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02 May 2006
Korea watched closely as the drama unfolded in the proxy battle between the management of KT&G Corporation, the biggest tobacco manufacturer in Korea, and a group of dissident shareholders, culminating in the election of Warren Lichtenstein of the dissident shareholder group as a non-standing director of KT&G. Part of the reason behind the media attention was the fact that the dissident shareholder group included funds associated with Carl Icahn, who is renowned for being a corporate raider. Many media reports have discussed the vulnerability of Korean companies against attacks from shareholder agitators.
This update considers some of the features of the proxy battle which are significant for the Korean market.
At the KT&G annual general meeting (AGM) on March 17 2006, which became the arena for the showdown between the dissident shareholder group and the management, the shareholders of KT&G were able to cumulate their votes. Under the Commercial Code, a company can exclude cumulative voting by explicitly stating this in its articles of incorporation. Thus, most listed companies in Korea do not allow cumulative voting by express exclusion in their articles. However, KT&G's articles of incorporation do not contain such an exclusionary clause and, following demand from the dissident shareholder group, the management of KT&G decided that cumulative voting would be allowed at the AGM. Whatever the reason behind the failure to exclude cumulative voting in the articles of incorporation, this is unusual in Korea and led to the dissident shareholder group requesting cumulative voting at the AGM.
The dissident shareholder group filed a petition for preliminary injunction against KT&G, asking the court to enjoin KT&G from resolving the agenda for the election of non-standing directors at the AGM, under which shareholders would be asked to vote separately to elect (i) non-standing directors who would also be members of the KT&G audit committee, and (ii) ordinary non-standing directors who would not be members of the committee.
There were six vacancies for directors to be filled at KT&G's AGM. Four of these vacancies were for non-standing directors who would also serve on the audit committee, while two vacancies were for ordinary non-standing directors. The dissident shareholder group nominated three candidates for non-standing directors without specifying whether these candidates were also candidates to serve on the audit committee. KT&G separated the agenda for the AGM into the election of ordinary non-standing directors and the election of non-standing directors who would serve as audit committee members. KT&G included the candidates nominated by the dissident shareholder group as candidates for ordinary non-standing directors only, resulting in five candidates (three nominated by the dissident shareholder group and two nominated by the KT&G non-standing director recommendation committee) competing for two positions. KT&G's reasoning was that the voting requirements are different for ordinary non-standing directors and non-standing directors who will serve as audit committee members. The dissident shareholder group filed a petition for preliminary injunction arguing that KT&G should have asked the shareholders first to elect six non-standing directors from the pool of candidates that included the three candidates nominated by the dissident shareholder group, and then, from among the six elected directors, to elect those who would also serve as members of the audit committee.
In a decision rendered on March 14 2006 the Daejon District Court ruled against the dissident shareholder group, holding that in the absence of a shareholder proposal, the board of directors has the authority to choose between (i) holding separate elections for ordinary non-standing directors and audit committee member non-standing directors (as KT&G chose to do), and (ii) holding an election for non-standing directors first and then electing audit committee members (as preferred by the dissident shareholder group). Therefore, the company's board of directors has discretion to decide how the election of directors will take place. However, the court has also left room for shareholders to influence the election of directors to some extent by submitting a shareholder proposal.
Ultimately Warren Lichtenstein, one of the nominees of the dissident shareholder group, was elected as a KT&G director. This is the first time in Korean corporate history that a foreigner nominated by a foreign shareholder has been elected to the board of directors of a Korean listed company without the support of the company's management. The KT&G proxy battle may mark the beginning of a new phase in Korea's corporate development that will see more foreign funds actively making demands on or seeking to take over Korean companies, which could change both the corporate landscape of Korean companies and the Korean corporate governance rules.
At the request of the court, full-scale oral arguments were made by both parties' counsel at the Daejon District Court hearing. Until recently, arguments in civil court proceedings have been principally made through the exchange of briefs rather than through oral argument. The Korean judiciary has recently made it clear that it will divert from past practice and implement the oral argument system, and this case served as a test case for this new practice. This change will significantly affect litigation in Korea.
For further information on this topic please contact Hee-Chul Kang, Ki Young Kim or Kon Moon at Woo Yun Kang Jeong & Han by telephone (+82 2528 5200) or by fax (+82 2528 5228) or by email (firstname.lastname@example.org or email@example.com or firstname.lastname@example.org).
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Ki Young Kim