1.

Amendments to KCC to Codify Directors’ Duty of Loyalty to Shareholders

The Proposed Amendments address directors’ duty of loyalty to shareholders, the protection of the interests of all shareholders and the obligation to treat all shareholders equitably. The amended provision concerning directors’ duty of loyalty to shareholders will take effect immediately upon the promulgation of the Proposed Amendments.

Even if the Proposed Amendments expanding directors’ duty of loyalty are enacted, there will be no material changes in situations where the interests of the company align with those of its shareholders. However, when a potential conflict arises between the interests of the company (or its controlling shareholders) and those of minority shareholders, breach of duty allegations involving directors are expected to become more prevalent. Under the current KCC, directors owe their duty of loyalty to the company. As long as directors can demonstrate that their actions served the best interests of the company, their business decisions, which may have not benefited certain shareholders, are likely to be protected. In contrast, the Proposed Amendments would expose directors to potential liability for breaching their duty of loyalty in transactions that, while beneficial to the company, could disadvantage certain shareholders (e.g., a third-party allotment of new shares). Furthermore, in transactions where potential conflicts of interest may arise between controlling and minority shareholders – such as mergers and comprehensive stock exchanges – directors could be at risk of breaching their duty to protect the interests of minority shareholders.

In light of these proposed changes, directors will need to thoroughly review not only whether their decisions – including those involving corporate restructuring or mergers and acquisitions – are in the best interests of the company, but also how these decisions may affect different groups of shareholders.
 

2.

Strengthened 3% Voting Cap for Appointment/Dismissal of Audit Committee Members, Expansion of Mandatory Cumulative Voting and Separate Election of Audit Committee Members

Under the current KCC, when appointing or dismissing an audit committee member who is not an outside director in a large listed company, the 3% voting cap for the largest shareholder is calculated by aggregating the shares held by the largest shareholder and its related parties. In contrast, under the Proposed Amendments, the aforementioned 3% voting cap will also apply to the largest shareholder when appointing or dismissing an audit committee member who is an outside director as well, starting one year after the promulgation of the Proposed Amendments. Currently, large listed companies must have at least two-thirds of their audit committee members appointed among their outside directors and, in practice, audit committees are often composed entirely of outside directors. With the Proposed Amendments expanding the 3% voting cap to be applicable to the appointment of audit committee members who are outside directors as well, companies will need to verify the scope and ratio of the voting cap before the Proposed Amendments take effect.

Furthermore, the new administration is expected to support amendments to the KCC that would require large listed companies with total assets of KRW 2 trillion or more to: (i) adopt mandatory cumulative voting when appointing two or more directors, and (ii) gradually expand the number of directors who would be part of the audit committee, who therefore would have to be elected separately from other directors.

If the aforementioned proposed amendments to (i) adopt mandatory cumulative voting when appointing two or more directors are enacted, large listed companies will no longer be able to opt out of the cumulative voting system through their articles of incorporation. Even if a large listed company already has provisions in its articles of incorporation opting out of cumulative voting, depending on the specific wording and the scope of the amendments to the KCC, such provisions may be rendered invalid in the event of legal disputes. As this may allow minority shareholders to immediately request the election of directors through cumulative voting, it would be essential for companies to proactively prepare for the possible change. Furthermore, the combination of the Proposed Amendments with the strengthened 3% voting cap and the subsequent amendments to the KCC described in points (i) and (ii) mentioned above may require the adoption of a cumulative voting system for separate election of directors who will become audit committee members, further increasing the likelihood of minority shareholder nominees being appointed as audit committee members.
 

3.

Introduction of Independent Director System and Codification of Electronic General Meetings of Shareholders for Listed Companies

The Proposed Amendments change the title of outside directors to “independent directors” and increase the mandatory appointment ratio of “independent directors” for companies with total assets under KRW 2 trillion from one-fourth to one-third. According to the addenda to the Proposed Amendments, listed companies must comply with the mandatory appointment ratio within one year after the Proposed Amendments take effect. The term “Independent director” is defined as a “director who performs functions independently from inside directors, executive officers, and those with executive authority.” Notably, the term “independent director” places increased emphasis on directors’ independence from controlling shareholders. That said, there do not seem to be any significant differences in the duties and eligibility of “independent directors” in the Proposed Amendments and “outside directors” in the current KCC.

Furthermore, the Proposed Amendments set forth legal grounds for electronic general meetings of shareholders and mandate the holding of such electronic shareholder meetings for listed companies designated by presidential decree, taking into account factors such as asset size (effective from January 1, 2027).
 

