Experts said this year's regular shareholder meetings are likely to be an inflection point for corporate governance overhauls ahead of the enforcement of the revised Commercial Act. They projected an unusually intense season, as vote battles between corporations seeking to respond to the changes and shareholders move into full swing.
Attorney Gu Hyun-ju of Hannuri Law said at the Korea Governance Forum seminar "How shareholder meetings will change under the revised Commercial Act, corporations' workarounds vs. strategies for ordinary shareholders," held in Yeouido, Seoul, on the 3rd, "The outcomes of this year's regular shareholder meetings will serve as a benchmark by company for gauging the prospects of ordinary shareholders entering boards in the future."
Earlier, the National Assembly passed the first Commercial Act amendment, centered on the so-called "3% rule," which caps the combined voting rights of the largest shareholder and related parties at 3% or less for audit committee member appointments. The amendment takes effect on July 23. The second Commercial Act amendment, which mandates cumulative voting and expands separate elections for audit committee members, also passed the National Assembly, with the rules to apply starting Sept. 10.
At the forum, participants said various scenarios could play out at shareholder meetings before the revised Commercial Act takes effect.
First, regarding the first Commercial Act amendment, analysis suggested that methods to disperse the voting rights of friendly equity could be used to circumvent the "3% rule," including price return swaps (PRS), total return swaps (TRS), funds, employee stock ownership associations, equity transfers, and stock lending.
Regarding the second Commercial Act amendment, a proposal was raised to reduce the very targets of cumulative voting by fixing the number of directors to be elected in advance or shrinking the board size through articles-of-association changes. It was also noted that companies might stipulate quotas by director type in the articles or employ a so-called "skip" voting method.
There was also an outlook that controlling shareholders may try to maintain influence by increasing the number of audit committee members so that those elected separately do not constitute a majority on the committee, or by introducing a staggered board that spreads out director terms.
Ahead of the third Commercial Act amendment focused on canceling treasury shares, ideas included disposing of treasury shares before the law changes or revising the articles through a special shareholder resolution. There was also the possibility of attempts to avoid canceling treasury shares by linking them to employee compensation.
Experts stressed that active exercise of voting rights by ordinary shareholders is crucial to ensure the purpose of the system is not undermined. They said ordinary shareholders should check the consistency between the intent of the revised Commercial Act and the actual meeting agenda items, and focus on whether the board size is being reduced, terms are being differentiated, cumulative voting is implemented, and the audit committee size is being expanded.
Attorney Sim Hye-seop said, "When corporations grow, their performance leads to profits, which then flow through asset and are returned to shareholders—that is the principle of capital circulation," adding, "In the Korean market, there are still significant questions about the linkage through which asset leads to shareholder returns." Sim added, "To resolve this, it is important to improve legislation in a direction that implements the principle of majority rule so shareholders can substantively participate in decision-making."
Lee Nam-u, chair of the Korea Governance Forum, said, "The controlling shareholder side is likely to deploy a shareholder-meeting strategy of preemptively submitting proposals to secure favorable ground before the revised Commercial Act takes effect, and in response, ordinary shareholders and institutional investors may rally, leading to vote battles in many places," adding, "This year's shareholder meetings will be hotter than ever."