Institutional Shareholders Dissenting Actions in the Korean Stock Market

다국어 초록 (Multilingual Abstract)

There has been a steady increase in institutional shareholdings in Korea. Yet,
most of the institutional investors have maintained a passive attitude in acting as responsible shareholders. The investment trust company is one of the rare cases showing examples of the limited role of corporate monitor. It experienced a minimum level of legal restriction on owning shares of an individual corporation, thereby becoming a leading shareholder. It could also remain independent from the influence of industrial firms because unlike other types of financial institutions, investment trust companies in Korea were not tied to them in terms of either ownership or business relations. Moreover, due to tile oligopolistic market structure of the investment trust industry, the s(1 called 'three majors' were able to collaborate with each other in the corporate monitoring Process.
The best example of corporate disciplining efforts exerted by tile investment trust companies is found in their exercise of appraisal rights. This study tried to survey the records of their activities and evaluate the effectiveness of their efforts. Its findings can be summarized as follows.
First. although the legal base was established in 1982, active use of appraisal rights began to take place in the early 1990s and tile trend is expected to continue incoming years. The main cause of this new type of shareholder's activism is believed to be the mounting pressure upon the investment trust companies in competing for their investors these years.
Second, the dissenting actions through the exercise of appraisal right made in four types of M&A trades: merge with listed company, merge with listed company, buying & selling of listed company, and buying & selling of nonlisted company. Dissenting actions of this sort were found to be more frequently occurring in the transactions of M&A trades with non-listed companies than in the case of M&A trades with listed companies. This finding is consistent with a common belief that the possibility of agency problems to occur in tile course of M&A trade would be greater in the transaction with a non-listed company than in the case of a listed company. However, when we adopted a likelihood ratio of dissenting action where the ratio is obtained by dividing the number of dissenting cases by the number of total M&A transactions which the investment trust companies portfolio storks experienced, the result turned out to be different from our believed concept; the likelihood ratio in the case of M&A trade with a non-listed company was found to be the lowest among all possible cases.
Third, the corporations facing the dissenting actions reacted in various ways: purchasing shares that tile dissenting investors own, yielding to the shareholder's demand by either Withdrawing Of modifying tile board's decision, making shareholders agree with board's decision through further efforts. And, in a substantial number of dissenting cases(12 out of total 31 dissenting cases),shareholders succeeded in attaining concessions from corporations.
Fourth, a significant number of dissenting actions(14 out of 31 cases) were undertaken under the collaboration of two or three major investment trust companies. At the same time, the concessions made by the corporation to the dissenting shareholders were observed to be more frequent in the multishareholder dissenting cases than in the single-shareholder dissenting cases.
Fifth, the investment rust companies' decisions on tile exercise of appraisal right were mainly determined b!'the magnitude of share price decline. They pursued the use of their appraisal right when they experienced a share price decline which they could not bear. They called off their intended plan of exercising appraisal right when their share prices which dropped of at the beginning picked up enough to recover the loss occurred before.
Finally, the remedy system based on the shareholder's appraisal right does not guarantee the full recovery of possible loss because the current method does not take into account the possibility of information leakage in its determination of purchase price.