4.

Systematization of Mandatory Allocation of New Shares to Existing Ordinary Shareholders of Parent Companies Upon Subsidiary Listings After Spin-Offs

There has been criticism in the market that when a listed company spins off a core business unit to establish a wholly owned subsidiary and subsequently lists that subsidiary, the share price of the parent company often declines, adversely affecting its minority shareholders. In response, regulators have pursued various reforms, including amendments to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “FSCMA”), to grant appraisal rights to shareholders who oppose such spin-offs.

Building on these developments, the new administration has announced plans for an additional regulatory framework that would require listed companies, when listing a subsidiary established through a spin-off, to mandatorily allocate a portion of the subsidiary’s new shares to the parent company’s existing ordinary shareholders who are not the largest shareholders and their related parties.

If the above mentioned framework is adopted, the mandatory allocation of new shares to parent company shareholders upon the listing of a spun-off subsidiary will become a legal requirement. This may affect the shareholder composition of the subsidiary and could have implications for the overall listing process. Accordingly, it would be advisable for companies considering a spin-off and subsequent listing transactions to carefully examine the potential impact of these regulatory changes in advance.
 

5.

Adoption of Fair Value Standards for Determining M&A Prices for Listed Companies and Strengthened Board Accountability in Corporate Restructuring Transactions

The new administration is expected to introduce regulatory measures requiring listed companies to determine the price of mergers and acquisitions by applying fair value standards that take into account share prices, asset values and earnings values. Additionally, there will likely be enhanced board responsibility to ensure that the legitimate interests of minority shareholders are protected during mergers and other corporate restructuring transactions.

In line with these anticipated regulatory developments, a bill to amend the FSCMA (proposed by National Assembly member Lee Jung-mun and 11 others on February 12, 2025) has been submitted to the 22^nd National Assembly. The proposed amendment stipulates the following: (i) in restructuring transactions such as mergers, spin-offs or business transfers, listed companies must determine transaction prices based on a fair value that comprehensively considers share price, asset value and earnings value, to the extent that does not undermine investor interests, (ii) in the event of a dispute regarding the fairness of transaction prices, the burden of proof to demonstrate that the price was fair rests with the company, and (iii) if the transaction price is found to have been unfairly determined, the company and its directors will bear joint and several liability for any resulting damages.

If the regulations described above are implemented through amendments to the FSCMA, it will become more crucial for listed companies to ensure fairness in determining the terms of restructuring transactions (e.g., mergers) by, for example, setting transaction prices based on assessments carried out by independent third-party advisors. Furthermore, as disputes regarding directors’ liability for damages are likely to increase, it will be essential for companies to pay heightened attention to maintaining both substantive and procedural fairness throughout the process of any restructuring transactions.
 

6.

Introduction of Mandatory Tender Offer Requirement in Corporate Acquisitions

The mandatory tender offer regime aims to protect minority shareholders by ensuring that, when a major shareholder sells a significant stake, the accompanying control premium is not exclusively enjoyed by the majority shareholder to the detriment of minority shareholders. Under this system, when a shareholder acquires shares exceeding a certain threshold, he/she is required to make a public offer to purchase all remaining shares in the company. This grants minority shareholders the opportunity to exit their investments on equitable terms.

The new administration is expected to once again pursue amendments to the FSCMA to introduce a mandatory tender offer system. Should such requirement take effect, the complexity of transferring management control is likely to increase for sellers. At the same time, buyers would face increased financial and procedural burdens, such as having to secure acquisition funds and engage in further transactions with minority shareholders. These factors are expected to have a profound impact on transactions involving the acquisition of corporate control.
 

7.

Review of Mandatory Cancellation of Treasury Shares by Listed Companies

Many have frequently criticized listed companies that often retain treasury shares acquired through buybacks rather than promptly canceling them. Such shares may subsequently be resold on the market or be disposed of to specific third parties for business purposes, ultimately limiting the effectiveness of share buybacks as a means of returning value to shareholders. To address this issue, the new administration is actively reviewing the introduction of a regime that would generally mandate the cancellation of treasury shares held by listed companies.

When these reforms are implemented, it is likely to become increasingly difficult for listed companies to dispose of treasury shares to business partners for alliances or to raise funds through the issuance of exchangeable bonds backed by treasury shares. Accordingly, it would be advisable for companies with significant treasury shareholdings to take into consideration relevant legislative developments, including whether the new cancellation obligations would apply retroactively to shares already held.