can alternatively be accelerated. But these options have their limitations. Given the circumstances in Korea, one of the best hopes to properly restrict the managerial agency problem is make cumulative voting mandatory and elect more independent directors on the board. 
IV. Holding Management Accountable for Their Conduct 
When the management has contributed to the improvement of the corporation they can be rewarded with increased compensation and reappointment. In contrast, when the management has harmed the corporation either through negligence or malfeasance they can be held responsible for their misdeeds by way of being replaced with a new management. But in the case of most Korean corporations, the management was always selected by the principal shareholders and they were effectively free from any challenges of other shareholders. Thus, legal measures to hold the management legally liable for its conduct are essential for the board to be responsive to the needs of all shareholders and not just the principal shareholder. Shareholders can file shareholder derivative actions seeking liability against directors or auditors. Robert B. Thompson, Preemption and Federalism in Corporate Governance: Protecting Shareholder Rights to Vote, Sell, and Sue, Vol. 62, Law and Contemporary Problems Summer (1999), p. 252 (emphasizing that exit and litigation are core governance functions for shareholders). Administrative or criminal complaints can be also raised against the management. 
In this regard, PSPDs activities were successful because PSPD did not merely make demands to target companies or just commence street campaigns to criticize the management. PSPD was careful to make very specific but achievable demands. If the management did not accept the demands, only then would PSPD consider the second phase of actions such as bringing shareholder derivative actions or criminal complaints. 
Negative campaigns are risky because PSPD itself is then forced to make determinations on matters intertwined with business judgments. But, if PSPD initiates legal proceedings such as shareholder derivative suits or criminal complaints, the court becomes the one that judges the propriety of managerial business decisions. Some criticized that PSPD challenged decisions that belonged to the business judgment and discretion of the management. But such suggestions are rather exaggerated because PSPD was careful to only focus its activities against those management decisions that involved egregious improprieties. 
A. Shareholder Derivative Actions 
The earliest example of a shareholder derivative suit occurred on June 3, 1997, when PSPD initiated an action against former officers of Korea First Bank (KFB). For a comprehensive discussion on the importance and history of shareholder litigation see, James D. Cox, The Social Meaning of Shareholder Suits, Vol. 65, Brooklyn Law Review (1999), p. 3. 
PSPD brought the claim on behalf of 61 minority shareholders. The plaintiffs claimed 40 billion won in compensation against the former president and directors of KFB. It was alleged that they received bribes in return for providing credit to the failed Hanbo conglomerate, causing critical losses to the bank., These allegations were substantiated through the criminal investigation that the former president and directors not only received bribes but they instructed staff employees to neglect internal regulations to extend huge loans to Hanbo even right before it went bankrupt. On July 24, 1998, the Seoul District Court ruled in favor of these minority shareholders issuing a historic 40 billion won money award against these directors. Judgment of Jul. 24, 1988, Seoul District Court, 98 kahap 39907. 
Following another government investigation, PSPD initiated a shareholders derivative suit against the Daewoo Corporation to request compensation for 23 billion won ($ 20 million). This claim was primarily the result of improper intercorate transactions by the conglomerate chairman, Woo-Chung Kim, and senior managers, in 1998. This civil action is currently pending judicial review. 
B. Criminal or Administrative Complaints 
Shareholders can also resort to seeking criminal or administrative investigations to seek the accountability of management. Civil lawsuits can be time consuming and it is difficult to obtain enough evidence to prevail in litigation. In many cases, PSPD chose to pursue criminal or administrative complaints. This avenue must be proceeded with caution, however, because criminal complaints have negative consequences. First, they will close the door for future negotiation possibilities, when compared to civil proceeding. Moreover, the involvement of the shareholders is limited after the issue has been raised. In the end, it was unfortunate that in many cases the prosecutors office or Fair Trade Commission (FTC) was reluctant to aggressively pursue cases brought by PSPD. 
