IN-DEPTH: Align Partners on the changing face of activism in South Korea
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An interview with Changhwan Lee, founder and CEO of South Korean activist firm Align Partners Capital Management.
Korea has proved to be a challenging market for activists in the past. How has the landscape changed in recent years?
I think overall the environment has been improving, though at a modest level. For example, the government announced the “Value-Up” program last year. Also, the opposition party is driving what they call the “Boost-Up Project.” So, there have been more activist situations and people's awareness of shareholder rights has improved as well. But why I say modestly, is because there haven't been any meaningful legal or regulatory upgrades yet. There are some minor updates, but we have yet to see a very meaningful improvement in the regulatory framework.
Do the “Value-Up” and “Boost-Up” plans share any common ground or goals?
They are related, but their approaches are different. The “Value Up” from the government and the ruling party is to softly encourage companies to improve their corporate governance and shareholder policies maybe emulating the Japanese approach of naming names but in a softer way. But the “Boost Up” plan is more stick than carrot. It requires greater duty of loyalty of directors, cumulative voting and focus on smaller minority shareholders.
Korea’s political situation made headlines with the brief martial law declaration in December. Can the Korean financial markets remain separate from politics?
Overall, yes. The recent political turmoil did create some uncertainties and maybe slowed momentum a bit. But I want to emphasize that both the value initiatives [cited above] are a response to the people of Korea wanting better protection for minority shareholders and a better kept market. That's why both parties are competing with these initiatives. Overall, the goal is the same, to improve Korean corporate governance and the capital market.
In December last year, one of Align's portfolio companies, Doosan Enerbility, withdrew its plan to spin-off Doosan Bobcat, a deal you had opposed. At the time, Doosan cited the market disruption caused by the political disturbances. Was that the real reason, or did politics offer a good excuse to walk away from an unpopular deal?
Both, I think. They were probably really surprised to see the level of backlash from shareholders. Traditionally, these kinds of mergers and splits go through, and no one speaks up. Even the government stepped in this time. And obviously, with the market drop caused by the martial law declaration the deal appraisal value was too high. Even if it went through, this could have become a problem for the group in the future. So overall I think I would say they're both reasons.
The extensive family ownership of so-called Chaebol companies in Korea appears to remain strong. Is the Chaebol system still a hindrance to activism or something that an active shareholder can utilize to seek change at a company?
The Chaebol system has always been the key issue for activist shareholders raising their voices and pushing through proposals. In most cases, these family owners push back hard on any attempt by shareholders to speak up. But, in the long run the level of family ownership is being diluted. The inheritance tax is one of the issues. These families also have multiple children, so as they go through generations the ownerships are diluted.
Shareholders are also getting more tools. For example, the 3% rule (that caps the voting rights of each shareholder at 3% during the election of auditors). So, while the environment is a bit harder for activists than in Japan or the U.S. given this the existence of the Chaebol families, the situation is getting better and it's not impossible to win campaigns, as you can see from our campaigns in 2023 and 2024.
Is there scope for private equity firms to backstop the activism market in the way they do in the U.S. and increasingly Japan and do you see much pushback from the government especially with M&A involving international PE firms?
It's not obvious yet, but the private equity market is pretty mature in Korea. There is a lot of dry powder and a lot of talent, and the overall infrastructure is already there. There are no meaningful restrictions for private equity to conduct M&A on activist targets. In fact, the government relaxed the capital requirement for cash deposit for tender offers to boot M&A. So that actually helps private equity get involved in take-private deals.
So far, there haven't been any really significant cases where private equity got involved with the activist. But there have been cases where the activist started the campaign and private equity stepped in as a white knight, like at Osstem Implant. The company was fully taken private, so the activists also made money.
What other ways does the Korean market distinguish itself?
I would just highlight the active grassroot actions taken by small retail shareholders in Korea. That is really the key difference between Korea and other markets. There's a lot of retail investors and they are gathering powers through online platforms, making their voices heard at companies, taking legal action and even demonstrating. Korean investors are angry. They are, you know, trying to protect their rights and that's really spreading pretty quickly.
