Bills to amend the Korean Commercial Code (the “KCC”) at the advent of the 22nd National Assembly, seeking to expand the target of the “directors’ fiduciary duty” from “companies” to now include “shareholders,” have attracted significant attention from the market and businesses, becoming a topic of social controversy.
Representative of such bills, on June 5, 2024, National Assemblyman Jun-ho Jeong of the Democratic Party of Korea (“DPK”) proposed an amendment to Article 382-3 (Fiduciary Duty of Directors) of the KCC, wherein the sentence, “Directors shall perform their duties in good faith for the interest of the company,” would be replaced with “for the proportional interest of shareholders and for the interest of the company,” which would require the board of directors to consider the interests of minority shareholders when making important managerial decisions, such as M&As and spin-offs. In another bill proposed by Jeong-Moon Lee of DPK on November 14, 2024, Article 382-3 (Duty of Care and Fiduciary Duty of Directors) states, “Directors, while performing their duties, shall protect the interests of all shareholders and shall not unreasonably infringe upon the interests or rights of any particular shareholder.”
According to news reports, at the Economic Issue Review Meeting in May 2024, President Suk-Yeol Yoon demanded the “creation of specific action plans to improve corporate governance to protect the interests of investors.” In this regard, Deputy Prime Minister and Minister of Economy and Finance Sang-Mok Choi held a press conference in May 2024, to announce that “the Ministry of Economy and Finance, the Financial Services Commission, and the Ministry of Justice will gather opinions on specific action plans through public hearings between June and July.” This garnered considerable attention because it was the first time the government announced its position on amending the KCC to expand the target of directors’ fiduciary duty to include shareholders.
At a party caucus on November 14, 2024, the Democratic Party of Korea, which holds the majority of seats in the National Assembly, agreed on initiatives to amend the KCC, aiming to strengthen transparency, independence, and shareholder rights protection of corporations, as detailed below. They also decided to address the relevant bills during the regular session of the National Assembly. The KCC amendment is a condition set by DPK leader Jae-Myung Lee for agreeing to the abolition of financial investment income taxes on November 4, 2024. On September 24, 2024, DPK announced its plan to adopt initiatives to amend the KCC as part of “Korea’s Five Boost-up Projects,” aiming to improve corporate governance and protect minority shareholders. To this end, DPK’s floor leader and the chairman of the policy planning committee recently took the lead in organizing a task force composed of major lawmakers within the party to invigorate the Korean securities market. It appears that the party has confirmed specific initiatives reflecting these recent developments:
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To stipulate directors’ duty of care to protect all shareholders’ interests;
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To require the appointment of independent directors who are not influenced by the largest shareholder;
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To gradually expand the scope of separate election of directors who are members of the audit committee (3% cap rule); and
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To invigorate cumulative voting in large companies.
According to recent news reports, the Supreme Court initially took a prudent approach to the proposed amendment, which would expand the target of directors’ fiduciary duties from “company” to “company and shareholders,” but it has begun to agree with this change. The National Court Administration of the Supreme Court recently submitted an opinion letter regarding the relevant proposed amendments to the National Assembly, stating that they “agree with the legislative intent of imposing a duty on directors to protect shareholders” and that “it is basically a matter of legislative and policy decision.” The National Court Administration reportedly noted that, as a reason for agreeing with the legislative intent, major countries overseas recognize the duties of directors to protect shareholders’ interests.
Following DPK’s announcement of its initiatives to amend the KCC, eight economic organizations[1] issued a reactive statement on November 14, 2024, expressing concern about the proposed amendments. They warned that the hasty changes could lead to excessive lawsuits against directors, that foreign speculative investors might misuse the amended law as a tool for management attack, and that litigation risks could cause delays in directors’ decision-making processes, potentially hindering corporations’ ability to enter new industries.
After ongoing discussions regarding the amendment of the KCC, which includes the requirement for directors to protect the interests of all shareholders, the majority party, DPK, has officially confirmed its initiatives and announced that it would promptly address the relevant bill. The government did not express explicit dissent but indicated a willingness to conduct a specific review, as described above. Even the Supreme Court reversed its previous opposing stance and agreed with the legislative intent, noting that it is a matter of legislative and policy decision-making. In light of these circumstances, the amendment bill is quite likely to be legislated.
The enactment of the bill will cause significant changes in key decision-making processes of companies, as well as in the operation of the board of directors and general meeting of shareholders, due to directors facing an expanded scope of duties and responsibilities. Other initiatives, such as appointing independent directors, holding separate elections for audit committee members, and expanding cumulative voting, will also strengthen minority shareholder rights, promote shareholder activism and engagement, and significantly influence the operations of general meetings of shareholders of listed companies. These constitute key issues in managing companies and responding to capital markets. Therefore, caution is required of corporate personnel and market investors.
[1] Eight economic organizations: Federation of Korean Industries, Korea Chamber of Commerce and Industry, Korea Federation of Small and Medium Business, Korea Enterprises Federation, Korea International Trade Association, Federation of Middle Market Enterprises of Korea, Korea Listed Companies Association, and KOSDAQ Listed Companies Association.
