One Member Short of Quorum... Concerns Over 'Auditor Appointment Crisis' at This Year's General Meeting

40% of KOSDAQ Listed Companies Affected...125 Firms Failed to Appoint Auditors Last Year

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[Asia Economy Reporter Kum Boryeong] This year, at the regular shareholders' meeting, it has been revealed that 4 out of 10 KOSDAQ-listed companies need to appoint new auditors, raising concerns about an 'auditor appointment crisis.'

According to the KOSDAQ Association on the 12th, based on an estimate of 1,298 KOSDAQ-listed companies with December fiscal year-end (excluding special purpose acquisition companies and foreign companies), 544 companies, accounting for 41.9% of the total (429 auditors and 115 audit committee members), must appoint new auditors or audit committee members at this year's shareholders' meeting.

KOSDAQ companies, which find it relatively more difficult to secure quorum compared to companies listed on the KOSPI market, are expected to face significant challenges. Last year, among 1,244 KOSDAQ-listed companies with December fiscal year-end, 490 companies (39.4%) put forward auditor appointment agendas at their shareholders' meetings, but 125 companies failed to appoint auditors.

The so-called '3% rule' applied to auditor appointment agendas has made it harder for these agendas to pass. Under the Commercial Act, to pass an agenda at a shareholders' meeting, unless otherwise stipulated in the company's articles of incorporation, approval by a majority of the voting rights of shareholders present and at least one-quarter of the total issued shares is required. If the largest shareholder holds more than 25% of shares, passing general agendas such as approval of financial statements is not difficult. However, for auditor appointments, the voting rights of the largest shareholder and related parties are limited to 3% of total shares, so the quorum must be met by the shares of minority shareholders excluding major shareholders.

The problem is the low participation rate of KOSDAQ company shareholders in shareholders' meetings. A KOSDAQ Association official explained, "Many investors in KOSDAQ companies are short-term traders, and the average holding period of shares is about three months, so not many people try to exercise voting rights directly at shareholders' meetings. Also, if shares are sold after the shareholder registry closes at the end of December, the shareholder holding voting rights at the registry closing may no longer be a shareholder by the time the shareholders' meeting is held."

Since the abolition of the proxy voting system called 'shadow voting' at the end of 2017, securing voting rights has become even more difficult. In 2018, 51 KOSDAQ companies failed to pass auditor appointment agendas at shareholders' meetings, and the number increased to 125 last year.

Although more companies have introduced electronic voting systems or commissioned professional vote collection agencies, the costs are burdensome. According to the financial investment industry, securing 1% of shares through a collection agency costs about 5 million to 10 million KRW. Securing 10% of shares could cost up to 100 million KRW.

This year's shareholders' meetings are also likely to face issues with the appointment of new outside directors whose terms have expired. This is due to the amendment of the Enforcement Decree of the Commercial Act, which sets the maximum term of outside directors at six years (nine years including affiliates). According to the Korea Listed Companies Association, 566 listed companies need to appoint new outside directors at this year's shareholders' meetings, totaling 718 outside directors. Among them, mid-sized and small companies account for 494 companies (87.3%) and 615 directors (85.7%), respectively.

The Korea Exchange warned that if a listed company fails to meet the required ratio of outside directors stipulated by the Commercial Act, it may be designated as a management item or face delisting, urging caution.

This content was produced with the assistance of AI translation services.