An example occurred on June 11, 1998 when PSPD filed a criminal complaint with the Prosecutors Office charging Samsung Electronics, Samsung Display Devices, Samsung Electro-Mechanics, Samsung Motors and the board members of each company for violating laws regulating the introduction of foreign capital, foreign currency management laws, and securities transactions laws. Samsung Electronics, Samsung Display Devices, and Samsung Electro-Mechanics, which are the main shareholders of Samsung Motors, made a joint investment agreement with an Ireland-based paper company called Pan-Pacific Industrial Investments (PP) to invest approximately $280.2 million in Samsung Motors. 
PSPD sometimes brought administrative complaints against professionals such as accountants or lawyers who aided in the illegal or improper activities of the management. In connection with Hyundai Electronics illegal manipulation of the stock prices, for instance, the Judiciary Monitoring Center of PSPD filed a complaint that the lawyers representing Hyundai Electronics aided the officers of Hyundai companies in concealing their criminal behavior. 
PSPD has also on several occasions requested investigations by the FTC. PSPD for instance requested a FTC investigation into Samsung Electronics alleged illicit support to Seoul Commtech. Samsung Electronics transferred certain asset and business licenses to Seoul Commtech at a price below market value from 1998 to 1999, giving them huge profit gains. It is suspected that this transaction was a means to transfer the chairmans wealth to his son who later became the largest shareholder by purchasing convertible bonds issued by the company. 
C. Demanding the Dismissal of Responsible Officers. 
Under the Commercial Code shareholders have the right to terminate directors before the end of their term. Art. 395. At present, this requires a special resolution and there must be a reasonable cause for the termination or the terminated director may seek compensation from the company. This measure has been rarely used for two reasons. 
First, from the perspective of principal shareholders they do not need to utilize this provision. Second, the ownership requirements needed for a special resolution are extremely high. 
D. Policy Recommendations 
In Korea, shareholder derivative suits against publicly-held companies still require 0.01 percent of the outstanding stock. SEA, Art. 191-13. At the same time, awards from a shareholder derivative action are paid to the corporation. Therefore, to allow shareholders to press claims against managers for their malfeasance, it is critical that
Korea permits class action litigation. Shareholders should also be able to terminate improper directors with only a standard voting quorum and not through a special super-majority requirement. Another option that should be considered is to reduce the terms of directors from three years to one year to allow shareholders to easily replace those who harm their interests. 
V. Conclusions 
While shareholder activism can take many forms, it still remains at a preliminary stage in Korea when compared to other advanced countries. Public interest organizations such as PSPD have tried to educate investors and management toward the importance of protecting shareholder rights. They have emphasized the importance of monitoring the decision-making of management and holding them accountable after the fact. PSPD has used a host of legal measures that previously remained dormant. 
Many obstacles still remain and much has yet to be achieved. Korea is still debating the contours of how to allow securities-related class actions and whether to make cumulative voting mandatory for the election of directors. Given Koreas unique situation, these reforms are among a host of measures that need to be adopted to enhance the effectiveness of corporate governance. In the meantime, shareholder activists in Korea wait for the day when Korean corporations will not resist but will instead openly compete with each other on how to strengthen their corporate governance and will be proud of it. 

Another important measure of shareholders has been the utilization of shareholder proposals. Christine L. Ayotte, Reevaluating the Shareholder Proposal Rule in the Wake of Cracker Barrel and the Era of Institutional Investors, Vol. 48, Catholic University Law Review (1999), p.511; Daniel E. Lazaroff, Promoting Corporate Democracy and Social Responsibility: The Need to Reform the Federal Proxy Rules on Shareholder Proposals, Vol. 50, Rutgers Law Review (1997), p. 33 (on the importance of shareholder proposals). PSPD for instance first made shareholder proposals at the GSMs of Samsung Electronics and SK Telecom. In March 1998 and March 1999, PSPD proposed that the AOI of Samsung Electronics be amended to protect the interests of minority shareholders. Also in March 1998, PSPD made similar proposals to SK Telecom to amend its AOI and also proposed the election of two outside directors. At the time, the proposals made to Samsung Electronics failed to obtain majority approval, whereas in contrast SK Telecoms management without even going to a proxy contest accepted many of PSPDs proposals. 
