In March 2018, the Ministry of Justice (“MOJ”) submitted to the Legislation and Judiciary Committee of the National Assembly its opinion on the 13 proposed amendments to the Korean Commercial Code (“KCC”) on corporate governance, as well as on the proposal by the MOJ special committee for the KCC amendment.  This January, the MOJ expressed its strong desire to pass the pending amendments within the year.

Key Changes Being Proposed under the Amendments:

1. Mandatory electronic voting system

Electronic voting system allows shareholders to exercise their voting rights electronically without having to attend the general meeting of the shareholders in person.  While the KCC allows companies to adopt this system by board resolution, as of 2018, only about 60% of the listed companies have adopted it.

The amendment bills contemplate making it mandatory for listed companies that meet certain size requirement and/or other conditions to adopt the electronic voting system or written absentee voting system to increase minority shareholders’ participation in shareholders' meetings.  The MOJ endorses a bill adopting a mandatory electronic voting system only, given the onerous procedure of written absentee voting.  

Mandatory electronic voting system is expected to enable minority shareholders to actively exercise their voting rights and to allow meeting quorum to be met with greater ease.  On the other hand, shareholders’ opinion may not be properly represented as in live discussions, and on-the-spot amendments to the agenda during shareholders’ meetings would be challenging.  The system could also bring shareholders’ resolution under challenge where a failure or an error in the electronic system is suspected.

2. Multi-tiered shareholder derivative action 

Several pending bills contemplate introducing a multi-tiered shareholder derivative action system under which the shareholders of a parent entity may file derivative action against a director, auditor or executive officer of a subsidiary in cases of such person’s breach of fiduciary duties.  

The standing requirements for filing a multi-tier derivative action (e.g., parent entity’s capital contribution ratio in the subsidiary) vary among the proposed bills.  The MOJ appears to advocate the proposal by its special committee, which would require for standing: (i) the parent company to have contributed more than 50% of the capital of the subsidiary; and (ii) shareholders of the parent company to hold at least 1% (for listed parent companies, 0.01%) of the total issued and outstanding shares of the parent company.

Introducing the multi-tiered shareholder derivative action system is expected to bolster minority shareholders’ supervisory power over the company’s subsidiaries and incentivize greater responsibility on the part of corporate directors, auditors and executive officers.  On the other hand, there are concerns that such multi-tiered shareholder derivative actions may constrain business activities of the subsidiary entities in general, and allow speculative funds with shares in the parent entities to meddle with the businesses of their subsidiaries.

3. Separate election of directors for audit committee members

Under the KCC, a listed company required to establish an audit committee (total assets of KRW 2 trillion or more) must appoint members of the audit committee at the general meeting of shareholders.  

Procedurally, this is done in two steps: (i) directors, whether they are to be audit committee member or not, are elected at the general meeting of shareholders; and (ii) among the elected directors, those proposed to be on the audit committee are put to vote (Articles 542-11 and 542-12 of the KCC).  As a purported safeguard to ensure independence of the audit committee, the KCC currently restricts the voting rights of the following shareholders in the second step of the election of audit committee members: 

• If the candidate for the audit committee is an outside director, any shareholder holding more than 3% of the issued and outstanding voting shares of the company; and
• If the candidate for the audit committee is not an outside director, the largest shareholder, if its combined shareholding (with related parties either in number of shares and voting units) exceeds 3% of the issued and outstanding voting shares of the company. 

However, the above safeguard has been criticized for being ineffective, because the voting restriction is not applied in the first step of the election, that is, when audit committee member candidates are initially elected as directors. 

To address this issue, a number of bills propose segregating the electing of directors who will serve as audit committee members at the initial election of directors, and applying the above voting restriction.  The MOJ endorses a bill which requires sizable listed companies (with total assets of KRW 2 trillion or more) to hold such segregated election for at least one member of the audit committee.

4. Mandatory cumulative voting system

“Cumulative voting,” which grants shareholders multiple votes per share in a multi candidate election and allows concentrating votes on a single candidate, may be adopted for certain qualifying shareholders upon request (i.e., shareholders with 3% of the issued and outstanding voting shares (1% for listed companies with total assets of KRW 2 trillion or more)).  However, as the KCC allows such qualifying companies to opt out from the cumulative voting system by so indicting in the articles of incorporation, few companies have incorporated it. 

The proposed bills contemplate making cumulative voting system “mandatory” in certain cases.  The MOJ endorsed suggestion by its special committee, which: (i) requires companies with certain asset size (to be specified by enforcement decree) to mandatorily adopt cumulative voting system; and (ii) lowers the current shareholding ratio threshold required to be entitled to request for cumulative voting. 

While such change would further empower minority shareholders and enhance corporate transparency, some raise concern that the proposed rule, together with segregated election of audit committee members, will make management control of corporate entities too vulnerable to outside challenge. 

Implications:

The Minister of Justice had indicated in March of this year that the MOJ will prioritize incorporation of mandatory electronic voting system and the multi-tiered derivative action system over the other items, seeking passage of the amendments within the first half of the year.  While on-going controversy on the amendment proposals and opposition by the business sector will likely delay the plan, the MOJ continues to express strong will to pass the legislation.  As such, corporate entities should closely monitor the legislative developments and discourse, and prepare action plans in light of the anticipated changes that may arise from the amendments.