Among the recent amendments to the so-called Three Major Acts for Fair Economy, which refer to the Korean Commercial Code (the “KCC”), Monopoly Regulation and Fair Trade Law, and the Act on Supervision of Financial Groups, we examine below the amendment to the KCC, which became effective on December 29, 2020, in relation to its impact on strengthening minority shareholder rights and resulting implications.
The recent amendment to the KCC with respect to minority shareholder rights includes the following: (i) in the case of listed companies, implementation of a separate election system for one audit committee member (two or more if provided as such by its articles of incorporation) from that of the other directors at the general shareholders’ meeting from the very beginning (which was already required by the Act on Corporate Governance of Financial Companies, but now newly included in the KCC), (ii) allowing shareholders of the parent company to file representative actions against directors of its subsidiaries (in the case of private companies, shareholders must hold 1% or more shares, and in the case of listed companies, shareholders must hold 0.5% or more shares for more than six months, or hold 1% or more shares), and (iii) stipulating that shareholders can choose to exercise either minority shareholder rights under the special provisions for listed companies or under the general provisions.
It appears that the companies would need to review the impact of the new regulations and respond appropriately.
As a result of the requirement of the separate election of audit committee members and regulations on the restriction of voting rights, some minority shareholders may interfere with corporate management or attempt to join the board of directors with the ulterior purpose of realizing their personal gains by way of capital appreciation. Some may attempt to participate in management by distributing blocks of 3% of shares each via speculative funds or special purpose vehicles, given that general shareholders (other than the largest shareholder and specially related parties) can exercise up to 3% of voting rights. In particular, since the 3% limit on voting rights is applied at the director appointment stage, in the separate elections of directors and audit committee members, the effective voting rights of the opposing shareholders may increase.
As a result of the introduction of multi-step derivative actions, shareholders of parent companies are likely to actively seek liabilities of the subsidiaries’ directors. With the amendment to the KCC, it is now possible for shareholders to raise issues regarding the management of subsidiaries by filing multi-step derivative actions even if the shareholders only own shares of the parent company. Especially under a holding company structure, attacks on the management rights of subsidiaries may be available even when the shareholder owns a relatively low shareholding ratio of the holding company.
Regarding various minority shareholder rights subject to the Special Cases of Listed Companies (e.g., the right to hold general shareholders’ meetings, the right to request an investigator to investigate the company’s operations and properties, the right of shareholder’s proposal, and the right to access accounting books), the amendment confirmed that one may choose between minority shareholder rights under the special provisions for listed companies and those under the general provisions. Therefore, if minority shareholders of listed companies meet the requirements under the general provisions, they may exercise their minority shareholder rights even if they do not satisfy the six-month shareholding period requirement, making it easier for them to exercise their rights.
In order to reduce any risks that may arise from the separate election of audit committee members and the restriction of voting rights, companies will need to respond in advance by thoroughly reviewing the shareholding status of friendly shareholders other than the largest shareholder and specially related parties. Under the Act on Electronic Registration of Stocks, Bonds, Etc., issuers of electronically registered stocks can request electronic registration agencies to fill out the shareholders’ information on a quarterly basis, thereby allowing issuers to check on the status of their shareholders.
In addition, as minority shareholders are likely to become more active in exercising their rights, including seeking director liabilities through representative actions, it will be necessary when making corporate decisions to improve governance structures and reinforce control systems in order to reassure compliance in advance. It will also be necessary to respond to any civil or criminal disputes (e.g., preliminary injunctions, voting rights disputes at general shareholders’ meetings, representative actions, and criminal cases related to director appointment) that may result from any objections raised by the minority shareholders.