Corporate Governance Reform: Pre-Announcement of Partial Amendment to the Korean Commercial Code

On June 11, 2020, the Ministry of Justice pre-announced a proposed partial amendment to the Korean Commercial Code that aims to improve corporate governance by introducing a multi-level derivative lawsuit system, a separate election for audit committee members, and enhanced rights for minority shareholders, among other changes (the “Bill”). The Bill was approved by the Cabinet on August 25, 2020, in substantially the same form as the original draft, submitted to the National Assembly on August 31 and is currently pending review before the Legislation and Judiciary Committee. We recommend that companies closely monitor future legislative developments regarding this matter, as the Bill is generally expected to pass during an upcoming plenary session, subject to certain amendments that may be adopted during the review process. Key features and implications of the Bill are set forth below.

1. Introduction of Multi-level Derivative Lawsuits

  i. Key Amendments

The amendment creates a cause of action for qualifying shareholders of the parent company against a director of a subsidiary in cases where the director caused harm to the subsidiary by, for example, acting negligently or breaching his or her duties. The threshold requirements for filing a multi-level derivative claim are to be the same as those for existing derivative claims and are as follows: (1) for unlisted companies, any shareholder holding more than 1% of the total number of issued shares, and (2) for listed companies, any shareholder holding more than 1% of the total number of issued shares as well as any shareholder who has continuously held 0.01% of the total number of issued shares during the preceding 6-month period.

  ii. Anticipated Effects and Implications

- Strengthening of minority shareholder rights and their ability to supervise major shareholders’ pursuit of personal interests at the expense of minority shareholders (i.e.,by unfairly favoring a subsidiary in business transactions).

-  A concern that the system will be abused/overused by minority shareholders, particularly by foreign investors making short-term investments.

- In anticipation of the amendment, the following corporate actions may be advisable: (i) review of the organization of the directors of the subsidiary, (ii) purchase of directors and officers liability insurance by the subsidiary, and (iii) review and restructuring of the subsidiary’s compliance monitoring system.

2.  Audit Committee: Introduction of a Separate Election and Amendment to Regulations Concerning Committee Appointments

  i.  Key Amendments

- Introduction of a separate election system: At least one director who will also be a member of the audit committee is to be elected separately from other directors at the time of the general elections for the board of directors, and the “3% cap rule” will apply to this election (i.e., shareholders are not entitled to exercise their voting rights above the 3% threshold).

- Amendment to regulations concerning the “3% cap rule” for member appointment: For listed companies, the “3% cap rule” will apply in a uniform manner to all audit committee member or auditor appointments, and regardless of whether such nominee is an outside director, voting rights are to be exercised only with respect to shares not exceeding 3%. For the largest shareholder, shares held by affiliated persons will be included in this calculation.

  ii. Anticipated Effects and Implications

- Increased independence for at least one of the audit committee members.

- With respect to the one audit committee member who must be elected separately, there is a greater chance that this candidate will be elected with the support of shareholders other than the largest shareholder. This may impose a burden on the management of listed companies. Specifically, there is a concern that foreign hedge funds may end up determining appointments to the audit committee by splitting ownership between its different entities.

- In anticipation of the amendment, medium-sized listed companies that are not required to establish an audit committee under the Commercial Code (i.e., listed companies with total assets between 100 billion and 2,000 billion Korean won), may consider retaining a full-time auditor in lieu of an audit committee.

3. Relaxation of Voting Threshold for Audit Committee Member/Auditor Elections Via Electronic Voting

  i. Key Amendments

An audit committee member or auditor may be elected via electronic voting by a resolution passed by a vote of the “majority of the voting rights present,” instead of 1/4 of the total number of issued shares.

  ii. Anticipated Effects and Implications

For companies who have difficulty meeting quorum requirements for the election of an audit committee member or auditor due to the “3% cap rule,” the electronic voting method is expected to reduce the possibility of the agenda being rejected due to lack of quorum.

4.  Amendment to Regulations Regarding Dividend Record Date

  i.  Key Amendments

Provisions which require the dividend record date to be the last day of the business year, with regards to the closure of the shareholders register and determination of the record date under Article 354(1) of the Commercial Code, are to be repealed.

  ii.  Anticipated Effects and Implications

-  While the timing of a general meeting of shareholders is not expressly determined under the current Commercial Code, when the dividend record date is set as the last day of the business year, a shareholders meeting must be held by the end of March of the following year (i.e., within 3 months of the dividend record date). As a result, shareholders meetings currently tend to be held at the end of March.

-  With the dividend record date no longer required to be at the end of the business year, companies may revise their articles of association and elect to set the dividend record date after the end of the business year. If so, some companies may start holding their general shareholders meetings after March.

5.  Amendment to Requirements on Exercise of Minority Shareholder Rights for Listed Companies

  i.  Key Amendments

Minority shareholders of listed companies now may choose between either (i) the general requirements pertaining to minority shareholders’ rights (percentage ownership requirement) which apply to all companies, including unlisted companies or (ii) the requirements pertaining to minority shareholders’ rights under special provisions relating to listed companies under the Commercial Code (i.e., relaxed percentage ownership requirement and a minimum 6-month holding period) in order to exercise their minority shareholder rights.

  ii. Anticipated Effects and Implications

- Increase in exercise of minority shareholders’ rights in listed companies.

- The amendment may create more opportunities for abuse of minority shareholders’ rights, as it will enable minority shareholders’ rights to be exercised upon satisfaction of the general ownership requirement only, without the need for a 6-month holding period. Shareholders may purchase shares just before the general meeting of shareholders for the sole purpose of exercising minority shareholders’ rights and sell such shares shortly after the meeting.