Investing in Samsung and SK Hynix: Legal Guide for Foreign Investors

Introduction

The global AI semiconductor boom has placed Samsung Electronics and SK Hynix squarely at the center of international investment attention. As the world's two largest memory chip manufacturers, these companies are critical suppliers of the high-bandwidth memory (HBM) chips powering AI data centers worldwide. Foreign investors are increasing their exposure to both stocks, but significant positions in Korean blue-chip companies come with legal obligations that must not be overlooked.

This guide outlines the key legal considerations for foreign institutional investors building or managing positions in Samsung Electronics and SK Hynix.

Market Context: The AI Semiconductor Opportunity

Korea's semiconductor sector has experienced a dramatic resurgence driven by:

• Explosive demand for HBM chips used in AI training and inference, with SK Hynix leading the market for HBM3E and next-generation products
• Samsung's catch-up investment in HBM manufacturing and advanced packaging
• Record capital expenditure by hyperscalers (Microsoft, Google, Amazon, Meta) on AI infrastructure
• KOSPI recovery driven in large part by semiconductor sector performance

Foreign ownership of Samsung Electronics common shares has historically ranged between 50% and 55%, while SK Hynix foreign ownership typically sits between 45% and 55%. These high foreign ownership levels mean that regulatory compliance is a live issue for hundreds of institutional investors.

The 5% Disclosure Obligation

Any investor whose holdings in Samsung or SK Hynix reach 5% of outstanding shares must file a large shareholding disclosure report within 5 business days. Given the market capitalizations involved:

• Samsung Electronics: 5% of common shares represents a position worth approximately $15 billion or more
• SK Hynix: 5% represents approximately $4 billion or more

While few individual investors reach these thresholds, several scenarios trigger compliance concerns:

• Index fund managers whose aggregate holdings across funds may approach or exceed 5%
• Activist investors accumulating positions through multiple vehicles
• Concert parties whose combined holdings cross the threshold
• Derivative positions (swaps, options, convertibles) that count toward beneficial ownership

For a detailed breakdown of filing requirements, see our guide to Korea's 5% disclosure rule.

Foreign Ownership Caps and Sector Regulations

Unlike some Asian markets, Korea does not impose a general foreign ownership cap on listed securities. Foreign investors can hold up to 100% of most Korean listed companies. However, sector-specific restrictions apply:

• Broadcasting and telecommunications: Foreign ownership caps of 30% to 49% depending on the license type
• Airlines: 49% foreign ownership limit
• Financial institutions: Approval required for holdings above certain thresholds

Samsung Electronics and SK Hynix, as semiconductor manufacturers, are not subject to foreign ownership caps. However, investors should be aware of:

• National security screening: Korea's Foreign Investment Promotion Act and related regulations allow the government to review foreign investments in sectors deemed critical to national security. Semiconductors may fall into this category.
• Strategic technology controls: Korea has implemented technology export controls aligned with US-led semiconductor restrictions. While these primarily affect the companies rather than investors, they can impact investment thesis and valuation.

Voting Rights and AGM Participation

Foreign shareholders in Samsung and SK Hynix have the same voting rights as domestic shareholders. Key considerations include:

Exercising Voting Rights

Foreign investors holding shares through global custodians (e.g., Citi, BNY Mellon, HSBC) must coordinate proxy voting through the custodian chain:

1. The beneficial owner instructs their broker or investment manager
2. The broker communicates with the global custodian
3. The global custodian instructs the local sub-custodian in Korea
4. The local sub-custodian submits votes to the Korea Securities Depository (KSD)

This chain must be completed before the proxy voting deadline, typically 1 to 2 business days before the AGM. Late submissions may not be processed.

AGM Attendance

Foreign investors may attend AGMs in person or through appointed proxies. Both Samsung and SK Hynix hold their AGMs in March, typically in Suwon (Samsung) and Icheon or Seoul (SK Hynix). AGMs are conducted in Korean, though major companies increasingly provide English interpretation.

Key Agenda Items to Watch

Recent AGMs at both companies have featured significant agenda items:

• Director appointments (including independent directors and audit committee members)
• Executive compensation approval
• Dividend policy proposals
• Capital allocation plans, including share buyback programs
• Value-Up Program commitments and disclosure

Foreign institutional investors subject to stewardship codes in their home jurisdictions should ensure their voting aligns with their stated engagement policies.

Dividend Considerations

Both Samsung and SK Hynix have significantly improved their shareholder return policies in recent years:

Samsung Electronics

• Adopted a three-year shareholder return framework committing to return a significant portion of free cash flow through dividends and buybacks
• Pays quarterly dividends, a rarity among Korean companies
• Foreign investors receive dividends subject to Korean withholding tax (typically 22%, reducible under applicable tax treaties)

SK Hynix

• Increased dividend payouts in line with improved profitability from the HBM cycle
• Pays annual dividends (with discussion of moving to interim dividends)
• Same withholding tax regime applies

Foreign investors should consult with tax advisors to ensure they claim available tax treaty benefits and avoid overpayment of Korean withholding tax on dividends.

Regulatory Reporting for Institutional Investors

Beyond the 5% disclosure rule, foreign institutional investors in Korean securities may have additional reporting obligations:

• Short selling reporting: Korea imposes reporting requirements on short positions exceeding 0.01% of outstanding shares
• Foreign investment registration: All foreign investors must register with the Financial Supervisory Service (FSS) before trading Korean securities
• Beneficial ownership reporting: Certain derivative positions must be reported separately

Compliance failures can result in trading restrictions and reputational consequences.

Practical Tips for Institutional Investors

• Register early: Complete FSS foreign investor registration well before initiating any trades
• Monitor aggregate holdings: If you manage multiple funds, track aggregate exposure to avoid inadvertently crossing the 5% threshold
• Plan for AGM season: Submit proxy voting instructions early to allow time for the custodian chain to process
• Claim treaty benefits: File for reduced withholding tax rates on dividends under your home country's tax treaty with Korea
• Stay current on regulations: Korea's semiconductor policy and investment regulations are evolving rapidly in response to geopolitical developments

How Korea Business Hub Can Help

Our team provides comprehensive support for foreign institutional investors in Korean equities:

• Regulatory compliance advisory, including 5% disclosure and FSS registration
• Proxy voting coordination and AGM representation
• Tax treaty advisory for dividend withholding optimization
• Corporate governance analysis for engagement and stewardship reporting
• Ongoing regulatory monitoring as rules affecting semiconductor investments evolve

If you are investing in Korea's semiconductor leaders, contact our equity services team to ensure you are fully compliant and positioned to exercise your shareholder rights effectively.