Unfortunately, under Article 84-21 of the Presidential Decree of the SEA, the type of proposals at a GSM that can be made by shareholders are strictly limited. For example, the dismissal of directors or auditors cannot be the subject of a shareholder proposal. The only way that shareholders may propose the dismissal of a director or auditor is for them to convene an extraordinary shareholders meeting. 
C. Proxy Solicitations 
Proxy solicitations are an important legal measure for shareholders to seek support from other shareholders. See generally, Douglas G. Smith, Comparative Analysis of The Proxy Machinery in Germany, Japan, and the United States: Implications for the Political Theory of American Corporate Finance, Vol. 58, University of Pittsburgh Law Review, p.145 (1996); Daniel E. Lazaroff, Promoting Corporate Democracy and Social Responsibility: The Need to Reform the Federal Proxy Rules on Shareholder Proposals, Vol. 50, Rutgers Law Review, p. 33 (1997). PSPD launched several proxy solicitations to gather proxies from other shareholders. Under Article 199 of the SEA, anyone who wants to solicit proxies from 10 or more persons must register the proxy statements in advance with the Financial Supervisory Commission (FSC). Presidential Decree of the SEA, Art, 85. The regulations have many obstacles as explained below. 
A meeting notice can only be dispatched to shareholders two days after a proxy statement has been filed with the FSC. In the course of PSPDs activities, this strict proxy rule prevented PSPD from actively seeking proxies especially from foreign shareholders that shared PSPDs views. This rule therefore needs to be amended so that the delivery of proxy statements can be made simultaneously with the registration filing with the FSC. 
D. Convening Extraordinary Shareholders Meetings 
In close correlation with soliciting proxies and shareholder proposals, shareholders can also convene Extraordinary Shareholders Meetings (ESM). PSPD, however, has not attempted to convene an ESM. It is noteworthy that in the case of SK Telecom, an outside auditor demanded the convening of an ESM under Article 412-3 of the Commercial Code with the support of PSPD. This is the first reported time that an auditor exercised this right under this legal provision. 
E. Policy Recommendations 
First for shareholders to be able to more actively participate in shareholders meetings the voting procedures must be improved. Second, the proxy statement sent to shareholders prior to the shareholders meetings must become more comprehensive. Third, the restrictions concerning shareholder proposals as provided in the SEA should be modified. Shareholders should be allowed to propose the termination of directors. 
III. Preventive Measures and Monitoring the Behavior of Management 
After shareholders have delegated the corporate decision making process to the board of directors, various legal measures are available for shareholders to monitor the actions of management. Preventive measures such as monitoring are important especially to deter illegal or improper management decisions. The threat to bring derivative action has some preventive effect, but this often takes time and is too late or remote. Thus, one of the major actions taken by PSPD was to demand the end of illegal activities of the management or to require relevant materials related to the business decisions to deter management from proceeding on problematic decisions. Shareholders may also inspect the records of the corporation, demand that certain management actions end or seek injunctions to prevent illegal activities. 
A. Inspection of Books and Records, Appointment of Inspectors 
Inspection of books and records as provided in the KCC was utilized to gain information for two purposes. Commercial Code, Art. 466; Randall S. Thomas, Improving Shareholder Monitoring of Corporate Management by Expanding Statutory Access to Information, Vol. 38, Arizona Law Review 331 (1996). First, inspections allow shareholders to gather critical information necessary to prepare for the shareholders meeting. Second, inspections help to get necessary information to pressure management into stopping illegal or unreasonable decisions. Important records for instance can include Board of Directors minutes and accounting records. 
In 1998, PSPD demanded the Board of Directors (BOD) minutes of Samsung Electronics. This request was made in order to find evidence as to whether Samsung Electronics illegally supported Samsung Motors and engaged in improper internal transactions with a related company. Contrary to the shareholders legitimate rights guaranteed under the Commercial Code, Samsung Electronics initially refused this basic request. A court order was sought to exercise this right and on June 12, 1998 the Suwon District Court ordered Samsung Electronics to provide the minutes and pay a fine of three million won for violating the law. 
