Gov’t set to amend Capital Markets Act to protect shareholders

Kim Byoung-hwan, center, chairman of the Financial Services Commission, speaks duirng a media briefing at the Government Complex Seoul, Monday. Yonhap

The ruling bloc is seeking to amend the Capital Markets Act to clarify the responsibilities of boards of directors in safeguarding shareholders' interests during mergers or spinoffs, according to the financial regulator, Monday.

The amendment is in response to an opposition-led bill that aims to expand directors' fiduciary duties under the Commercial Act, shifting the focus from loyalty solely to companies to also include the protection of shareholders.

Regulators believe the amendment to the Capital Markets Act could address concerns arising from the revision of the Commercial Act, such as increased litigation, slower decision-making, and attempts to seize control of company management. By limiting directors' loyalty duties to shareholders and applying them only in specific circumstances, the amendment aims to mitigate these side effects and reduce the risk of management challenges.

“Since the Commercial Act revision, as a general law applicable to all companies, could lead to significant unintended side effects, we hope the proposed amendment to the Capital Markets Act will be discussed more intensively in the National Assembly as an alternative,” Kim Byoung-hwan, chairman of the Financial Services Commission, said during a media briefing.

Under the amendment proposed by the government, when a listed company engages in any of the four activities specified in the Capital Markets Act — mergers, spinoffs, significant transfers of business or assets, or comprehensive share exchanges and transfers — the board of directors will be explicitly required to make efforts to protect the legitimate interests of shareholders.

The board must prepare and disclose a statement detailing the purpose of the merger, expected benefits and the appropriateness of the merger price to ensure the protection of shareholders’ interests.

The amendment also aims to oblige directors to transparently disclose how the merger prices are assessed, to ensure that the price reflects the company’s intrinsic value rather than relying on a uniform formula.

In addition, the government intends to extend the Korea Exchange’s review period for measures aimed at protecting general shareholders of subsidiaries following physical spinoffs, lengthening it from the current five years to an indefinite period.

The government and the ruling People Power Party (PPP) have pushed for the amendment in response to the main opposition Democratic Party of Korea (DPK), which has been advocating for a revision of the Commercial Act to broaden the scope of directors' fiduciary duties to include the protection of shareholders.

The DPK has argued that decisions neglecting the interests of minority shareholders and causing them harm have become widespread. It contends that this issue is a key driver of the so-called “Korea discount” and has proposed amending the Commercial Act as a solution to address the problem.

This proposal, however, has faced opposition from the business community due to concerns that it would apply not only to listed companies but also to unlisted companies, excessively restrict corporate autonomy and hinder business activities.

The government acknowledges the need for greater transparency in corporate governance and better protection of minority shareholders. However, due to the potential side effects of the Commercial Act revision, it views the introduction of targeted regulations through the Capital Markets Act amendment as a more appropriate approach.

According to the government, this approach would prevent the misuse of lawsuits, minimize disruptions to business operations, and address uncertainties. The revision would apply to approximately 2,400 listed companies and would be limited to four specific actions, including mergers and spinoffs.

The government plans to submit the amendment bill to the Assembly this week.

Kim Chang-beom, front row center, vice chairman of the Federation of Korean Industries, speaks during a press conference at a hotel in Seoul, Nov. 21, to protest a planned revision to the Commercial Act, which the business sector claims will undermine corporate growth momentum. He is joined by executives of 16 conglomerates. Yonhap

"By introducing provisions that require the board of directors to protect shareholders’ legitimate interests, we expect that adhering to these procedures will ensure the legality of the transaction," Kim said.

“This is expected to enhance predictability, compared to the proposed Commercial Act revision, which include both the company and shareholders as the subjects of directors’ fiduciary duties.”