Korean Government Announces Economic Policy Roadmap Enhancing General Meetings of Shareholders and Strengthening Directors’ Responsibilities

On July 3, 2024, the Korean government announced the “Economic Policy Directions for the Second Half of 2024” and the “Dynamic Economy Roadmap” at a meeting presided over by President Yoon Suk Yeol.

The above announcement (the “Announcement”) includes “enhancement of capital markets through the Corporate Value-up Program” as one of the top ten tasks for achieving sustainable growth, which is based on the following recognition:

Capital markets: The market’s persistent undervaluation has hindered corporate growth and asset appreciation of middle-class households through capital markets.

Shareholder returns: Listed companies have a low propensity to pay dividends, and shareholder returns via treasury shares have also been modest.
* Shareholder Return Ratio of Major Countries (Dividend Propensity + Treasury Stock Purchase Ratio, 2014-2023 average): (Korea) 29% (United States) 91% (China) 31% / (Average for Advanced Economies) 67% (Average for Emerging Market Economies) 38%
Governance: With key decisions primarily made by controlling shareholders, there is an inadequate protection of general shareholders.
* Asia Corporate Governance Evaluation Ranking (conducted by the Asian Corporate Governance Association (“ACGA”), based on 12 Asian countries): (2016) 8^th, (2018) 9^th, (2020) 9^th, (2023) 8^th

As part of the measures aimed to enhance corporate governance in furtherance of the abovementioned goal, the Korean government plans to (i) strengthen directors’ responsibilities (e.g., by prohibiting misappropriation of business opportunities), (ii) introduce virtual shareholders’ meetings, and (iii) grant appraisal rights to dissenting shareholders in the event of a vertical spin-off, as outlined below:

Enhancing governance: Strengthen directors’ responsibilities, including by prohibiting the misappropriation of opportunities (e.g., requiring prior approval by the board of directors, etc.) (second half of 2024).

Enhance the effectiveness of general shareholders’ meetings by introducing virtual shareholders’ meetings and reducing the effective period of the record date for shareholders’ meetings (from three months to two months), and grant appraisal rights to dissenting shareholders in the event of a vertical spin-off (second half of 2024).
Enhance market valuation and induce investment by recognizing companies that excel in corporate value enhancement and providing benefits such as preferential treatment in the selection of exemplary taxpayers to such companies (within 2025).
Continue to seek additional supplementary measures, such as the promotion of long-term shareholding and enhancement of the inheritance tax system and governance* (starting from 2025).
* e.g., regarding inheritance taxes, reform the taxation system, and regarding governance, enhance the function and effectiveness of general shareholders’ meetings, make directors’ responsibilities more concrete, etc.

The introduction of virtual shareholders’ meetings and improvement of the appraisal rights regime had already been included in the proposed amendments to the Korean Commercial Code (“KCC”) announced by the Ministry of Justice on August 24, 2023 (Link), but a legislative notice of the proposed amendments was issued again on May 21, 2024 in connection with the inauguration of the 22^nd National Assembly. Based on the Announcement, it is expected that the process of amending the KCC may gain momentum in the near future.

The Announcement did not include measures aimed at strengthening directors’ fiduciary duty to protect the proportional interests of shareholders, which is currently garnering much attention in the market. According to a media report, the 1^st Vice Minister of Economy and Finance Kim Byeong-hwan stated in a briefing before the Announcement that “public discussions are ongoing regarding the proposed amendment to the KCC to strengthen directors’ fiduciary duty” and that “the government will likely establish its position at some point during this process.”

The above measures aimed to strengthen directors’ responsibilities and enhance the effectiveness of general shareholders’ meetings (via the introduction of virtual shareholders’ meetings, etc.) warrant close attention, as they are expected to have a significant impact on (i) companies’ major business and financial decisions and proceedings of the board of directors’ meetings in connection therewith, (ii) companies’ response to minority shareholders, and (iii) operation of the general meetings of shareholders.

[Korean Version]

Share

Professionals

Professionals