Listed Companies Without Audit Committees and Assets Under 2 Trillion Won Keep '3% Rule'... Controversy Over Regulatory Reverse Discrimination

Despite easing the 3% rule for separate election of audit committee members... limited to listed companies with total assets or audit committees
Concerns over small and medium-sized enterprises being manipulated by speculative forces exploiting legal loopholes
Legal and business circles say "violation of fairness and constitutional controversy"

[Image source=Yonhap News]

[Asia Economy Reporters Hyewon Kim, Dongwoo Lee, Gimin Lee] In the review of the Commercial Act amendment bill, which is on the verge of passing the National Assembly, controversy over regulatory reverse discrimination has arisen as the reality of small and medium-sized enterprises (SMEs) and mid-sized companies with total assets under 2 trillion won, which select auditors according to the current Commercial Act, has been excluded. The Democratic Party of Korea partially relaxed the so-called '3% rule,' which limits the voting rights of major shareholders and related parties to 3% when electing audit committee members separately, from 'combined' to 'individual,' but only limited the scope to companies with a certain asset size or listed companies that have established an audit committee. Critics point out that this leaves a risk that SMEs and mid-sized companies, whose major shareholder equity structures are relatively weak compared to large corporations, could be exploited by hostile forces taking advantage of loopholes in the bill.

According to the National Assembly and industry sources on the 8th, SMEs and mid-sized companies with total assets under 2 trillion won or those that do not have a separate audit committee and elect auditors at the general shareholders' meeting are not subject to the 3% rule based on this Commercial Act amendment bill. Under the current Commercial Act, directors must first be collectively appointed at the shareholders' meeting, and then auditors must be appointed from among the appointed directors.

The problem lies in the fact that the existing 3% rule under the current Commercial Act must be applied, not the partially relaxed 3% rule under the amendment bill. While the amendment bill is likely to recognize a 3% voting right individually rather than combined for major shareholders and related parties in listed companies with total assets of 2 trillion won or more or those with an audit committee, listed companies not subject to this must follow the existing Commercial Act. This has led to complaints that it is a violation of fairness, with some saying, "Trying to catch conglomerates but ending up catching SMEs and mid-sized companies."

For example, if Company B intends a hostile merger and acquisition (M&A) of Company A, which has total assets of about 500 billion won, and controls half of Company A's board through friendly shares in a vote battle, it gains an advantageous position in appointing auditors where the 3% rule applies only to major shareholders and related parties. A lawyer from a major law firm specializing in commercial law and corporate governance pointed out, "There is clearly an issue of fairness," adding, "Whether it is auditors or audit committee members, if voting rights are to be limited to 3%, either both companies with total assets above and below 2 trillion won should apply the combined major shareholder method, or neither should apply the combined 3%. Applying the major shareholder combined rule differently is unfair."

Yoo Hwan-ik, Director of Corporate Policy at the Federation of Korean Industries, also said, "Limiting the voting rights of major shareholders to 3% even for full-time auditors in companies with total assets under 2 trillion won is a Galapagos-style regulation that exists nowhere else," adding, "It could cause fundamental infringement of shareholders' property rights and raises concerns about the possibility of external exposure of trade secrets depending on the auditor's role."

Regarding this Commercial Act amendment bill, the business community is expressing anger beyond opposition, calling it excessive legislation that ignores the previous opinion-gathering process. Some companies that have already transitioned to a holding company system under government policy are left in a state of despair. Choi Jun-seon, Honorary Professor at Sungkyunkwan University Law School, said, "It is especially problematic for holding companies with high major shareholder equity ratios in key affiliates that can only exercise 3% of their shares," expressing concern that "private equity funds with small shares are likely to harm corporate management rights."

Companies are mobilizing their legal teams to prepare for constitutional lawsuits. A legal industry official said, "The separate election of audit committee members or the 3% rule itself has many grounds for unconstitutionality," and judged, "Restricting voting rights when electing directors itself infringes on the essential rights of shareholders."

Eight economic organizations, including the Korea Chamber of Commerce and Industry and the Korea Employers Federation, argue that the separate election system for audit committee members should be withdrawn, calling it "creating a playground for speculative capital." They believe it is likely to become a system serving only institutional investors such as foreign speculative capital or domestic funds rather than protecting the rights of minority shareholders. If directors recommended by foreign funds enter the board, given the auditor's significant access to information, leakage of technology or investment plans is deemed inevitable.

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