Big K-pop corporate showdown spurs Korean activists

The event marked a stark change in the South Korean corporate scene: a millennial fund manager faced off against senior executives from one of the country’s leading entertainment companies in a YouTube debate held for the the country’s growing army of retail investors.

Changhwan Lee, 35, who quit private equity group KKR last year to set up his own activist fund in Seoul, was promoting his efforts in March to improve governance at entertainment giant SM Entertainment. publicly traded K-pop.

A few days later, he made waves with a decisive victory over SM founder, majority shareholder and “chief producer”, Soo-man “SM” Lee. Changhwan Lee’s Align Partners fund won support from other investors to impose a new independent auditor for the company on a reluctant board that included several relatives, childhood friends and longtime associates of Soo-man Lee. .

Align, which has a 0.9% stake and has just $65 million in assets under management, wanted tighter control over the company’s affairs, including its royalty payments to a private company owned by SM Lee. . SM Entertainment said it is now having an internal discussion on corporate governance issues raised by investors and dealing with conflicts of interest.

The victory was a boost for activists investing in South Korea – historically seen by many as the preserve of predatory foreign funds engaged in what is locally known as “eat and run”.

“Everyone in the Korean stock market is frustrated that local companies are not realizing their value due to poor governance,” Changhwan Lee told the Financial Times. “It’s been like this for 20 years.”

Lee was born in 1986 in the provincial city of Daegu, in the heart of Korea’s conservative south, the son of a single mother who worked as a school cook and invested her meager salary in Korean stocks. It is a reminder of the hostility of many Koreans towards foreign investors who made big profits by flipping troubled Korean assets following the Asian financial crisis of the late 1990s.

That unease surfaced just a few years ago, after Elliott Management’s dispute with Samsung’s founding family over the controversial 2015 merger of construction subsidiary Samsung C&T with chemical subsidiary Cheil Industries.

The political shenanigans surrounding the merger, which helped Samsung’s ruling family secure its control over the conglomerate, led to the jailing of Samsung vice chairman Lee Jae-yong and conservative chairwoman Park Geun-hye, triggering a national soul-searching on corrupt people. practices.

But after warning that the merger would harm Samsung C&T shareholders, Elliott was lambasted in local media as a parasite; its founder Paul Singer was described on the Samsung C&T website as a bespectacled, large-billed vulture in a suit.

“Foreign activist funds started to abandon Korea after that,” Lee said. “The directors here have a fiduciary duty only to the company, not to the shareholders, so you can’t sue them even if they intentionally drive down the stock price.”

Since then, however, there has been a steady change in attitude, especially among young Korean investors who entered the market during the coronavirus pandemic. The number of Korean retail investors has increased from 6.1 million in 2019 to 13.8 million in 2021, more than a quarter of the country’s total population.

“Young Koreans have learned a lot by investing in American companies,” said Lee, who was convinced to start his own fund after seeing how local media narratives had changed. He said retail investors noted that when Microsoft bought Activision Blizzard, for example, they paid a 40% premium to all investors. Lee points out that in Korea, bidders have no legal obligation to acquire shares from minority shareholders when they acquire control of a company, “which means they get nothing.”

Observers note that the real watershed moment will come when local investors – perhaps in alliance with foreign funds – succeed in forcing big changes in the management of a cherished national champion like Samsung or Hyundai.

“Retail investors in Korea have become an assertive force and are leveraging their political clout to demand regulatory changes to improve minority shareholder protections and shareholder returns,” Lee said. “Once foreign funds see this, they will come back.”

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