Firms agonize over shadow voting

A semiconductor company decided recently to hold its shareholders meeting before the end of the year to avoid new rules outlawing shadow voting.

Although the company’s shareholders’ meeting usually is held at the beginning of the year, the company decided to move the date up largely because of a cautionary report by the Kosdaq Listed Companies Association (Kosdaqca).

The report advised companies to hold their shareholders meetings before shadow voting is banned starting next year.

The report noted that the banning of shadow voting will have a huge impact not only on the way shareholder meetings have been held but also on management’s control of corporations.

“Because the ratio of our minority shareholders is so huge, it is difficult to meet the required conditions needed in passing a vote with more active participation of the shareholders,” said a company official who requested anonymity.

Some listed companies are also considering alternate means for active participation of shareholders including using electronic or written ballots.

Shadow voting, also known as mirror voting, was first adopted in Korea in 1991. It was adopted because summoning shareholders to a meeting wasn’t easy. According to Korean shareholders law, a general shareholders meeting requires the participation of holders of a combined stake of 25 percent of the company’s shares. For a vote to pass it needs the approval of more than half of the participating shareholders.

The shadow voting system, which was added to the law in 1991, provides a shortcut. A company can pass a vote if 10 out of every 100 shareholders cast votes and eight approve it. The same vote proportion applies to proxies of shareholders who don’t participate.

However, critics said companies were manipulating the system to push through votes on controversial issues and the power of shareholders was diluted. In May 2013, the government revised the law to ban the practice starting next year.

According to the Korea Corporate Governance Service, of the 659 companies listed on the Kospi whose fiscal year ends in December, 99 companies have controlling shareholders whose stakes are less than 25 percent of the companies. This will require those companies to actively encourage the participation of shareholders annual general meetings starting next year.

The companies include Samsung Electronics, NHN, Posco and KB Financial Group.

Many companies are holding early shareholders meetings to name auditors.

But as complaints have risen about the end of shadow voting, the legislation and judiciary subcommittee of the National Policy Committee voted Wednesday in favor of postponing the revision of the legislation for another three years . If the postponement passes the National Assembly, shadow voting will not be abolished until 2017. The postponement will be submitted to the National Assembly on Dec. 9.

BY KIM CHANG-GYU, YEOM JI-HYUN [ojlee82@joongang.co.kr]