[In-Depth Review] The Three Fair Economy Acts: Allowing Unjust Interference in Corporate Management

Choi Seung-jae, Chief Attorney at Choi Seung-jae Law Office

The Commercial Act, the Fair Trade Act, and the Financial Group Supervision Act, collectively known as the so-called Three Fair Economy Laws, have passed the Cabinet meeting. Regarding the Commercial Act, the amendments include the introduction of the multiple derivative lawsuit system, the introduction of separate election of audit committee members, and revisions to appointment and dismissal regulations. For the Fair Trade Act, the amendments involve strengthening regulations on unfair profit appropriation and tightening shareholding requirements for holding companies, among other corporate group regulatory reforms. The Financial Group Supervision Act designates non-holding financial groups with assets exceeding 5 trillion won as supervision targets, establishes risk management systems, and implements capital adequacy checks, thereby preparing supervision measures for financial groups. The Korea Chamber of Commerce and Industry and other business circles have already expressed their opinions on the Commercial Act and the Fair Trade Act.

The amendment to the Commercial Act defines the introduction of multiple derivative lawsuits (Article 406-2) as a minority shareholder right (shareholders holding at least 1%) and stipulates that it applies as long as the company is a subsidiary.

However, multiple derivative lawsuits should only be available in cases of a complete parent-subsidiary relationship, as there are issues regarding who can file such lawsuits in other cases, making their introduction unnecessary. In fact, conflicts of interest may arise. In South Korea, where there are almost no means to defend management rights, allowing the parent company's minority shareholders to acquire minority shareholder rights and exercise expanded shareholder rights over subsidiaries through multiple derivative lawsuits constitutes undue interference in corporate management.

Regarding the separate election of audit committee members, this was also a point of controversy during the management rights attack on KT&G. Whether to separate the election of audit committee members should be left to the articles of incorporation and does not need to be mandated by law. The 3% voting rights restriction on audit appointments is a system unique to South Korea, and there is even a cumulative 3% system that restricts major shareholders' exercise of management rights. Introducing such a system in a situation vulnerable to attacks by foreign funds would result in reverse discrimination against domestic companies.

The full revision of the Fair Trade Act has undergone several public hearings where issues were pointed out. In particular, the business community is concerned that expanding internal transaction regulations could lead to reverse discrimination against holding companies. Holding companies are essentially companies whose main business is controlling other companies, and unlisted subsidiaries of holding companies inevitably fall under regulatory targets. Measures such as recognizing transactions between affiliates within holding companies as exceptions to internal transaction regulations are necessary.

Although there is some understanding of the legislative intent behind restricting voting rights of public interest corporations, such restrictions should not be applied retroactively to existing contributed shares. They should only apply to shares contributed after the law’s enforcement. Retroactive application constitutes excessive infringement on property rights. Even if voting rights restrictions are necessary, sanctions such as restricting voting rights should only apply when the activities of public interest corporations are evaluated and properly certified. Uniformly restricting voting rights of public interest corporations is not considered a desirable institutional design.

Regarding the Financial Group Supervision Act, there is agreement that the financial supervision system needs to be improved considering the possibility of crises caused by rapid changes in market conditions. However, rather than introducing new systems in such crises, it is preferable to operate systems harmoniously with the existing economic and financial environment. No matter how good a system is, companies require resources and costs to adapt.

Given the shortage of resources just to respond to crises, it is worth considering whether it is desirable to consume additional resources to comply with new systems through legal amendments. Financial groups have diverse business types, business unit proportions, and governance structures compared to the standardized financial holding company system. The amended law needs to consider regulatory levels among banks, insurance companies, and financial investment companies. Banks and insurance companies, which prioritize stability, and other financial companies should be distinguished considering the characteristics of their customers and investment assets.

Choi Seung-jae, Chief Attorney, Choi Law Office

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