After Stewardship Code Reform, Focus Shifts to "5% Rule"…Democratic Party to Pursue Legal Amendment

Push for Capital Markets Act Revision

Ordinary Shareholder Activities to Be Classified as Ordinary Investments

Expanded Scope for Institutional Investor Collaboration Expected

Following the recent revision of the stewardship code aimed at encouraging institutional investors to actively participate in shareholder activities, the National Assembly is now moving forward in earnest to improve the so-called "5% rule" (large shareholding reporting system). This comes as criticisms mount that the current system, which treats institutional investors’ demands for increased dividends or actions to enhance corporate value as having the same intent as influencing management control, restricts meaningful shareholder engagement.

According to political circles on August 7, the Democratic Party’s Special Committee on Capital Markets has recently held a series of meetings with asset management industry representatives and other market participants to begin amending the Capital Markets Act to revise the disclosure standard for the large shareholding reporting system, commonly known as the 5% rule. Lawmakers such as Park Hongbae, a member of the National Assembly’s Political Affairs Committee from the Democratic Party, are preparing the amendment bill.

The 5% rule requires investors who own 5% or more of a listed company’s shares, or whose shareholdings change by more than 1% thereafter, to publicly disclose their intentions for holding these shares. If the purpose of holding is classified as "to influence management control," investors must release more detailed information about their shareholdings and future plans.

The issue, however, is that as institutional investors take a more proactive role in engaging with companies to improve corporate value, there is growing criticism that the current system is out of step with reality. If ordinary shareholder activities—such as requesting higher dividends, proposing the use of treasury shares, or calling for improvements in corporate governance—are also classified as intended to influence management control, this could discourage institutional investors from more active participation.

Notably, with the first revision of the stewardship code in a decade emphasizing institutional investors’ fiduciary duties and role in shareholder activities, momentum is building for political leadership to push for improvements to the 5% rule. The financial investment industry has repeatedly pointed out that if routine shareholder activities are regarded as coordinated holdings, the resulting disclosure burden and legal risks could hinder collaborative engagement by institutional investors. If the 5% rule remains unchanged, the revised stewardship code may not be effective as intended.

The amendment currently being prepared reportedly seeks to expand the scope of legitimate shareholder activities by classifying stewardship code actions as ordinary investments rather than as acts of participation in management control. Another consideration is an exemption clause that would relieve institutions from coordinated holding disclosure obligations if, even acting together, each entity’s shareholding remains below 5%. There are also plans to clarify the criteria for defining coordinated holdings under the enforcement decree apart from specific laws.

A Democratic Party official commented, "In order for the stewardship code to be effective, the current system needs to be revised," adding, "We are moving forward on this because even institutional investors, including major pension funds like the National Pension Service, face significant restrictions in exercising their shareholder rights."

Previously, Democratic Party lawmaker Kim Namgeun, who serves as secretary for the National Assembly’s Special Committee on Capital Markets, also stated, "Institutional investors must be allowed to act collectively, but the Financial Services Commission’s interpretation of the 5% rule is ambiguous. The FSC needs to provide clear guidance," adding, "If necessary, we will push for additional legislation on this matter."

Meanwhile, the business community has expressed concerns about relaxing these regulations. They argue that this could increase the likelihood of activist funds intervening in management and undermine companies’ long-term business decisions.

This content was produced with the assistance of AI translation services.