3% Rule, the Only One Among G7 Countries... No 'Management Rights Defense Measures'

"If not abolished, there must be at least minimum countermeasures such as dual-class voting rights"

[Asia Economy Reporter Sung Ki-ho] The "separate election of audit committee members and 3% voting rights restriction for major shareholders" system, which the government and ruling party are reconsidering, is the corporate regulation bill among the three pending laws in the National Assembly (Commercial Act, Fair Trade Act, Financial Supervisory Act) that the business community is most concerned about.

This bill was promoted with the intention of enhancing the independence of corporate audits, but it has a vulnerability in that it could increase the possibility of abuse by speculative capital. The bigger problem is that there are virtually no defense measures against attacks by speculative capital. Even if the largest shareholder holds 51% of shares, the voting rights they can exercise in appointing auditors are only 3%. If speculative capital uses the 3% rule to split shares, they can appoint audit committee members. Audit committee members are key directors of the board of directors, the highest decision-making body of a company, and can deeply involve themselves in corporate management. This effectively creates an official channel for hostile external forces like speculative capital to attack management rights and enter the corporate board.

For this reason, the business community shares the common view that the bill itself must be abolished. Kim Yong-geun, Senior Vice President of the Korea Employers Federation, pointed out, "If audit committee members, who are key personnel of the board, are appointed from outside, it becomes difficult to operate the board itself. While companies should be held strictly accountable for any wrongdoing, fundamental and preemptive regulations should be approached cautiously." Yoo Hwan-ik, Director of Corporate Policy at the Federation of Korean Industries, said, "Limiting major shareholders' voting rights to 3% could allow hedge funds and others to infringe on corporate management rights," adding, "This will cause long-term management uncertainty." He also noted, "There is a fundamental problem of essential infringement on the property rights held by major shareholders," and stated, "Therefore, the Federation of Korean Industries takes the position that the regulation limiting major shareholders' voting rights to 3% should be completely abolished." Previously, Kwon Tae-shin, former Senior Vice President of the Federation of Korean Industries (President of the Korea Economic Research Institute), also indicated in an interview with Asia Economy that "While the multiple derivative lawsuit system can be endured by companies in terms of legal and cost burdens due to frequent lawsuits, the separate election of audit committee members is the biggest problem as there is no way to respond," implying that abolition is inevitable.

The business community emphasizes that if abolition is difficult, complementary measures such as "dual-class voting rights" and "exemption from voting rights restrictions" should be implemented to defend corporate management rights. In advanced countries, at least one of the following systems is operated to protect management rights: ▲'Dual-class voting rights,' which grant a particularly large number of voting rights to certain shares ▲'Poison pill,' which allows existing shareholders to purchase shares at a price much lower than market value in the event of hostile mergers and acquisitions (M&A) or management rights infringement attempts ▲'Golden shares,' which grant veto rights on major corporate management matters regardless of the number or proportion of shares held. However, South Korea has none of these methods.

Among these, dual-class voting rights and poison pills were discussed for introduction through Commercial Act amendment bills proposed by Liberty Korea Party lawmakers Jeong Gap-yoon, Yoon Sang-jik, and Kwon Seong-dong during the 20th National Assembly, but these were discarded due to the expiration of the assembly's term. The business community regards dual-class voting rights as a practical countermeasure against hostile M&A forces. Dual-class voting rights are one of the corporate management defense measures against hostile M&A, granting a particularly large number of voting rights to certain shares to strengthen the control of some shareholders, and are considered an effective means to defend management rights from hostile M&A. Currently, they are being introduced in the United States and Europe; for example, Ford Motor Company's founder holds 7% of shares but can exercise 40% of voting rights due to dual-class voting rights.

If it is difficult to introduce separate management defense measures, there is also an opinion that a "3% rule exemption" provision should be established. Jeong Young-seok, Team Leader of Corporate Innovation at the Korea Chamber of Commerce and Industry, emphasized, "If the separate election system for audit committee members must be introduced, at least when speculative funds attempt to enter the board through shareholder proposals, the 3% voting rights rule for major shareholders should be lifted."

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