Samsung, SK Hynix Bonus Stock Agreements Face Shareholder Legal Challenge

Shareholders are preparing legal action over bonus agreements at Samsung Electronics Co. and SK Hynix Inc. A retail investor group said it plans to file a lawsuit seeking a court declaration that the companies’ operating-profit-linked stock bonus agreements are invalid, arguing the plans were adopted without shareholder approval.

Bonus Agreements Without Shareholder Approval Are a Problem

The Korea Shareholder Activism Center said on June 10 that it has begun procedures to file a suit seeking confirmation that the operating-profit-linked stock bonus agreements separately signed by Samsung Electronics and SK Hynix are invalid. It also plans to seek an injunction to suspend the agreements.

The group said both companies had agreed to pay stock-based bonuses tied to annual operating profit, amounting to roughly 10% of annual operating profit and reaching trillions of won. It argued the arrangements amounted to unlawful de facto dividends because they bypassed shareholder resolutions and profit-distribution procedures under the Commercial Act.

It said a decision to allocate part of operating profit to employee bonuses over a long period could affect shareholder value and should therefore have been put to shareholders first. “A company’s profits belong neither to the union nor to management,” the group said. “The ultimate authority over their disposition lies with shareholders.”

The group said it is already working with a law firm with experience in collective litigation to refine its legal strategy. Any shareholder holding at least one share in Samsung Electronics or SK Hynix can join the case, according to the group.

Seeks Official Position From National Pension Service

Separately from the litigation, the group said it will send letters to major domestic and foreign institutional investors. The first recipient is the National Pension Service, Samsung Electronics’ largest shareholder.

In a letter to the National Pension Service, the group asked for an official position on the operating-profit-linked stock bonus agreements at Samsung Electronics and SK Hynix. It said the pension fund, which owns about 7% of Samsung Electronics and is South Korea’s largest institutional investor, should respond actively in line with its fiduciary duty.

The group asked the National Pension Service to exercise shareholder rights and engage with the companies under its stewardship code, formally called the Principles on Fiduciary Responsibility. It also asked the fund to refer the matter to its fiduciary responsibility committee and disclose the review process and decision to subscribers.

The group also requested a meeting with the National Pension Service. Because the pension fund is a long-term investor with broad exposure to the domestic stock market rather than a short-term trader, it should respond to governance concerns through engagement rather than selling, the group said.

It plans to send similar letters to foreign institutional investors. The group said it will ask major Samsung Electronics investors, including BlackRock, Vanguard, Capital Group, Norges Bank Investment Management and State Street, to state their positions and exercise shareholder rights.

The group said the money managed by those institutions belongs to beneficiaries, giving them fiduciary obligations to protect shareholder value. The institutions should not remain silent on an issue involving the transfer of a company’s future value to a specific group without shareholder consent, it added.

Legal Action Over Access to Shareholder Registry

The group is also pursuing a request to inspect and copy Samsung Electronics’ shareholder registry. It said Samsung Electronics rejected that request.

The group has therefore begun injunction proceedings against Samsung Electronics seeking access to and copies of the shareholder registry. Once it secures the list, it plans to mail materials to at least 10,000 shareholders to rally retail investors.

The move also coincides with government discussions on whether to require shareholder approval for bonus systems that distribute a fixed share of operating profit. The group said that debate highlighted procedural problems in agreements that have already been signed.

Still, it remains unclear whether the government discussions will lead to legislation or what effect any new rules would have on existing agreements. The group said it will not wait for legislation and will instead directly challenge the validity of the bonus agreements at Samsung Electronics and SK Hynix.

“The time for words has passed,” the group said. “This lawsuit is not a fight for a few people. It is a fight for all shareholders.”

Hong Min-seong and Kim Dae-young, Hankyung.com reporters