The legislative developments regarding the proposed amendment to the Korean Commercial Code (the “KCC”), introducing directors’ duty to protect all shareholders’ interests, have sparked significant interest from the market and companies. This newsletter provides a comprehensive overview of the recent legislative developments.

In 2025, activist fund and minority shareholder challenges during annual shareholder meetings, such as cases of minority shareholders’ engagement in corporate matters, as well as campaigns to encourage dissenting proxy votes to shareholder proposals, have continued to increase. These challenges are attracting attention from capital market investors and listed companies.

One of the fundamental forces behind the strengthening of minority shareholder rights and the ensuing rise of demands to enhance shareholder value, such as corporate management and shareholder returns, is the amendment of the KCC and the Financial Investment Services and Capital Markets Act (the “FSCMA”). This has led to regulatory improvements, such as the separate election of audit committee members and multiple derivative lawsuits, thereby expanding the legal means for minority shareholders to raise issues against controlling shareholders and management.

The most recent controversy regarding strengthened regulations to protect minority shareholders’ rights involved an amendment that would expand directors’ duty of care and fiduciary duty to their company under the existing KCC, to all shareholders.

The Democratic Party of Korea (the “DPK”), a majority party of the National Assembly, announced on November 14, 2024, that it would actively pursue its initiatives to propose the following amendments to the KCC (proposed by National Assembly member Jeong-Moon Lee, please refer to our previous newsletter (Link) issued in November 2024 for details).
 

• Stipulate the duty to protect all shareholders’ interests as the duty of care of directors;

• Stipulate the grounds for a virtual general meeting of shareholders of listed companies;

• Require listed companies to appoint independent directors who are not influenced by the largest shareholder;

• Expand the scope of separate election of directors of large listed companies who are members of the audit committee; and

• Invigorate cumulative voting when appointing directors of large listed companies.
   

In response to this, the Government held a press conference hosted by the Financial Services Commission (the “FSC”) on December 2, 2024, and announced the direction of amendments to the FSCMA aimed at strengthening the protection of general shareholders’ interests. The event was attended by Byoung-Hwan Kim, Chairman of the FSC, Sang-Yeop Koo, Head of the Legal Affairs Bureau at the Ministry of Justice, and Se Hoon Lee, First Senior Deputy Governor of the Financial Supervisory Service (“FSS”).

At the press conference Mr. Kim stated, “To minimize the negative effects that revising the KCC might have on numerous unlisted small and medium-sized enterprises, as well as mid-tier companies, we have limited its application to listed corporations.” He further explained that the amendment of the FSCMA is being pursued, and that “by explicitly including measures to protect shareholders in financial transactions within the FSCMA, we can alleviate the uncertainties in day-to-day management activities that might arise from the revision of the KCC.”

The specific directions announced by the Government are as follows:
 

• Specify that the board of directors shall make efforts to protect the legitimate interests of shareholders in the event of a merger, etc., of a listed company;

• Abolish the provision on calculation of merger prices based on stock prices not only for mergers between non-affiliates but also for mergers between affiliates;

• In principle, all mergers, etc., must be evaluated and disclosed by an external valuation agency;

• Establish grounds for preferential allotment of up to 20% of the newly issued shares to general shareholders (excluding major shareholders) of the parent company if the company lists a subsidiary after a vertical spin-off; and

• Delete the period limit (five years) for the Korea Exchange to review a company’s efforts to protect general shareholders if the company lists a subsidiary after a vertical spin-off.
   

After undergoing discussions on the bill by both parties, on February 24, 2025, the First Subcommittee on Bill Review of the Legislation and Judiciary Committee approved the alternative to the proposed amendment to the KCC, which reflected some of the amendments to the KCC proposed by the DPK, as outlined below. The alternative bill was also approved at the plenary meeting of the Legislation and Judiciary Committee held on February 26, 2025, and passed at the plenary session of the National Assembly on March 13, 2025.
 

On February 24, 2025, when the alternative bill was passed by the subcommittee, eight economic organizations announced that there is a high risk of excessive lawsuits against directors and abuse of the proposed measures, as means for activist funds to attack the management right if the alternative bill is legislated.

The alternative bill was scheduled to be proposed and resolved at the plenary session of the National Assembly on February 27, 2025. However, companies and the People Power Party, the ruling party, protested against the bill, and National Assembly Speaker Won-Sik Woo refused to submit the bill to the plenary session. On February 27, Mr. Woo held a press conference just before the opening of the plenary session, and explained the reason for his refusal, stating, “There is a huge disagreement between the negotiating groups on the proposed amendment to the KCC,” and “We intend to discuss the proposed amendment because it would have a huge impact on our society.”

After the DPK re-submitted the alternative bill to the plenary session of the National Assembly on March 13, 2025, the bill was approved by the National Assembly. However, on April 1, 2025, the Acting President vetoed the proposed amendment to the KCC and sent it back to the National Assembly for reconsideration. In response, the National Assembly attempted to pass the proposed amendment again on April 17, 2025. The bill was subsequently abandoned, as it failed to meet the quorum and voting requirements during the reconsideration (i.e., receive a majority of the total members in attendance and an affirmative vote of at least two-thirds of the members present).

Although the alternative bill was abandoned, the DPK may decide to partially alter the alternative bill and strive to amend the KCC again. In light of the scheduled presidential election, it will also be crucial to examine future developments on this matter. If the DPK’s bill, aiming to expand the scope of directors’ duty of care, is enacted, there will be fundamental and extensive changes in corporate governance, directors’ responsibilities, the exercise of minority shareholders’ rights and the operation of general meetings of shareholders.

Particularly, in the context of protecting companies’ interests, it may be difficult to point out issues in restructuring transactions such as mergers, spin-off mergers, comprehensive stock exchanges and transfers. If conflicts of interest between controlling shareholders and minority shareholders due to unfairness in the merger ratio or due to the infringement of minority shareholders’ rights arise, unlike before, there could be lawsuits against directors for breaching their duty towards shareholders, leading to civil and criminal liabilities, thereby increasing the risk of liability for directors and management.

Moreover, as the above mentioned duty to protect shareholders’ interests as a general rule will apply to all decisions made by directors, it may be necessary for companies to ensure the substantive and procedural legitimacy of major business decisions, prepare and improve their internal control and compliance systems, and secure integrity in the operational procedures of the board of directors and the general meeting of shareholders.

Similarly, the introduction of virtual general meetings of shareholders may require a review of the necessary procedures, such as amending the relevant articles of incorporation and introducing the operation system of the virtual general meeting of shareholders.

[Korean Version]