Sovereign Asset Management Ltd. is bullish on South Korea. The secretive Dubai-based investment fund has steadily built its position in South Korean companies for the past five years. And on Feb. 25 it stunned Korea Inc. by announcing it had taken a 7% stake, worth $1 billion, in both LG Electronics Inc. and its holding company, LG Corp. That could give Sovereign a big say in the running of one of Asia's hottest electronics outfits.
But Sovereign, owned by a pair of New Zealanders, brothers Richard and Christopher Chandler, doesn't intend to meddle in LG's management. The fund says it bought into fast-growing LG because it's a model of improved corporate governance thanks to an unusually transparent ownership structure. But Sovereign is making no such concession in the case of its other big investment, SK Corp., Korea's top oil refiner. The activist fund has been running full-page ads in major Korean newspapers since mid-February urging shareholders to actively exercise their rights. Issue No. 1: Sovereign's call for the ouster of SK Corp. Chairman Chey Tae Won.
Indeed, the ads are a prelude to what's sure to be one of Asia's most contentious proxy fights. Sovereign, SK Corp.'s single largest shareholder with a 14.9% stake, wants Chey off the company's board, which is a de facto holding company of Korea's fourth-largest chaebol, or conglomerate. Chey, 44, nephew of the founder of the SK group, was convicted of accounting fraud and breach of his fiduciary duties in 2003 and served seven months in prison. Sovereign is calling on other shareholders to vote down a board recommendation to reelect Chey to another three-year term at an annual shareholders' meeting on Mar. 11. "Having a convicted criminal presiding over the board is a cause for grave concern," says Sovereign Chief Executive James N. Fitter.
Chey and his defenders insist he is now a model of rectitude and note SK Corp.'s sales for 2004 jumped 26%, to $16.9 billion, with return on equity of 24.1%. In fact, SK has initiated reforms. The 10-man board has seven outside members, up from five two years ago. Outside directors now have direct oversight of the audit committee and must approve all transactions exceeding $10 million. "There has been a Sovereign effect," says Nam Dae Woo, an outside member.
The risk for Sovereign: pushing activist tactics too hard could provoke a backlash. As it is, all 10 board members are on record supporting Chey's reappointment, making Sovereign's campaign a long shot. The Chandlers may love Korea Inc. But the course of true love never did run smooth.
By Moon Ihlwan in Seoul