Commercial Act revision by new gov't to test businesses

President Lee Jae-myung arrives at the presidential office in Yongsan District, Seoul, Wednesday. Joint Press Corps

With the launch of the Lee Jae-myung administration, the president’s proposal to revise the Commercial Act is emerging as a new challenge for businesses in Korea. The plan aims to boost stock prices but could also expose companies to increased pressure from activist shareholders seeking to influence corporate decision-making.

During a YouTube livestream on Monday, a day before the presidential election, Lee said he will handle the revision “within two to three weeks after taking office.”

“Since the revision has already passed the National Assembly once, it should be reinforced and made stronger,” he said. “The largest shareholders are abusing their control over companies and taking the benefits through spin-offs and relistings. There’s no other country that allows this. We can stop it through revisions to the Commercial Act.”

The revision Lee was referring to was passed in the National Assembly on March 13 with the unilateral endorsement of Lee's party, the Democratic Party of Korea, which holds a majority. It was vetoed by then-acting President Han Duck-soo on April 1, and scrapped after another vote.

The ruling party has drafted a similar revision again and set to pass it in the near future by exploiting its dominance in the Assembly. Lee said it “won’t take a month to pass the revision.”

The revision centers on expanding board directors’ fiduciary duty to include shareholders, not just the company.

Currently, Article 382-3 of the Commercial Act limits board directors’ duty to the company itself, which is widely interpreted that directors are only obligated to act faithfully in the interest of the company, not individual shareholders.

Due to this, there have been limits in challenging board decisions that may harm the interests of minority shareholders.

A screen at the National Assembly in Seoul shows that a proposed revision to the Commercial Act was voted down, April 17. Yonhap

If the revision is passed, it will oblige board members to fairly protect the interests of all shareholders.

Along with this, the revision also introduces new obligations such as expanding cumulative voting and requiring the separate nomination of audit committee members — both of which were part of Lee’s presidential pledges. These measures are widely seen as efforts to strengthen the rights of minority shareholders.

Lee believes the revision will successfully address the chronic undervaluation of the Korean stock market, in an effort to pump up the benchmark KOSPI to 5,000 from the current 2,700.

Though Lee and the ruling party are casting a rosy outlook on the revision, businesses are interpreting the revision as a test, as the Act may excessively affect corporate decision-making.

Businesses are most concerned about the proposed expansion of board directors’ duties. If directors are required to serve not only the company but also its shareholders, they could be held accountable for stock price declines, making it harder for companies to pursue bold investments.

“In an extreme case, this could open the door for any dissatisfied shareholder to file a lawsuit over nearly every decision made by the board,” a conglomerate official said.

The business community is concerned that the definition of shareholders is too broad and vague, which could lead to serious side effects. Industry officials said it would be unrealistic to satisfy the interests of various shareholders — such as individual investors, financial institutions, activist funds and even government. This will likely trigger shareholder lawsuits against the board, potentially paralyzing corporate management.

When the previous revision was scrapped at the National Assembly on April 17, the Korea Enterprises Federation, a lobby group representing employers, issued a statement saying the scrapping "reflects concerns that the revision could increase uncertainty in business decision-making and cause serious disruptions in corporate management.”

As the new government moves to push the revision again, it will need to secure support from both the main opposition People Power Party and the business community to deliver on Lee’s campaign pledges.

“There are expectations that President Lee Jae-myung will engage in dialogue with businesses regarding the new revision, given that he actively sought common ground with them during the presidential campaign,” the official said.