[Asia Exclusive] "3% Rule and Outside Director Term Limits... Concerns Over This Year's General Meeting Rejection Crisis"

Sangjangsa Association Expects 238 Listed Companies' AGM Rejections This Year... 3% Rule Created 60 Years Ago Hampers Listed Companies

Jung Wooyong, Vice Chairman of Policy at the Korea Listed Companies Association. / Photo by Hyunmin Kim kimhyun81@

"This year's regular shareholders' meeting is expected to be more chaotic than ever due to revisions in the Enforcement Decree of the Commercial Act, the Enforcement Decree of the Capital Markets Act, and the National Pension Service's shareholder rights exercise guidelines. In particular, since the 3% rule under the Commercial Act and the resolution requirements for shareholders' meetings have not been amended, many cases of meeting resolutions being rejected are feared again this year."

Jung Woo-yong, Vice Chairman of Policy at the Korea Listed Companies Association, could not hide his concerns about the upcoming regular shareholders' meeting season in an interview with Asia Economy on the 19th at the Listed Companies Hall in Mapo-gu, Seoul. The '3% rule,' which limits the voting rights of major shareholders for auditor appointments to 3%, has made auditor appointments practically difficult, and to make matters worse, the Enforcement Decree of the Commercial Act, which restricts the term of outside directors to a maximum of 6 years (9 years including affiliates), has been enforced from this year.

In addition, companies preparing for regular shareholders' meetings are busy dealing with concerns such as disruptions in the preparation of consolidated financial statements due to audits of subsidiaries located in China caused by the novel coronavirus disease (COVID-19), tight audit schedules, securing candidates for director appointments including outside directors, and spending much time securing quorum for resolutions. According to the Listed Companies Association, since the abolition of shadow voting in 2017, the number of listed companies whose agenda items were rejected due to lack of quorum at regular shareholders' meetings increased from 76 in 2018 to 188 last year. This number is expected to increase further this year compared to last year.

Jung Wooyong, Vice Chairman of Policy at the Korea Listed Companies Association. / Photo by Hyunmin Kim kimhyun81@

-There are widespread concerns about a 'crisis' regarding this year's regular shareholders' meetings. What is the actual situation?

▲According to a survey by the Listed Companies Association, 238 companies are expected to have their shareholders' meetings rejected this year. The terms of auditors appointed in advance in preparation for the abolition of shadow voting will expire this year. They must be reappointed at this year's meetings, but due to the 3% rule, this is expected to be the agenda item with the most rejections.

The 3% rule has existed since the Commercial Act was enacted in 1962. At that time, the domestic securities market was not open to foreign investors, and there were no hedge funds demanding excessive dividends under the pretext of management rights. It is true that the 3% rule, created almost 60 years ago, is now holding back domestic listed companies competing in the global market in 2020.

We have been consistently advocating for the abolition of the 3% rule and easing of quorum requirements for several years. Especially when shadow voting was abolished, we continuously submitted opposition statements based on statistical analysis data. We do not oppose the abolition of shadow voting itself. However, shadow voting was introduced because it was difficult to meet the quorum, and its purpose should be fulfilled. It is not desirable to barely hold shareholders' meetings.

-Do you think it is impossible to avoid shareholders' meeting rejections without easing quorum requirements?

▲When shadow voting was abolished, it was said that the introduction of electronic voting could solve the quorum problem at shareholders' meetings. However, the electronic voting participation rate is very low and has not significantly helped in establishing meetings. According to data from the Korea Securities Depository, the electronic voting participation rate relative to total issued shares was 1.8% in 2017, 3.9% in 2018, and about 5.04% last year. Experts predict that for KOSDAQ companies, considering that 60-70% of shareholders are small shareholders, the electronic voting participation rate needs to be over 15% for agenda items to pass.

One method could be to base quorum on the number of shares present, as done overseas. Although extreme, in the UK, a shareholders' meeting can be valid with only two attendees. This means quorum is met with just two shareholders present. In France, voting rights vary depending on the length of shareholding. Starting from the idea that it may not be fair if a shareholder holding shares for three years and one holding for one week both have one vote, they differentiate voting rights accordingly. We might consider adopting such methods as well.

-This year, the 6-year term limit for outside directors is being enforced. How are listed companies reacting?

▲While the intention is understood, due to this Enforcement Decree of the Commercial Act, among 936 non-financial companies that need to newly appoint outside directors, 566 companies (60.5%) are affected, accounting for 718 out of 1,432 people (50.1%). With the regular shareholders' meetings approaching, the amendment to the Enforcement Decree has been finalized, and corporate practitioners are struggling to find reputable outside director candidates with expertise and independence. Even when looking for candidates, there is a lack of time to assess whether they are excellent personnel capable of understanding various industries and the characteristics of each company.

It is even more difficult for small and medium-sized enterprises (SMEs) to find outside directors. SMEs are relatively disadvantaged compared to large companies in terms of corporate recognition and compensation. There is also a tendency to avoid companies located in provinces, which burdens companies that need to raise compensation. The Listed Companies Association plans to actively support companies in finding candidates through its own pool of outside director personnel.

-With the spread of COVID-19, how are listed companies' shareholders' meetings and performance plans for this year being affected?

▲Companies with subsidiaries in China are expected to see deteriorating performance due to sluggish domestic demand and factory shutdowns in China, leading to decreased productivity. Companies highly dependent on exports and imports to and from China are also expected to be adversely affected.

-Among the series of processes from listing to accounting and auditing, which financial regulations do you think should be prioritized for improvement?

▲There is concern that regulations in accounting and auditing have been excessively strengthened. Under the pretext of strengthening auditor independence, numerous systems with the same purpose have been introduced simultaneously, increasing the burden on companies. The speed of implementation is also problematic. Because systems with significant impact have been introduced hastily and all at once, there are concerns about whether these systems can be smoothly settled. There are still doubts about whether the standard audit hours system has been sufficiently reviewed. We need to consider whether there are redundant systems.

-What do listed companies absolutely need?

▲The introduction of management rights protection systems is necessary. Korea's capital market has a significant proportion of foreign capital, many of which are hedge funds solely focused on maximizing returns. For them, achieving target returns is often prioritized over the company's survival or growth.

Moreover, with recent amendments to the Capital Markets Act, many aggressive domestic funds are expected to emerge, raising concerns about instability in management rights. Currently, companies have no choice but to secure friendly forces or acquire treasury stocks to defend management rights. While there are various means to attack corporate management rights, there are no means to defend them. We need to distinguish between improving governance such as management and hostile corporate takeovers, and protect companies that are being managed soundly.

◆ Jung Woo-yong, Vice Chairman of Policy, Korea Listed Companies Association

▲Born in 1963 in Daejeon

▲Graduated from the Department of Law, Sungkyunkwan University

▲Ph.D. in Law, Graduate School of Sungkyunkwan University

▲Executive Director, Korea Listed Companies Association

▲Director, Korea Accounting Standards Board

▲Vice Chairman, Korean Economic Law Association and Korean Corporate Law Association

▲Adjunct Professor, Department of Law, Gachon University

▲Vice Chairman of Policy, Korea Listed Companies Association

Interview by: Cho Young-joo, Head of Capital Markets Department

Compiled by: Geum Bo-ryeong, reporter gold@

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