Korean Only 'Makmuganae-Style Commercial Law Amendment' Condemned by Business Community

Criticism Grows Over Government-Proposed Commercial Act Amendment as Korean-Style Corporate Regulation
Intended Adoption of Global Standards Undermined, Causing Infringement on Independent Management Rights of Korean Companies

[Asia Economy Reporters Changhwan Lee, Dongwoo Lee] South Korea is the only country in the world that has introduced or plans to introduce the "separate election of audit committee members," a key element of the Commercial Act amendment currently being promoted by the government. Another contentious issue, the derivative lawsuit system, is confirmed to be a regulation strictly allowed only under stringent conditions in Japan.

This is why criticism is growing that the government's proposed Commercial Act amendment, originally intended as a "global standard," could become a uniquely Korean-style regulatory bad law. The Ministry of Justice plans to prepare the final government legislative bill based on opinions received from various sectors and submit it to the National Assembly as early as the end of August.

According to business and academic circles on the 27th, the Ministry of Justice's proposed Commercial Act amendment, whose core contents include the separate election of audit committee members and the derivative lawsuit system, is regarded as an ultra-strong corporate regulation with hardly any similar cases overseas.

Major economic organizations such as the Federation of Korean Industries, the Korea Employers Federation, and the Korea Chamber of Commerce and Industry emphasized that if these regulations are introduced, they could seriously infringe on the independent management rights of Korean companies in the face of speculative large foreign capital.

An official from an economic organization said, "The main contents of the government's proposed Commercial Act amendment are unprecedented strong corporate regulatory policies that are difficult to find even similar cases overseas," adding, "It will be a bad law that infringes on property rights and obstructs corporate activities."

In particular, the separate election of audit committee members and the 3% voting rights limitation were investigated as systems with no legislative precedents overseas. Currently, the Commercial Act stipulates that directors are elected first, and then audit committee members who are directors are appointed, so the major shareholder's voting rights are not restricted at the director election stage. However, if this system is introduced, only 3% of the shares will be guaranteed voting rights when electing audit committee members.

The government expects to secure the independence of audit committee members through this and improve management soundness and transparency. However, the business community emphasizes that the separate election system for audit committee members may violate the basic rules of joint-stock companies, as some shareholders could dominate the board through regulatory disparities.

The derivative lawsuit system is also recognized only under strict conditions in a few countries and is not introduced in most major countries such as Germany, France, and the United Kingdom. Japan, which uniquely introduced the system in 2015, permits lawsuits only under extremely limited conditions, such as when the parent company owns 100% of the subsidiary's shares or when the book value of the subsidiary's shares exceeds 20% of the parent company's total assets. The United States also recognizes it only through case law in some states.

In contrast, South Korea's Commercial Act amendment allows derivative lawsuits against subsidiaries where the parent company holds more than 50% of shares if shareholders hold only 0.01% of total issued shares or 1% in unlisted companies. The business community argues that if this system is newly established, it is highly likely to be abused as a means of hostile takeover and corporate pressure with a small shareholding.

There is also a prediction that the litigation risk for listed companies could increase by 3.9 times, as minority shareholder rights of listed parent companies could enable threatening lawsuits against unlisted subsidiaries. For example, the possible derivative lawsuit amount for Samsung Electronics, with a market capitalization of 327 trillion won, is only 31.1 billion won. Cheongho Comnet Co., Ltd., a listed company on the KOSPI, could file lawsuits against a total of 13 companies including parent and subsidiaries with just 1.35 million won.

Additionally, the selective operation of minority shareholder rights exercise requirements and regulations related to the dividend base date are also cited as regulations with no overseas precedents.

Professor Emeritus Donggeun Cho of Myongji University's Department of Economics said, "The biggest problem with the government's proposed Commercial Act amendment is that our companies will be highly exposed to foreign capital," adding, "This will create a tilted playing field and significantly weaken the mechanisms companies have to defend their management."

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