FKI Recommends Careful Review of Amendments to the Commercial Act and Fair Trade Act by the National Assembly

[Asia Economy Reporter Changhwan Lee] The Federation of Korean Industries (FKI) announced on the 31st that it has requested the National Assembly's Political Affairs Committee and Judiciary Committee to carefully review the government's proposed amendments to the Commercial Act and the Fair Trade Act and actively reflect the opinions of the business community, coinciding with the opening of the September regular session of the National Assembly.

Economic organizations including the FKI had previously requested a careful review of the government's proposed amendments to the Commercial Act and the Fair Trade Act, which were announced for legislative notice in July. However, the government finalized the original draft at the Cabinet meeting on the 25th without reflecting any opinions from the business community.

The FKI expressed regret over this government decision and warned that if the government proposal passes the National Assembly as is, the management burden on companies struggling with the economic crisis caused by the novel coronavirus infection (COVID-19) will increase significantly.

The FKI is particularly concerned about several items. First is the introduction of the multiple derivative lawsuit system. With the introduction of this system, shareholders of a parent company can hold directors of a subsidiary accountable even with only a 1% stake.

This could increase litigation risks, as subsidiaries may become embroiled in lawsuits initiated by shareholders of the parent company who have not invested in the subsidiary, and it may also relatively infringe on the rights of subsidiary shareholders.

The separate appointment of audit committee members is also a concern for the business community. According to the government proposal, at least one audit committee member must be appointed separately from other directors at the stage of director election.

Although audit committee members have the same rights and duties as other directors, there are concerns that this separate appointment regulation, which lacks legitimacy, will infringe on shareholders' property rights and undermine the principle of majority rule in capital by restricting voting rights of major shareholders.

The revision of the 3% voting rights restriction regulation is another concern. The government proposal limits the voting rights of the largest shareholder and their special related parties to 3% when appointing audit committee members. There is a risk that hedge funds could use this voting rights restriction as a weapon to appoint audit committee members as they wish, thereby destabilizing management rights.

To avoid such situations, companies are expected to rigidly operate audit systems by reducing the overall number of audit committee members, including outside directors, or by converting the audit committee system to a full-time auditor system.

Regarding the Fair Trade Act, the strengthening of regulations on holding company shareholding ratios is also a concern. According to the government proposal, in the future, when large business groups transition to a holding company system or when existing holding companies newly incorporate subsidiaries or sub-subsidiaries, they will have to acquire more shares of subsidiaries and sub-subsidiaries than currently required.

The FKI emphasized that the cost of transitioning to a holding company system alone will be about 30 trillion won, and the resulting job losses will reach approximately 230,000.

Other concerns include the expansion of the scope of self-dealing regulations, abolition of exclusive prosecution rights, and raising the upper limit of fines.

Yoo Hwan-ik, Director of Corporate Policy at the FKI, stated, "The amendment forces companies to exhaust their capabilities complying with unnecessary regulations at a time when they should be focusing on overcoming the economic crisis caused by COVID-19," and added, "We hope that the business community's opinions will be proactively reviewed during the regular session of the National Assembly starting in September."

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