With the possibility of the government's proposed amendment to the Commercial Act, aimed at revitalizing the capital market, being processed in the National Assembly on the 3rd, tension is rising in the business community. If the amendment passes, there could be more disputes over breaches of trust in board decisions, leading to concerns that protections for management rights may weaken, making them vulnerable to attacks from activist funds.
According to the business community and the National Assembly on the 2nd, the Legislation and Judiciary Committee will hold a plenary session that day to discuss four bills of amendments to the Commercial Act, respectively introduced by Democratic Party lawmakers Lee Jung-moon and Park Joo-min, as well as People Power Party lawmakers Park Jun-tae and Koo Ja-geun.
The amendment to the Commercial Act includes ▲ codifying the duty of directors to act in good faith toward shareholders ▲ introducing a cumulative voting system in the election process of directors for large listed companies ▲ expanding the number of directors for separately elected audit committee members ▲ introducing electronic shareholder meetings ▲ limiting the voting rights of combined shares held by the largest shareholder and related parties to 3% known as the '3% rule.'
Under the current Commercial Act, directors must fulfill their obligations of due care and good faith. According to Article 382, section 3 (the duty of directors to act in good faith) of the Commercial Act, directors are required to perform their duties faithfully 'for the company.' If there is a conflict of interest between the directors and the company, the decision must prioritize 'the company's interests.'
However, if the duty of good faith of directors is expanded to include not just the company but also 'the company and shareholders,' the board will have to consider the interests of short-term minority investors as well.
If the board makes decisions unfavorable to minority shareholders for the personal benefit of controlling shareholders, it has laid the legal groundwork for liability under the Commercial Act for damages or for criminal breach of trust under the Penal Code.
In specific cases, a structure may emerge where controlling shareholders face off against minority shareholders, increasing the burden on the board to make decisions. Examples include ▲ controlling shareholders acquiring company stocks at low prices ▲ pricing management rights at a premium and selling at a high price monopolistically ▲ separating key institutional sectors by using physical spin-offs to subsidiaries and listing or selling separately, preventing minority shareholders from sharing in the profits.
Moreover, holding companies have faced criticism for utilizing means that increase the personal benefits of controlling shareholders, such as group separation and succession, strengthening control, and avoiding legal risks. The liquidity discount due to duplicate listings of subsidiaries represents a chronic conflict of interest issue between shareholders of holding companies and subsidiary shareholders.
Expectations that the board of holding companies will no longer be able to make such decisions if the amendment to the Commercial Act passes have led to a recent surge in the stock prices of holding companies.
In addition to the duty of directors to act in good faith towards shareholders, the amendment to the Commercial Act includes provisions that allow institutional investors and minority shareholders engaged in shareholder activism to exert influence.
According to the separate election of audit committee members, minority shareholders can have their desired audit committee members advance to the board. If a cumulative voting system is adopted, there is a high likelihood that candidates for directors supported by minority shareholders will be elected. Increased participation from minority shareholders is expected when electronic shareholder meetings are held.
A business representative noted, 'Currently, the amendment contains provisions that seriously disrupt the management rights of most corporations,' adding that 'discussion is needed to prevent side effects and reduce trial and error.'