Ruling party passes revision toughening Commercial Act despite opposition from biz groups

A revision toughening the Commercial Act is passed during a plenary session of the National Assembly in Seoul, Monday, under the ruling Democratic Party of Korea’s leadership, while seats for main opposition People Power Party lawmakers remain empty as they boycott the vote. The amendment requires listed companies with assets exceeding 2 trillion won ($1.4 billion) to adopt a cumulative voting system when electing directors. Yonhap

The ruling Democratic Party of Korea (DPK) pushed through a revision toughening the Commercial Act aimed at expanding minority shareholder rights, Monday.

The DPK, which holds a majority in the National Assembly, railroaded the bill during a plenary session in the morning after an overnight filibuster by the main opposition People Power Party (PPP), which claims the new rule will make it difficult for management to maintain stable control of companies.

In the plenary vote, 180 voted in favor and two abstained out of 182 lawmakers present. All supporting votes came from the DPK and its allied parties, while the two members of the minor conservative Reform Party abstained. Most PPP lawmakers, who opposed the bill, boycotted the vote.

Under the revision, listed companies with assets exceeding 2 trillion won ($1.4 billion) are required to adopt cumulative voting, and will have to select at least two audit committee members separately from other board members, up from the current standard of one.

Cumulative voting allows minority shareholders to check controlling shareholders when electing directors. Each share carries votes equal to the number of directors to be chosen, and all votes may be allocated to a single candidate.

For instance, if three directors are to be elected, shareholders are entitled to three votes per share, which can all be cast for one nominee. This enables minority shareholders to combine their votes and elect a director even against the controlling shareholders’ wishes.

The passage of the latest Commercial Act revision follows an earlier amendment passed on July 3, which expanded directors’ fiduciary duties to cover not only the company but also its shareholders.

According to the government and the ruling party, all these revisions are aimed at better protecting minority shareholders. However, the business community and main opposition party have expressed concerns that these two rounds of revisions pose a serious threat to corporate management rights.

Rep. Joo Jin-woo of the main opposition People Power Party conducts a filibuster at the National Assembly in Seoul, Monday, as part of his party’s effort to block the additional Commercial Act revision. Yonhap

The second amendment was tabled at the Assembly’s plenary session on Sunday, prompting the PPP to launch a filibuster. However, that move ended Monday morning under parliamentary rules which state that a filibuster can be ended after 24 hours if at least three-fifths of all lawmakers, or 180 members, vote in favor of doing so. Holding enough seats to meet the threshold, the DPK and allied parties submitted a motion to end the filibuster, and voting on the amendment followed.

In response, the PPP plans to consider legal action, including a constitutional petition, against the Commercial Act revision as well as the so-called “yellow envelope bill,” which the ruling party recently pushed through under a similar procedure. The latter refers to revisions to the Trade Union and Labor Relations Adjustment Act aimed at broadening workers’ rights.

Backlash from business circles

Business circles argue that the two rounds of Commercial Act revisions will constrain corporate management by making it harder to maintain stable control.

They warn that minority shareholders, foreign investors or activist funds could block key decisions for growth, such as restructuring, large-scale investments and mergers and acquisitions.

Eight major business organizations, including the Federation of Korean Industries, issued a statement expressing regret over the passage of the additional amendment, saying it “would likely increase management disputes and litigation risks.”

They called on the Assembly to pursue balanced legislation that minimizes side effects and stressed that “stronger defense mechanisms aligned with global standards” are urgently needed to protect companies from speculative capital.

Rep. Song Eon-seog, interim leader of the main opposition People Power Party, speaks during a party meeting at the National Assembly in Seoul, Monday, criticizing the ruling Democratic Party of Korea for pushing through the additional Commercial Act amendment. Yonhap

In particular, concerns have been raised over the combination of the “3 percent rule” under the July 3 revision, which limits the voting rights of controlling shareholders and their affiliates to 3 percent when selecting audit committee members, and the newly mandated cumulative voting system.

A simulation by Choi June-sun, a professor emeritus of law at Sungkyunkwan University, found that in a seven-member board, the largest shareholder and affiliates could secure only two to three seats, while other shareholders could claim four to five, enabling decisions to be made against the largest shareholders’ wishes.

A recent survey of 300 listed companies by the Korea Chamber of Commerce and Industry also found that 77 percent of respondents saw the Commercial Act revisions as detrimental to growth, and 74 percent viewed them as a potential threat to management control.

Nevertheless, the DPK emphasized that the revisions will enhance corporate transparency and strengthen minority shareholder rights, with the potential to attract more capital to the stock market.

“Introducing cumulative voting and expanding separate elections for audit committee members would be a meaningful policy step if Korea’s major listed companies can rebuild trust in their boards making decisions for overall growth and innovation from the perspective of ordinary shareholders,” said Rep. Oh Gi-hyung, who chairs the DPK’s special committee to advance President Lee Jae Myung’s pledge to push the KOSPI above 5,000.