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The Ministry of Justice Amending the Korean Commercial Code to Reinforce Regulations on Corporate Governance


On June 11, 2020, the Ministry of Justice (the "MOJ") announced a proposed partial amendment to the Korean Commercial Code (the "Proposed Amendment") to reinforce regulations on corporate governance.  The government and the ruling party have been discussing to strengthen minority shareholder rights and to expand the scope of measures to check and balance the largest shareholder's exercise of management control.  Provided below are key changes, which have been included in the Proposed Amendment:

  1. Introduction of a multi-level derivative suit.  If a director of a subsidiary (in which the parent company holds more than 50% equity, and including a second-tier subsidiary of the parent company) inflicts loss on the subsidiary due to the breach of the fiduciary duty thereto, the shareholders of the parent company may file a derivative lawsuit against the said director.  More specifically, a shareholder of the parent company will have standing to file a multi-level derivative suit if the same holding requirements are satisfied as those currently applicable to a derivative action – holding at least one-hundredth (1/100) of shares, or holding at least one-ten thousandth (1/10,000) for more than six months in case of a listed company.

  2. Separate election of a director who is an audit committee member.  As a general matter, when voting to elect audit committee members, shareholders who own more than 3% of a company's voting rights are not entitled to have voting rights above that 3% (i.e., the 3% cap rule) with the aim of strengthening the independence of the audit committee members for a listed company.  However the 3% cap rule does not apply to the director election stage, but to the audit committee member election only under the current rule.  The Proposed Amendment requires that at least one candidate for a position of director who will also take the role of an audit committee member go through a separate election process at the shareholders meeting while applying the 3% cap rule from the stage of a director election, enabling minimization of the largest shareholder's influence in the director appointment as well.  Further, under the new requirement the largest shareholder and any related party thereof are allowed to exercise voting rights for the shares not exceeding 3%, in aggregate, of the total number of shares issued and outstanding, whereas the 3% cap rule is applicable to general shareholders for the shares that they each hold only, regardless whether the candidate is an outside director or not.

  3. Relaxed requirements to adopt a resolution to appoint an auditor/audit committee member elected via electronic voting.  The Proposed Amendment allows a company adopting an electronic voting system to pass a resolution to appoint an auditor or a member of the audit committee even though the required voting threshold representing 1/4 of the shares issued and outstanding is not satisfied, as long as the majority of the attending shareholders vote for the appointment.  Such loosened requirements are intended to address the issues companies have been facing regarding an auditor or a member of the audit committee appointment related with the application of the 3% cap rule following the abolishment of the shadow voting system.

  4. Streamlined regulations on a dividend record date enabling the ordinary general meetings of shareholders after April.  The provision in the current Commercial Code assuming a dividend record date to be the end of the preceding fiscal year, in connection with the pro-rated dividends, will be eliminated.  Accordingly, companies may hold ordinary general meetings of shareholders after April, spreading out general meeting schedules for companies as a dividend record date (which expires in three months) can now be set after the end of December of the preceding fiscal year.  This amendment can be understood in the context of the provision in the Enforcement Decree of the Commercial Code (scheduled to be implemented next year) which obligates companies to attach their annual business reports to all public and individual notice to hold ordinary general meeting of shareholders.

  5. Relaxed requirements for exercising minority shareholders' rights.  Minority shareholder of a listed company can exercise its minority shareholder rights if one of the following two requirements is satisfied: (i) the requirement for the exercise of minority shareholders' rights, which is also generally applicable to non-listed companies (the holding requirement), or (ii) the requirement for the exercise of minority shareholders' rights pursuant to the special provision in the Commercial Code, which is applicable to listed companies (relaxation of the holding requirement with additional requirement for the six-month holing period).  The Proposed Amendment has resolved practical and theoretical debates related to the relevant provision, for example, certain lower courts decisions requiring that minority shareholders of a listed company hold shares for at least six months in order to exercise the minority shareholders' rights regardless of the shareholding ratio.

Following the announcement, the Ministry of Government Legislation and the Cabinet Council must review the Proposed Amendment and have it approved by the President before the Proposed Amendment is submitted to the National Assembly.  We expect the Proposed Amendment to go through the deliberation and resolution process of the National Assembly.