New Developments on Dual-Class Shares

Article 382-3 of the Korean Commercial Code (the “KCC”) currently stipulates that “a director shall faithfully perform his or her duty for the company in accordance with the provisions of the law and the articles of incorporation.” However, there have recently been arguments advocating for the amendment of this provision to explicitly include the “duty to shareholders” in the scope of directors’ fiduciary duties as part of the initiatives aimed at protecting the interests of minority shareholders and general investors.

In relation to the foregoing, the Solidarity for Economic Reform issued a press release on May 27, 2024, urging that amendments to the KCC should be promptly undertaken to ensure that the scope of directors’ fiduciary duties covers the proportionate interests of shareholders, in order to guarantee the effectiveness of the Government’s corporate value-up policy. On the other hand, on June 25, 2024, eight economic organizations^[1] submitted a joint proposal to the Government and the National Assembly opposing the amendment plans aimed at expanding the scope of directors’ fiduciary duties to include the duty to shareholders.

Against this backdrop, various bills to amend the KCC aimed at broadening the scope of directors’ fiduciary duties, as well as several other bills designed to protect the interests of minority and ordinary shareholders, are continuously being proposed to the 22^nd National Assembly.

Details of Proposed Amendments to KCC on Protection of Minority Shareholders and General Investors’ Interests

The amendments to the KCC that have been proposed to the 22^nd National Assembly, which is seeking to expand the scope of directors’ fiduciary duties to encompass the duty to ordinary shareholders, are detailed as follows:

Classification	Provision of the KCC	Reason for Proposal
Current Law	Article 382-3 (Director’s Fiduciary Duties): A director shall faithfully perform his or her duty for the company in accordance with the provisions of the law and the articles of incorporation.	-
Bill No. 2200144 (Proposed by National Assembly Member Jun-Ho Jeong	Article 382-3 (Director’s Fiduciary Duties): A director shall faithfully perform his or her duty for shareholders’ proportionate interests and the company in accordance with the provisions of the law and the articles of incorporation.	The term “company” should be amended to “shareholders’ proportionate interests and the company” to include the proportionate interests of shareholders as an item to be considered within the scope of the director’s fiduciary duties, thereby imposing a duty upon a director to protect ordinary shareholders from impairment of value, even in the event the company itself is not affected.
Bill No. 2200457 (Proposed by National Assembly Member Ju-Min Park)	Article 382-3 (Director’s Fiduciary Duties): A director shall faithfully perform his or her duty for the company and all of its shareholders in accordance with the provisions of the law and the articles of incorporation.	The term “company” should be amended to “company and all of its shareholders” to explicitly include the interests of all shareholders within the scope of the director’s fiduciary duties and to impose a duty upon a director to protect interests of all shareholders, thereby resolving any conflicts of interest between controlling shareholders and minority shareholders.
Bill No. 2200687 (Proposed by National Assembly Member Hoon-Sik Kang)	Article 382-3 (Director’s Fiduciary Duties): A director shall faithfully perform his or her duty for the interests of the company and shareholders in accordance with the provisions of the law and the articles of incorporation.	The current law imposes fiduciary duties upon a director of a company in connection with the performance of his or her duty as it relates to the company only. However, as the current law has been deemed insufficient to protect the interests of shareholders, the term “company” should be amended to “interests of the company and shareholders.”
Bill No. 2202571 (Proposed by National Assembly Member Hyun-Jung Kim)	Article 382-3 (Director’s Fiduciary Duties): ① A director shall faithfully perform his or her duty for the company in accordance with the provisions of the law and the articles of incorporation. ② A director shall have a duty to treat shareholders fairly in the performance of his or her duty. ③ A director shall be deemed to have fulfilled his or her duty under paragraph (2) above with respect to resolutions adopted by minority shareholders alone, without the largest shareholder and its related parties exercising their voting rights at a general meeting of shareholders; provided, that in such case, sufficient information shall be provided for minority shareholders to make a proper decision.	Article 382-3 (2) and (3) should be newly established to provide greater protection for minority shareholders by imposing a duty on directors to treat shareholders fairly and by granting directors immunity for resolutions adopted exclusively by minority shareholders at a general meeting of shareholders.
Bill No. 2202847 (Proposed by National Assembly Member Sang-Hyuk Park)	Article 382-3 (Director’s Fiduciary Duties): A director shall faithfully perform his or her duty for the company in accordance with the provisions of the law and the articles of incorporation, and shall protect the interests of all shareholders fairly in the performance of his or her duty.	The current law imposes a fiduciary duties upon a director of a company in connection with the performance of his or her duty as it relates to the company only. However, as the current law has been deemed insufficient to protect the interests of shareholders, the provision should be amended to ensure that a director protects the interests of all shareholders fairly.

