Shadow voting

Shadow voting (섀도우 보우팅) means the voting exercised by the depositary in proportion to the "pro and con ratio" realized at the shareholders' meeting at the request of the issuing company lest the shareholders' meeting should fail because of the insufficient number of shareholders present at the meeting.

As a matter of fact, almost of listed companies are concerned about the failure of shareholders' meeting because minority shareholders are not interested in the agenda of the shareholders meeting. They do not usually respond to the solicitation of proxy either.

As the relevant provisions of the the Financial Investment Services and Capital Markets Act (the "Capital Markets Act", 자본시장과 금융투자업에 관한 법률) were repealed on May 28, 2013, the shadow voting is no longer in practice as from January 1, 2015. Instead, the electronic voting is expected to be widely used.

Key words
shadow voting, securities depositary, proxy, electronic voting, minority shareholders' right

Legal Background
The legal background of the shadow voting was firstly introduced in the 1991 Amendment to the Securities and Exchange Act (구 증권거래법) so as to prevent the failure of shareholders' meeting of the listed corporations. Though repealed in May 28, 2013, those provisions are still found in the Capital Markets Act as stated below until the end of 2014:
 * Article 314 (Exercise of Rights of Deposited Securities)
 * (1)-(3) Omitted
 * (4) An issuer of stock certificates shall, when it makes a notification or public notice on the convocation of a general meeting of shareholders, notify or publicize the matters regarding the exercise of voting rights as prescribed by paragraph (5) to shareholders holding stock certificates an entry of which is changed in the name of the Securities Depositary. Deleted in May 2013
 * (5) Where any shareholder holding stock certificates an entry of which is changed in the name of the Securities Depositary fails to express his/her intention to exercise voting rights directly or by proxy, or not to exercise voting rights, the Securities Depositary may exercise such voting rights; provided, however that the same shall not apply to cases falling under any of the following subparagraphs: Deleted in May 2013
 * 1. Where an issuer of such stock certificates fails to make a notification or public notice specifying matters regarding the exercise of voting rights by the Securities Depositary pursuant to Paragraph (4);
 * 2. Where an issuer ofsuch stock certificates requests thatthe Financial Services Commission prevent the Securities Depositary from exercising voting rights;
 * 3. Where the objective of a general meeting of shareholders falls under any of the matters prescribed by Articles 360-3, 360-16, 374, 438, 518, 519, 522, 530-3 and 604 of the Commercial Act;
 * 4. Where shareholder exercises voting rights directly or by proxy at a general meeting of shareholders; or
 * 5. Where an issuer of such stock certificates is an investment company.
 * (6),(7) Omitted

Pros and Cons of Shadow Voting
It is true that a number of listed companies have reached proper resolutions of their agenda thanks to the shadow voting. It makes sense that the voting rights of the stocks held by the intermediaries may be exercised by such securities depositary which is committed to properly maintain the client listed companies. Otherwise, they might fail to meet the quorum of shareholders' meeting since their capital base has increased and stock ownership has been diversified. It could save costs of shareholders' meetings.

On the other hand, while the shadow voting prevails, shareholders' positions are getting weaker and weaker in corporate governance. As the corporate environment is changing as witnessed by the gradual abolition of quorum, adoption of institutional investors' voting and electronic voting, etc. the shadow voting is increasingly at issue.

Most of all, the shadow voting usually enhances the dominance power of large shareholders and probably infringes upon the minority shareholders' rights. In fact, the top 18 listed companies among the 30 listed companies which had frequently used shadow voting went private, two of them faced with the suspension of stock trading. It means that less transparent or marginal listed companies have made ill use of the shadow voting.

Electronic Voting as a Solution
In order to correct the above-mentioned misuse of the shadow voting and promote electronic business operation, the Amendments to the Commercial Act authorized the electronic voting at the shareholders' meeting as from May 2010. By preferring to do so, shareholders are allowed to vote via the Internet needless to visit the meeting venue.

This kind of electronic voting, a typical offspring of the Digital Age, was introduced by such advanced countries as the United States, United Kingdom and Japan in the early 2000s. In particular, 45 percent of U.S. companies have adopted the electronic voting, while 80 percent of Nikkei 225-included Japanese companies, whose aggregate current market price amounts to three fourths of that of the total listed companies, have used this system.

It is true that the listed corporations are reluctant to adopt the electronic voting, but they must bear it in mind that they cannot go against the tide asking for the protection of minority shareholders' rights and transparent business operation. Even though the shadow voting is abolished in the near future, listed companies may actively adopt the electronic voting system and accordingly the shareholders' meeting will be vitalized.