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New regulation to enforce stricter governance for companies, commitment to shareholders
The revised Commercial Act is passed during a plenary session of the National Assembly in Seoul, Thursday. Yonhap
By Jun Ji-hye
Assembly passes Commercial Act revision again after Yoon government veto
The ruling Democratic Party of Korea (DPK) and opposition parties passed a revision to the Commercial Act on Thursday, aimed at strengthening minority shareholder rights and curbing the influence of major shareholders.
The amendment was approved with 220 votes in favor out of 272 lawmakers present during a plenary session of the National Assembly, a day after the main opposition People Power Party (PPP) shifted its stance and agreed on the passage.
As a key change to the act, the revised rule expands the scope of fiduciary duty for corporate directors from serving solely the company to serving both the company and its shareholders. With this revision, directors are now legally required to consider not only the interests of the company — or interests of major shareholders who are mostly company owners — but also those of all shareholders when making decisions.
The amendment also allows listed companies to hold digital shareholders' meetings.
Under the previous law, shareholders' meetings were required to be held "at or near the company's headquarters," which was widely interpreted as limiting them to physical gatherings.
The revision now permits hybrid meetings, enabling some shareholders to participate electronically from remote locations. For companies exceeding a certain size threshold, hosting such virtual access is mandatory.
The third and final change involves the so-called "3 percent rule," which limits the combined voting rights of company's largest shareholders and affiliated parties to 3 percent when appointing audit committee members in listed firms. Previously, the restriction applied only to the appointment of internal directors, but the revision extends it to outside directors serving on audit committees.
The 3 percent rule had been a major point of contention between the ruling and opposition parties but a last-minute compromise was reached to include the rule in the revised law.
The revision of the Commercial Act was initially passed by the Assembly's plenary session on March 13 with the unilateral endorsement of the then-opposition DPK, which aimed to prevent excessive influence and potential abuse of power by controlling shareholders.
But it had faced strong opposition from the then-ruling PPP and the business community, who argued that it could undermine management control protections.
After the first passage, the bill was vetoed by then-acting President Han Duck-soo of the Yoon Suk Yeol administration on April 1 and ultimately scrapped following a revote on April 17.
After agreeing to pass it this time, Rep. Jang Dong-hyeok of the PPP said, "Amending the Commercial Act greatly affects the stock market. It sends a much stronger positive signal when both ruling and opposition parties agree on such legislation, rather than showing divisions. Although there were some disagreements, we managed to reach consensus on most issues and successfully pass the bill."
Rep. Kim Yong-min, left, of the ruling Democratic Party of Korea, and Rep. Jang Dong-hyeok of the main opposition People Power Party speak to reporters at the National Assembly in Seoul, Wednesday, after reaching an agreement on the passage of the Commercial Act revision. Yonhap
The ruling and opposition parties, however, decided to postpone discussion on two key issues — the adoption of cumulative voting and the expansion of audit committee members.
The cumulative voting system enables minority shareholders to concentrate their votes on specific director candidates during elections, while the proposal to expand the audit committee involves increasing the number of audit committee members, elected separately from other directors at the shareholders' meeting, from one to two or more. Both measures aim to reduce the influence of major shareholders.
The rival parties agreed to conduct public hearings to collect opinions before moving forward with these proposals.
The latest Commercial Act amendment is regarded as enhancing corporate governance transparency and better safeguarding minority shareholders' interests compared to the earlier amendment vetoed by the Yoon administration. That version did not contain the 3 percent rule.
The revised act is set to be enforced after a one-year grace period following its official promulgation to give companies sufficient time to adapt to the new regulations.
Nevertheless, the requirement for mandatory digital shareholders' meetings will come into effect on Jan. 1 of next year, while the provisions regarding directors' fiduciary duties will be effective immediately upon promulgation.
"Passing the first major bill about people's livelihood under the Lee Jae Myung government with bipartisan consensus is very significant," Rep. Kim Yong-min of the DPK said. "We will strive to enhance shareholder protections and contribute to a more stable capital market. The two remaining unresolved issues will be promptly addressed through public hearings."
Business groups, including the Korea Chamber of Commerce and Industry and the Federation of Korean Industries, expressed concerns over the amendment's passage, citing shortcomings in director protections and potential risks from the 3 percent rule.
"We acknowledged the intent behind the revision to boost capital markets and promote fair market conditions. However, we are deeply concerned over the lack of legal protections for directors against lawsuits. The strengthened 3 percent rule could also increase the risk of activist investors influencing audit committee appointments," they said in a joint statement.
They urged swift discussions on safeguards for management rights, citing the Assembly's pledge to maintain dialogue with the business sector.