[Desk Column] For the 3% Rule to Be an Act of Goodwill

One of the hot issues related to corporate governance this year is the '3% rule.' The ruling party, the Democratic Party of Korea, is threatening to pass the so-called 'three corporate regulation laws' during this regular session of the National Assembly. Among them, the proposed amendment to the Commercial Act includes separating the election of audit committee members and limiting the voting rights of major shareholders to 3%, which has sparked strong opposition from the business community. Currently, the 3% rule applies only when appointing auditors, but if it is expanded to audit committee members, large corporations could be fully exposed to hostile takeovers by speculative capital. So, is the currently enforced 3% rule truly reasonable?

The 3% rule is a system that limits the controlling shareholders of listed companies to exercising voting rights on only 3% of shares when appointing auditors or audit committee members. It was introduced in 1962 to prevent the arbitrary actions of major shareholders and to ensure transparency in management. At that time, stock trading was not frequent, so it was not a big issue, but as the stock market became more active and the number of minority shareholders increased, unexpected problems arose. Although minority shareholders' stakes increased significantly, they often did not attend general meetings. As cases of general meetings being invalidated due to lack of quorum increased, the shadow voting system was introduced in 1991. This system considered shareholders who did not attend the meeting as having voted to prevent the meeting from being invalidated due to lack of quorum. However, shadow voting was criticized for being abused by major shareholders to secure quorum and for making general meetings a mere formality, leading to its abolition in December 2017.

After that, general meeting chaos resumed. Among 2,029 listed companies with December fiscal year-ends, 16.8% (340 companies) failed to pass agenda items at this year's regular general meetings due to lack of quorum. This is a significant increase compared to 3.7% in 2018 and 9.4% last year. Companies wage battles every general meeting season to secure voting rights. Employees visit minority shareholders one by one, and the use of proxy voting agencies has also increased. Despite these efforts, many companies still fail to appoint auditors. For this reason, general meetings have become a source of fear for small and medium-sized listed companies every year.

The bigger problem is exposure to hostile takeovers by speculative capital. Speculative capital cleverly exploits loopholes in the 3% rule. A typical example is splitting shareholdings. When Sovereign attacked SK in the past, it split its 14.99% stake into five funds. This allowed it to exercise the full 14.99% voting rights. In contrast, major shareholders and related parties cannot use this method. Regardless of whether their stake is 30% or 40%, they can only exercise 3% voting rights when appointing auditors.

There is also an opinion that 'the second-largest shareholder should be allowed to have an auditor or outside director.' However, companies fear that a 'spy director' might infiltrate the board of directors, which handles and decides various management secrets. This could lead to leakage of trade secrets and attempts at technology theft. Considering that recently Chinese companies have been using any means to steal technology from Korean companies, both small and large companies could become targets.

The 3% rule was introduced with the good intention of protecting minority shareholders. Underlying this good intention is the equation 'minority shareholders = weak' or 'major shareholders = vested interests.' This was somewhat reasonable when corporate management was not transparent in the past. That was in 1962. Is it still fair in 2020? Many minority shareholders only pursue dividend income or capital gains from stock price increases. Some minority shareholders are not even interested in the company's mid- to long-term growth and enhancing shareholder value through it.

Speculative capital, such as hedge funds chasing short-term profits, sees companies merely as money-making tools. They have no regard for the company's survival or employees' employment issues. They restructure and sell healthy companies, sometimes even ruining them. If the 3% rule is necessary to protect minority shareholders, there should also be a minimum defense mechanism to protect sound major shareholders from malicious speculative capital. Who will protect and grow companies? This question cannot be avoided by the National Assembly and the government.

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