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K-pop’s big corporate showdown boosts Korean activists

It was an event that marked a marked turnaround in South Korea’s corporate scene: the director of the Millennium Foundation takes on senior executives from one of the country’s leading entertainment companies. YouTube debate Dressed for the country’s growing retail investor army.

Changhuan Li, 35, who left private equity group KKR last year to set up his own activist fund in Seoul, promoted his March effort to improve the management of SM Entertainment, the stock-traded K-Pop group.

Days later, he made waves with a decisive victory over SM founder, controlling shareholder and “chief producer”, Sue-Man “SM” Lee. Changhwan Lee’s Align Partners Fund has received support from other investors to impose a new independent auditor for the company on a reluctant board that included some of Su-Man Lee’s relatives, childhood friends and longtime associates.

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

The victory was an addition to the investment of activists in South Korea – historically seen by many as the domain of predatory foreign funds engaged in what is locally called “eat and run”.

“Everyone in the Korean stock market is frustrated that local companies do not understand their value because of poor governance,” Changhuan Lee told the Financial Times. “It’s been like this for 20 years.”

Lee was born in 1986 in the city of Dago in the heart of conservative South Korea, the son of a single mother who worked as a cook in a school and invested her meager salary in Korean stocks. He recalled the hostility of many Koreans towards foreign investors who made big profits and turned Korean assets into distress following the financial crisis in Asia in the late 1990s.

This bad feeling was evident only a few years ago, following Elliott’s management dispute with Samsung’s founding family over Controversial merger In 2015 of the subsidiary Samsung C&T with the subsidiary of chemicals Cheil Industries.

The political nonsense surrounding the merger, which helped Samsung’s ruling family secure control of the conglomerate, led to Imprisonment of Samsung’s vice chairman, Li Zhe-jong And Conservative President Park John-hee, which provoked a fit of national mental reckoning over corrupt practices.

But after warning that the merger would hurt Samsung C&T shareholders, Elliott was destroyed in the local media as a parasite; Its founder Paul Singer described On the Samsung C&T website itself as a bespectacled eagle, with a large beak in the suit.

“Foreign activist funds began to give up on Korea afterwards,” Lee said. “The directors here have a fiduciary duty only to the company, not the shareholders, so it is not possible to sue them even when they intentionally lower the share price.”

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

“The young Koreans have learned a lot from investing in American companies,” he told me, who was persuaded to set up his own fund after seeing how the local media’s narratives changed. According to him, retail investors indicated that when Microsoft bought Activision Blizzard, For example, they paid a 40 percent premium to all investors. Lee notes that in Korea, bidders have no legal obligation to purchase shares from minority shareholders when they acquire control of the company, “meaning they get nothing.”

Observers point out that the moment of the real watershed will come when local investors – perhaps in alliances with foreign funds – will be able to force major changes in the management of a beloved national champion like Samsung or Hyundai.

“Retail investors in Korea have emerged as an assertive force and leverage their political influence to demand regulatory changes to better protect minority shareholders and shareholder returns,” Lee said. “Once foreign funds see it, they will come back.”

christian.davies@ft.com

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