[Inside Chodong] Frustrated Business Community Over the Unfair "Fair Economy 3 Laws"

At the end of June, executives at the president level from more than 10 major conglomerates, including the top four groups, gathered at a hotel in Seoul. An economic organization representing the business community arranged this private meeting. The agenda included amendments to the Commercial Act and the Fair Trade Act. At that time, the 40-day legislative notice period was underway. Since the discussion was held on an "off the record" basis, candid and realistic conversations took place. During the meeting, the management of a major corporation, which had successfully transitioned to a holding company and was considered a model case, raised their voice in frustration. The issue was the core of the Commercial Act amendment: the separate election system for audit committee members. In fact, this issue is not new, as it was previously attempted during former President Park Geun-hye’s administration but quietly disappeared.

The separate election of audit committee members means, simply put, that at the shareholders' meeting, one or more directors who will serve as audit committee members are elected separately from the start and included as part of the board. Under the current law, directors are elected collectively at the shareholders' meeting, and then audit committee members are selected from among them, which leaves room for major shareholders' influence. The proposed amendment aims to enhance the board’s independence and transparency, and this intention is fully understandable.

The problem is that this system, introduced to prevent the arbitrary actions of major shareholders and improve opaque corporate decision-making structures, could backfire and threaten management rights. This is due to the so-called "3% rule," which limits voting rights to 3% when appointing audit committee members. There are plenty of ways to circumvent the 3% rule by splitting shareholdings.

Take Hyundai Motor Company, which was targeted by the US hedge fund Elliott Management last year, as an example. Under current law, Hyundai Motor’s major shareholders?Hyundai Mobis (21.43%), Chairman Chung Mong-koo (5.33%), and Vice Chairman Chung Eui-sun (2.62%)?can exercise a total of 29.38% voting rights in the director appointment process. However, applying the 3% rule for separate election of audit committee members reduces their combined voting rights to only 8.62%. If speculative funds like Elliott or multiple institutional investors collude, it would not be difficult to dominate the audit committee of a major company.

It does not end there. Even without the intent to threaten management rights, if an unfriendly faction becomes a board member, they can access confidential business plans and accounting books and participate in key decision-making. It is questionable whether the positive effects of the separate election system for audit committee members can outweigh these side effects. This is a direct blow to holding companies with high subsidiary shareholdings. For example, if a holding company and other shareholders each hold half of a subsidiary’s shares, the voting rights exercisable during the separate election of audit committee members could differ drastically?3% versus 50%?a gap of up to 47 percentage points.

While the separate election system for audit committee members is a representative example, other provisions in the Fair Trade Act, such as the multiple derivative suit system, prohibition of private claims, and abolition of exclusive prosecution rights, which are far from global standards, have raised concerns that South Korea might become a "litigation republic."

The passage of the so-called "Fair Economy 3 Laws"?amendments to the Commercial Act and Fair Trade Act, and the enactment of the Financial Group Supervision Act?seems imminent. With the ruling party holding a massive 176 seats, these bills, which have failed several times before, are more likely than ever to pass the National Assembly. Above all, these are key policy tasks of the Moon Jae-in administration and election pledges of the Democratic Party. The Commercial Act amendment, which includes the same content, was the only bill sponsored by Kim Jong-in, the emergency committee chairman of the United Future Party, during his 16 years in the National Assembly as the Democratic Party’s emergency committee leader, making it difficult to frame the issue as ideological conflict between the ruling and opposition parties. The business community, feeling the urgency, has been visiting lawmakers’ offices repeatedly since the 21st National Assembly convened. It is hoped that all stakeholders will listen carefully and show flexibility to find common ground rather than allowing a one-way approach.

Kim Hyewon, Deputy Editor, Ministry of Industry kimhye@

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