If the proposed amendment to the KCC, which aims to expand the scope of a director’s fiduciary duties to include all shareholders, is approved by the National Assembly and takes effect, it would be significant in that the amended law would provide a legal basis for minority shareholders to hold directors legally liable for breaches of fiduciary duties if it is determined that the directors’ actions undermine the interests of ordinary shareholders, even when such actions do not inflict harm on the company.

However, it is important to consider that the following criticisms have been raised in connection with the proposed amendments from both the business community and academia:

①	Under the KCC, a director is merely an agent of a company and no legal delegatory mandate exists between a shareholder and a director. Proposing such a relationship as a legal provision would be contrary to the existing legal framework;

②

The KCC already contains provisions for liabilities arising from a director’s breach of fiduciary duties, including liability to the company and liability to third parties. Additionally, various other regulations aimed at protecting minority shareholders or restricting the rights of controlling shareholders are already in place, such as the Financial Investment Services and Capital Markets Act (the “FSCMA”) and the Monopoly Regulation and Fair Trade Act;

③

In instances where a director fails to fulfill his or her fiduciary duties to a company by being negligent in managing the company, among others, the shareholders would also inevitably suffer losses. This indicates that there is virtually no distinction between the interests of all shareholders and those of the company. Therefore, amendments aimed at expanding the scope of a director’s fiduciary duty may not lead to any substantial difference; and

④	If conflicts of interest arise between a company and its shareholders, the practical decision-making process could become complicated, thereby increasing management uncertainty.

Government’s Proposed Amendments to KCC on Protection of Minority Shareholders and General Investors

On June 27, 2024, the Government also presented to the National Assembly a bill to amend several provisions of the KCC, including provisions in connection with the protection of minority shareholders and general investors. The aforementioned bill is based on the amendments to the KCC that were initially announced by the Government on August 24, 2023, but ultimately discarded at the end of the 21^stNational Assembly term (which ended in May of 2024), and is also related to the corporate governance improvement measures included in the capital market development plan announced by the Ministry of Economy and Finance through the “Dynamic Economy Roadmap” on July 4, 2024. However, the Government’s proposal to amend the KCC and the capital market development plan does not incorporate the amendments designed to expand the scope of directors’ fiduciary duties to include duties owed to shareholders.

Specifically, the following are the key details of the Government’s proposed amendments to the KCC:

To explicitly define the method for obtaining shareholders’ consent for the notice of convocation of a general meeting of shareholders via electronic documents, the amendment explicitly provides that shareholders’ consent may be obtained through electronic means in addition to written documents in accordance with the Presidential Decree.

If a relevant basis exists within the articles of incorporation, a company may hold a “fully electronic shareholders’ general meeting,” where all shareholders attend via electronic communication means, as well as a “hybrid electronic shareholders’ general meeting,” where shareholders may choose between attending the meeting at a physical location and participating via electronic means.

3.	Revision of provisions on the exercise of voting rights at a shareholders’ general meeting

(i)	The amendment explicitly provides that proxies’ power of representation may be certified via electronic documents as prescribed by Presidential Decree, in addition to written documents.

(ii)	The amendment explicitly provides that a shareholder who has voted in writing or through electronic means shall not exercise his/her voting rights at a physical or electronic general meeting of shareholders unless otherwise provided for in the articles of incorporation.

4.	Revision of provisions on written and electronic voting

(i)	Taking into consideration the equity with the requirements for introducing electronic shareholders’ general meetings and electronic voting systems, the amendment provides that the requirements for introducing a written voting system shall be determined by a “resolution of the board of directors.”

(ii)	The amendment expressly provides that written and electronic voting shall constitute means of pre-voting.

5.	Establishment of new provisions on the operation of electronic shareholders’ general meetings, together with attendance and the related exercise of voting rights

6.	Revision of regulations on appraisal rights of shareholders dissenting from corporate restructuring

(i)

By specifying that a share purchase transaction shall become effective if the company pays the purchase price calculated by the company in full by the effective date of corporate restructuring (such as mergers or spin-offs), the amendment explicitly provides that the dissenting shareholder will only hold the status of a creditor.

(ii)

If the company fails to pay all or part of the specified purchase price to the dissenting shareholder by the effective date of the corporate restructuring, the company shall be permitted to deposit the amount of the purchase price in excess of the specified price, so that liquidated damages for delay are exempted to the extent of the deposit.

(iii)

In the notice convening the general meeting of shareholders regarding the corporate restructuring, the company shall provide the specified price and the basis for its calculation, and grant shareholders the right to request access to or copies of the relevant data.

7.	Granting of appraisal rights to dissenting shareholders in split-offs

“Bill on Corporate Governance of Listed Companies” Submitted to National Assembly

On August 20, 2024, the “Bill on Corporate Governance of Listed Companies” (the “Special Corporate Governance Bill” or the “Bill”) was also introduced to the National Assembly by member Nam-Geun Kim. This bill seeks to (i) consolidate regulations relating to listed companies that are currently dispersed across the KCC and the FSCMA; (ii) strengthen the regulatory framework concerning corporate governance of listed companies; and (iii) enhance the process of exercising shareholder rights to make it more shareholder-friendly.