Under the SEA, shareholders may request in writing inspection of books and records. If the management denies such a request, the shareholders may apply for an injunction order with the court. Furthermore, the shareholders may demand the appointment of an inspector in certain circumstances. Although PSPD has not filed for such an injunction, the existence of the right to inspect books and records functions as an effective threat to press management to produce relevant materials. 
B. Demands to Cease Illegal Activities 
Shareholders can demand that management stop engaging in certain transactions that are illegal or that unreasonably damage their interests. When making such demands, PSPD explained why it was concerned with a particular transaction and urged an explanation from the management. The management has no official obligation to respond to such a demand from individual shareholders. Although the ultimate responsibility for any business decision belongs to the management, a demand letter from a shareholder reminds management to give due consideration to shareholder concerns or they could be subject to legal action. Several cases existed where the management accepted the demands of PSPD. In 1999, for instance, Hyundai Heavy Industries partly agreed to the demands made by PSPD by withdrawing their plan to support Hyundai Motors for their acquisition of Kia Motors and Asia Motors. Similarly, Samsung Electronics decision not to further expand its automobile business was known partly due to objections raised by PSPD. 
Ironically, on some occasions, PSPDs demand letters served as the ostensible reasons for the management of some chaebol companies to refuse requests for help from their sister companies for fear of litigation. In the course of Hyundai Engineering & Constructions financial crisis last year, Hyundai Heavy Industries refused a request for help from the Hyundai Group because PSPD and minority shareholders opposed such a subsidy. Some critics suggest that such interference by PSPD limits the creative and challenging business decisions of the professional managers. But in reality PSPDs involvement grants more authority to professional managers by giving them a means to refuse improper demands of the controlling shareholders. 
Nevertheless, in many cases the management of companies would not accept the demands of PSPD. In most of these cases where shareholder demands are rejected, however, the management would at least make changes to their original plans to avoid the risk of a shareholder challenge or legal action. Hence, the demand did have an effect on the management. In the case of SK Telecom, PSPD and outside directors raised objections to the managements plan for the purchase of certain real estate from one of its sister companies. Although PSPD and outside directors could not prevent the purchase of the real estate, the outside directors did force the management to modify the terms and conditions for the purchase. 
C. Injunctions to Prevent Illegal Acts of Management 
Shareholders demands can also develop into more formal legal proceedings. In the case of PSPD, it has filed injunctions to prevent management decisions from being implemented. On March 24, 1997 Samsung Electronics had a private placement of convertible bonds (CB) worth 60 billion won of which Samsung Group Chairman Keon-Hee Lees son Jae-Yong Lee purchased 45 billion won and the Samsung Corporation purchased 15 billion won. The private placement of CBs are different from public issues because the issuing company can sell the bonds to particular designated individuals. 
PSPD believed that the private placement of CBs was not only a means to pass on the management control of the Samsung Group to Jae-Yong Lee but also violated the preemptive rights of minority shareholders to purchase Samsung Electronics shares and diluted their voting power. In addition, it argued that the conversion price was set lower than the market price at the date of issue. This lower price further violated shareholders interests because it was transferring company wealth to an individual. Samsung claimed that the CBs were issued to Jae-Yong Lee because they needed the capital and he was an accessible source under the circumstances. 
As a result, PSPD filed a legal action on June 24, 1997 against Jae-Yong Lee and Samsung Corporation to nullify Samsung Electronics issue of convertible bonds, and filed a request for a temporary injunction against their conversion, sale or other disposition. On September 30, the court approved the request for a temporary injunction against Samsung Electronics. However, the day before the courts ruling, Samsung Corporation made a sudden move to convert the CBs to shares. In response, on October 7, PSPD requested a temporary injunction against the disposition or listing of Jae-Yong Lee and Samsung Corporations newly converted shares, and modified the compliant to one that sought to nullify the issue of convertible bonds to one that sought to nullify the issue of new shares. On December 17, 1997, the Suwon District Court ruled in favor of PSPDs claim with regard to the temporary injunction against the disposition or listing of Jae-Yong Lees shares. In the opinion issuing the temporary injunction, the court stated that for a private placement of convertible bonds to a third party or a particular shareholder, there must be an objective legitimate reason. 

