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Activist fund targets Korean Air as Seoul boosts investor powers

Chaebol under pressure to improve poor corporate governance

Hanjin KAL controls Korean Air, the country's largest carrier, with a 29.6% stake.   © Getty Images

SEOUL -- Activist funds are targeting Korean Air Lines' parent company and South Korea's other family-run conglomerates, pressing them for better shareholder returns and improved governance in a sign that recent government moves to boost the power of minority shareholders are having an effect.

Korea Corporate Governance Improvement Fund, a local private equity fund, has become the second largest shareholder in Hanjin KAL, paying 135.7 billion won ($120.1 million) for a 9% stake. It ranks just behind Chairman Cho Yang-ho who owns 17.7%.

By taking the stake last month KCGI became the first South Korean activist to challenge one of the country's powerful chaebol conglomerates. South Korea is attracting a growing number of foreign activists hoping to exploit recent overhauls of its corporate governance code and the stated desire of the government to reform the powerful family-controlled conglomerates. Elliott Management, the U.S. activist, has waged campaigns for change at Samsung and Hyundai.

South Korea's financial regulator is also loosening regulations that constrain private equity funds' participation in a company's management. The Financial Services Commission said in September that it planned to allow funds holding less than 10% to propose shareholder votes on key matters such as the dismissal of board directors.

KCGI has denied it intends to seize management powers at Hanjin. Its mission, the fund said, was "to improve local companies' corporate governance and increase shareholders' interests. We believe that investors can maximize their gains by improving a company's corporate governance and contribute its sustainable management."

So far, KCGI has not setout its demands in full. But analysts expect it to press Hanjin KAL to increase shareholder returns and improve corporate governance which will lead to positive evaluations of the company.

The fund has been quoted in Korean media as saying the group's affiliates have been undervalued due to "idle assets and deferred investment."

"We expect that KCGI will demand that the company pay more dividends and improve its corporate governance," said Lee Sang-heon, an analyst at Hi Investment & Securities. "The fund will also pressure Hanjin KAL to use the group's assets such as its hotel chains."

Lee said that minority shareholders will support the fund's actions, as the reputation of the controlling family shareholder has been damaged by controversy over abuses against employees and corruption scandals. Chairman Cho was indicted on a charge of allegedly taking bribes worth 27.4 billion won from Korean Air's contractors. Earlier this year, his daughter Hyun-min drew criticism for pouring juice over an employee of an advertisement company.

Hanjin KAL controls Korean Air, the country's largest carrier, with a 29.6% stake and owns 22.2% of Hanjin, which operates ports and container terminals. The holding company is also the largest shareholder of Jin Air, the country's biggest budget airliner, with 60.0% stake.

Last month, Elliott sent a letter to board directors at Hyundai Motor Group, demanding the company to return 12 trillion won to shareholders of Hyundai Motor and Hyundai Mobis, the automaker's auto parts affiliate. Elliott owns 3% stake in Hyundai Motor and 2.5% stake in Mobis.

"HMG is now the only major corporate group in Korea with an unreformed legacy shareholder structure and no plan to address it," said Elliott in the letter. "We believe it is imperative for the respective boards of HMG to take bold and decisive action to remedy HMG's underperformance."

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