The 3% Voting Rights Loophole, Companies Cornered

Concerns Over Direct Threats to Management Rights Due to Speculative Capital and Other Hostile Forces

[Asia Economy Reporters Changhwan Lee and Soyeon Park] As discussions on the three Fair Economy Acts?Commercial Act, Fair Trade Act, and Financial Group Integrated Supervision Act?accelerate within the government and political circles, corporate concerns are growing day by day. If these bills pass, they could even affect management rights, leading companies to label them as the worst possible legislation from their perspective.

Among the three Fair Economy Acts, the 10 largest conglomerates have identified the provisions on separate election of audit committee members and the 3% voting rights cap for major shareholders as the most worrisome, as these could directly infringe on management rights. Audit committee members are key personnel within the board of directors, the highest decision-making body of a company, and can oversee not only audits but also corporate management.

Currently, audit committee members are selected from among directors appointed by major shareholders. However, under the government's proposed amendments to the Commercial Act, companies will be required to elect at least one audit committee member separately from directors at the shareholders' meeting. This means that audit committee members must be elected separately at the shareholders' meeting, not from directors appointed by major shareholders.

Moreover, major shareholders can exercise only 3% of their voting rights. While general shareholders are also limited to 3%, the regulations regarding special related parties are unclear, so if several minority shareholders form a coalition, their combined voting power could significantly outweigh that of the major shareholders.

This creates an opening for hostile external forces, such as speculative capital, to enter corporate boards. In fact, Korean companies have faced threats to their management rights from speculative capital multiple times in the past. Representative examples include the activist fund Elliott's threats to the management rights of Samsung and Hyundai Motor.

Around 2004, Sovereign Asset Management, which engaged in a management rights battle with SK, split its 14.99% stake in SK into five funds, each exercising 2.99% voting rights. Sovereign used its high voting power to demand the resignation of SK's management, oppose support for underperforming affiliates (SK Global), and call for improvements in corporate governance, thereby threatening management rights.

Among the amendments to the Fair Trade Act, companies are particularly burdened by the expanded scope of regulations on private benefit appropriation (preferential treatment of related parties) and the restructuring of the exclusive prosecution system. According to the amendment, the threshold for regulating preferential treatment has been strengthened from the current 30% ownership by the controlling family in listed companies and 20% in unlisted companies to 20% ownership in all cases, thereby increasing the number of companies subject to regulation.

For example, as of the end of June, the controlling family's stake in Glovis, part of Hyundai Motor Group, is 29.9%. To be exempt from the law, the controlling family would need to sell 9.9% of their shares. Major holding companies such as LG and GS will also face increased regulations on preferential treatment.

A representative from Group A stated, "The abolition of exclusive prosecution rights, the introduction of multiple derivative lawsuits, and restrictions on major shareholders' voting rights are each provisions that could severely hinder normal business activities. We fear that we will spend the entire year embroiled in management-related disputes unrelated to competitiveness, unable to even step onto the global competition stage, remaining stuck at the starting line until the economic cycle ends."

The amendment to the Insurance Business Act, known as the 'Samsung Life Act,' is also an issue that shakes Samsung Group's governance structure. The core of the amendment is that the valuation of an insurer's affiliate shareholdings must be calculated at market value, and this amount must be within '3% of total assets.'

If this is implemented as is, Samsung Life Insurance would have to dispose of Samsung Electronics shares worth 20.59 trillion KRW (5.8% stake), after subtracting 9.53 trillion KRW, which is 3% of its total assets of 317.8256 trillion KRW. The securities industry suggests Samsung C&T as a potential buyer of Samsung Life's Samsung Electronics shares, but this could make Samsung C&T a holding company, a difficult option for Samsung Group.

Experts express concerns that the government's push for the three Fair Economy Acts could result in unreasonable regulations. Professor Junseon Choi, Emeritus Professor at Sungkyunkwan University School of Law, said, "Currently, Korea only has regulations limiting management rights, with no legal framework for defending management rights. Even if the separate election system for audit committee members is introduced, it should be accompanied by the introduction of management rights defense mechanisms such as dual-class shares or poison pills."

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