Furthermore, the court announced that in issuing the convertible bonds to Jae-Yong Lee as an individual in this case, the need for capital was only a superficial reason and the only reason was for the interests of the dominant shareholder; hence, it should be void. The Suwon District Court, however, ruled against the actual nullification of the newly issued shares.The Seoul High Court subsequently affirmed the decision not to nullify the newly issued shares. see, Seoul High Count, 98 na 4608. (Ed. Note: This decision is provided in the materials section in this issue). 
D. Policy Recommendations 
For shareholders to prevent the malfeasance and misappropriation of managers, information concerning the corporation must be provided promptly. At the same time, the courts must respond more quickly to injunctions. Otherwise, it often becomes too late to correct or retract such illegal activities because they have progressed too far. 
One solution is to strengthen the disclosure requirement. The injunction process can alternatively be accelerated. But these options have their limitations. Given the circumstances in Korea, one of the best hopes to properly restrict the managerial agency problem is make cumulative voting mandatory and elect more independent directors on the board. 
IV. Holding Management Accountable for Their Conduct 
When the management has contributed to the improvement of the corporation they can be rewarded with increased compensation and reappointment. In contrast, when the management has harmed the corporation either through negligence or malfeasance they can be held responsible for their misdeeds by way of being replaced with a new management. But in the case of most Korean corporations, the management was always selected by the principal shareholders and they were effectively free from any challenges of other shareholders. Thus, legal measures to hold the management legally liable for its conduct are essential for the board to be responsive to the needs of all shareholders and not just the principal shareholder. Shareholders can file shareholder derivative actions seeking liability against directors or auditors. Robert B. Thompson, Preemption and Federalism in Corporate Governance: Protecting Shareholder Rights to Vote, Sell, and Sue, Vol. 62, Law and Contemporary Problems Summer (1999), p. 252 (emphasizing that exit and litigation are core governance functions for shareholders). Administrative or criminal complaints can be also raised against the management. 
In this regard, PSPDs activities were successful because PSPD did not merely make demands to target companies or just commence street campaigns to criticize the management. PSPD was careful to make very specific but achievable demands. If the management did not accept the demands, only then would PSPD consider the second phase of actions such as bringing shareholder derivative actions or criminal complaints. 

Negative campaigns are risky because PSPD itself is then forced to make determinations on matters intertwined with business judgments. But, if PSPD initiates legal proceedings such as shareholder derivative suits or criminal complaints, the court becomes the one that judges the propriety of managerial business decisions. Some criticized that PSPD challenged decisions that belonged to the business judgment and discretion of the management. But such suggestions are rather exaggerated because PSPD was careful to only focus its activities against those management decisions that involved egregious improprieties. 
A. Shareholder Derivative Actions 
The earliest example of a shareholder derivative suit occurred on June 3, 1997, when PSPD initiated an action against former officers of Korea First Bank (KFB). For a comprehensive discussion on the importance and history of shareholder litigation see, James D. Cox, The Social Meaning of Shareholder Suits, Vol. 65, Brooklyn Law Review (1999), p. 3. 
PSPD brought the claim on behalf of 61 minority shareholders. The plaintiffs claimed 40 billion won in compensation against the former president and directors of KFB. It was alleged that they received bribes in return for providing credit to the failed Hanbo conglomerate, causing critical losses to the bank., These allegations were substantiated through the criminal investigation that the former president and directors not only received bribes but they instructed staff employees to neglect internal regulations to extend huge loans to Hanbo even right before it went bankrupt. On July 24, 1998, the Seoul District Court ruled in favor of these minority shareholders issuing a historic 40 billion won money award against these directors. Judgment of Jul. 24, 1988, Seoul District Court, 98 kahap 39907. 