While the Special Corporate Governance Bill covers a wide range of provisions concerning the corporate governance of listed companies, it specifically provides for the following items in relation to the protection of the interests of minority shareholders and general investors: (i) the expansion of the scope of directors’ fiduciary duties to encompass a duty to all shareholders; (ii) the extension of the notice period for convening a general meeting of shareholders and the mandatory implementation of an electronic voting system; (iii) the limitation of voting rights for shareholders holding more than 3% of the outstanding shares in the election or dismissal of statutory auditors or audit committee members; (iv) the relaxation of requirements for the exercise of minority shareholders’ rights; (v) the introduction of a requirement for a resolution of a general meeting of shareholders to approve structural reforms such as mergers and spin-offs between affiliates; and (vi) the limitation of voting rights of the largest shareholder and the granting of appraisal rights to dissenting shareholders.

In particular, the following provisions of the Special Corporate Governance Bill specifically address the protection of the interests of minority shareholders and general investors:

The notice period for convening a general meeting of shareholders will be extended, and the implementation of an electronic voting system will become mandatory.
Directors will be obligated to protect not only the interests of the company but also the equitable interests of all shareholders in fulfilling their fiduciary duties.
In the event of the election or dismissal of a statutory auditor or an audit committee member, shareholders holding more than 3% of the total outstanding shares will be limited to a maximum voting right of 3%. To ensure that the statutory auditor or the audit committee is not affected by the interests of any particular shareholder, the voting rights of the largest shareholder will also be limited to a maximum of 3% of the total number of outstanding shares, including those held by related parties, during the election or dismissal of a statutory auditor or an audit committee member. Furthermore, voting rights of shareholders submitting shareholder proposals for the election or dismissal of a statutory auditor or an audit committee member will likewise be limited to a maximum of 3% of the total number of outstanding shares, including those held by their related parties, at the time of resolving the relevant matter during the general meeting of shareholders.
The requirements for the exercise of various minority shareholders’ rights under the KCC will be relaxed in alignment with the Act on Corporate Governance of Financial Companies.
The right to inspect books of account under the KCC will be expanded to encompass “the right to inspect and copy management information,” which includes documents submitted to the board of directors and its committees, as well as internal regulations of a company.
In the event of mergers between affiliates, comprehensive share exchanges/transfers, business transfers/acquisitions and asset transfers/acquisitions of a scale prescribed by the Presidential Decree, and the establishment of subsidiaries through split-mergers, spin-offs or in-kind contributions, approval from a general meeting of shareholders will be obtained in accordance with the requirements, methods and other standards prescribed by the Presidential Decree, and the exercise of voting rights by the largest shareholder and its related parties will be limited to a maximum of 3% at the time the relevant matter is resolved at the general meeting of shareholders. In addition, shareholders who oppose the relevant decisions will be granted appraisal rights.

The proposed amendments to the KCC and the Special Corporate Governance Bill have all been introduced and submitted to the competent standing committees. At this stage, it is uncertain whether these bills will be enacted following the standing committees’ review and subsequent approval at the plenary session of the National Assembly. Additionally, the possibility that the contents of these bills may be modified during discussions in the relevant committees and the plenary session cannot be ruled out.

In particular, if the amendments to the KCC expanding the scope of directors’ fiduciary duties are enacted, the impact on future corporate governance restructuring transactions will depend on the specific wording of the amendments and the interpretation thereof (such as explanatory notes or authoritative interpretations issued by the Ministry of Justice), together with the discussions surrounding the potential abolition of the criminal offence of embezzlement, which is currently being considered in relation to the amendments to the KCC.

If the KCC is amended to directly provide for directors’ fiduciary duties to encompass obligations to protect shareholders, several implications that companies should take into consideration may arise, including the following: (i) in future corporate governance restructuring transactions, a more thorough examination of potential conflicts of interest between majority shareholders and minority shareholders, along with measures to protect minority shareholders, may be required in addition to judgments on the company’s managerial needs; (ii) discussions may be necessary regarding whether existing judicial precedents concerning the business judgment principle of the board of directors can still be applied even after the introduction of the amended system; and finally, (iii) there may be an increase in external interest in the business judgment exercised by the board of directors in relation to corporate governance restructuring transactions.

^[1] The Federation of Korean Industries, Korea Chamber of Commerce & Industry, Korea Federation of SMEs, Korea Enterprises Federation, Korea International Trade Association, Federation of Middle Market Enterprises of Korea, Korea Listed Companies Association, and KOSDAQ Listed Companies Association.

[Korean Version]

Share

Professionals

Professionals