March 6, 2020 / 11:45 AM / 23 days ago

Activist fund KCGI says Delta should abstain from vote on control over Korean Air

SEOUL (Reuters) - Delta Air Lines Inc (DAL.N) should abstain from voting at an upcoming shareholders meeting that is likely to decide who leads Korean Air Lines (003490.KS) as the U.S. firm has pledged to be a passive investor, the top shareholder in the Korean carrier’s parent firm said.

FILE PHOTO - The logo of Korean Air Lines is seen on a plane at its aviation shed in Incheon, South Korea, February 27, 2017. REUTERS/Kim Hong-Ji/File Picture

Korean Air’s parent firm Hanjin Kal (180640.KS) is in the midst of an intense proxy fight. On one side is Korean Air CEO Walter Cho who is a friend of Delta Chief Executive Ed Bastian and is widely believed to backed by Delta. Together, with other Cho family members, they would command about 40% of the voting rights for Hanjin.

On the other is activist fund KCGI, which has built up a near 18% stake to become the top shareholder in Hanjin and has joined hands with Walter Cho’s older sister Heather, a former executive at the airline who lost her job after a famed ‘nut rage’ incident in 2014.

Their camp has roughly 37% of Hanjin’s voting rights and are backing Kim Shin-bae, a former CEO of a telecom company, to replace Walter Cho as a Hanjin board member.

Delta took 4.3% in Hanjin last year, two years after announcing a joint venture with Korean Air and after Walter and Heather Cho’s father died. It has been increasing the stake and new data released on Thursday showed the holding now stands at 13.98%.

That stake build-up is at odds with a public filing Delta made last year that says it will not influence Hanjin’s management, Kang Sung-boo, head of KCGI or Korea Corporate Governance Improvement Fund, told Reuters.

Under Korean law, investors with a stake of 5% or more must declare if they are a passive investor or plan to influence management; if the latter, they are subject to higher scrutiny by regulators.

Kang added that he believes if Delta votes at a March 27 shareholder meeting, it would suggest that the U.S. firm intends to influence management and he might pursue legal action to find out more information.

“I have concerns that Delta’s board and top executives could be violating Korea’s securities laws,” he said, adding that his legal advisor said Delta should have made a filing which made clear its intent to exert influence.

KCGI said it would decide in the coming days whether it would make a direct request to Delta to abstain.

Delta declined to comment on Kang’s remarks. It has made no public comments about the increase in its stake in Hanjin or whether it backs Walter Cho. But its stake buildup has been interpreted as support for Walter Cho, with the market doubling Hanjin’s stock price this year on expectations of a cut-throat proxy war.

Bastian said last June shortly before the announcement of Delta’s initial purchase in Hanjin that his friendship with Walter Cho stretches back 20 years.

Legal and corporate governance experts contacted by Reuters said that under South Korean law, Delta can be a passive investor and still retain the right to vote at a shareholders meeting.

The run-up in Hanjin’s share price this year to record levels comes despite Korean Air having to cut 80% of its capacity and put its cabin crew members on leave due to the spread of the coronavirus.

The airline’s labor union has said it opposes KCGI and Heather Cho’s proposals, arguing their candidates do not have sufficient airline industry experience and has urged shareholders to vote against them.

Reporting by Joyce Lee and Hyunjoo Jin; Additional reporting by Tracy Rucinski in Chicago; Editing by Miyoung Kim and Edwina Gibbs

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