Following another government investigation, PSPD initiated a shareholders derivative suit against the Daewoo Corporation to request compensation for 23 billion won ($ 20 million). This claim was primarily the result of improper intercorate transactions by the conglomerate chairman, Woo-Chung Kim, and senior managers, in 1998. This civil action is currently pending judicial review. 
B. Criminal or Administrative Complaints 
Shareholders can also resort to seeking criminal or administrative investigations to seek the accountability of management. Civil lawsuits can be time consuming and it is difficult to obtain enough evidence to prevail in litigation. In many cases, PSPD chose to pursue criminal or administrative complaints. This avenue must be proceeded with caution, however, because criminal complaints have negative consequences. First, they will close the door for future negotiation possibilities, when compared to civil proceeding. Moreover, the involvement of the shareholders is limited after the issue has been raised. In the end, it was unfortunate that in many cases the prosecutors office or Fair Trade Commission (FTC) was reluctant to aggressively pursue cases brought by PSPD. 
An example occurred on June 11, 1998 when PSPD filed a criminal complaint with the Prosecutors Office charging Samsung Electronics, Samsung Display Devices, Samsung Electro-Mechanics, Samsung Motors and the board members of each company for violating laws regulating the introduction of foreign capital, foreign currency management laws, and securities transactions laws. Samsung Electronics, Samsung Display Devices, and Samsung Electro-Mechanics, which are the main shareholders of Samsung Motors, made a joint investment agreement with an Ireland-based paper company called Pan-Pacific Industrial Investments (PP) to invest approximately $280.2 million in Samsung Motors. 
PSPD sometimes brought administrative complaints against professionals such as accountants or lawyers who aided in the illegal or improper activities of the management. In connection with Hyundai Electronics illegal manipulation of the stock prices, for instance, the Judiciary Monitoring Center of PSPD filed a complaint that the lawyers representing Hyundai Electronics aided the officers of Hyundai companies in concealing their criminal behavior. 
PSPD has also on several occasions requested investigations by the FTC. PSPD for instance requested a FTC investigation into Samsung Electronics alleged illicit support to Seoul Commtech. Samsung Electronics transferred certain asset and business licenses to Seoul Commtech at a price below market value from 1998 to 1999, giving them huge profit gains. It is suspected that this transaction was a means to transfer the chairmans wealth to his son who later became the largest shareholder by purchasing convertible bonds issued by the company. 
C. Demanding the Dismissal of Responsible Officers. 
Under the Commercial Code shareholders have the right to terminate directors before the end of their term. Art. 395. At present, this requires a special resolution and there must be a reasonable cause for the termination or the terminated director may seek compensation from the company. This measure has been rarely used for two reasons. 

First, from the perspective of principal shareholders they do not need to utilize this provision. Second, the ownership requirements needed for a special resolution are extremely high. 
D. Policy Recommendations 
In Korea, shareholder derivative suits against publicly-held companies still require 0.01 percent of the outstanding stock. SEA, Art. 191-13. At the same time, awards from a shareholder derivative action are paid to the corporation. Therefore, to allow shareholders to press claims against managers for their malfeasance, it is critical that Korea permits class action litigation. Shareholders should also be able to terminate improper directors with only a standard voting quorum and not through a special super-majority requirement. Another option that should be considered is to reduce the terms of directors from three years to one year to allow shareholders to easily replace those who harm their interests. 
V. Conclusions 
While shareholder activism can take many forms, it still remains at a preliminary stage in Korea when compared to other advanced countries. Public interest organizations such as PSPD have tried to educate investors and management toward the importance of protecting shareholder rights. They have emphasized the importance of monitoring the decision-making of management and holding them accountable after the fact. PSPD has used a host of legal measures that previously remained dormant. 
Many obstacles still remain and much has yet to be achieved. Korea is still debating the contours of how to allow securities-related class actions and whether to make cumulative voting mandatory for the election of directors. Given Koreas unique situation, these reforms are among a host of measures that need to be adopted to enhance the effectiveness of corporate governance. In the meantime, shareholder activists in Korea wait for the day when Korean corporations will not resist but will instead openly compete with each other on how to strengthen their corporate governance and will be proud of it. 

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