"Covering Eyes and Saying Awoong... Loosening the Individual 3% Rule Has No Effectiveness," Industry's Cry of Despair

Korea Industrial Alliance Forum (KIAF) Simulates Voting Rights Application for Audit Committee Member Election in Top 15 Market Cap Companies
Concerns Over 7 of 15 Audit Committee Seats Being Taken by Foreigners Like Hedge Funds Even with 20% Voting Limit Instead of 3%
Calls for Defensive Measures Such as Recourse Rights if Companies Suffer Actual Damage
Economic Group Official Expresses Frustration, "If Recourse Rights Fail, Then Legislative National Recall System for Lawmakers"

[Asia Economy Reporters Kim Hyewon and Lee Gimin] The ruling party has pushed through the amendment to the Commercial Act, focusing on strengthening regulations on the appointment of audit committee members, and although some provisions of the '3% rule' have been relaxed, criticism is growing that it is merely a meaningless formality without practical effect. In the business community, voices are emerging calling for institutional measures to prevent excessive legislation by the National Assembly, as well as defensive means such as claims for indemnity in case of actual damage to corporate management activities in the future.

◆No difference in corporate defense rights between combined 3% or individual 3% = According to an analysis report obtained by this paper on the 9th from the Korea Industrial Alliance Forum (KIAF) titled 'The Impact of Voting Rights Restrictions on Individual Shareholders on the Election of Audit Committee Members Recommended by Hedge Funds and Other Foreign Shareholders,' if voting rights are individually limited to 3%, there is a concern that hedge fund-recommended personnel could be elected as audit committee members and directors in 93.3% (14 out of 15) of the top 15 listed companies by market capitalization, including Samsung Electronics, Naver, SK Hynix, Hyundai Motor, and LG. When limited to a combined 3%, foreign shareholders secured voting rights of 25% or more in all 15 companies.

This means that although the bill was relaxed from the original draft during the National Assembly discussions to apply an individual 3% limit without aggregating the shares of major shareholders and related parties when electing outside directors as audit committee members, the concern over losing audit committee seats to hostile forces such as hedge funds is essentially the same whether it is a combined 3% or individual 3% limit.

KIAF also simulated scenarios where individual shareholder voting rights were additionally limited to 5%, 10%, and 20%, reporting that the probability of hedge fund-recommended personnel being elected as audit committee members and directors in the 15 companies was 86.7%, 80%, and 46.7%, respectively. Even with a relaxed 20% rule instead of the 3% rule, 7 out of the 15 companies could face shareholder disputes over the election of audit committee members.

Even applying the minimum approval rate of foreign shareholders (45.8%), when voting rights are individually limited to 3-20%, foreign shareholders secured voting rights of 25% or more in 12, 11, 6, and 3 companies out of the 15, respectively. KIAF based the foreign shareholder approval rate for hedge fund proposals on the 45.8%, 49.2%, and 53.1% approval rates for three outside director candidates recommended by activist fund Elliott Management at last year's Hyundai Motor shareholders' meeting.

Jung Manki, chairman of KIAF, stated, "Voting rights restrictions when electing audit committee members separately may be unconstitutional as they infringe on property rights, and the amendment is for hedge funds or foreign competitors rather than minority shareholders, which will deal a fatal blow to the global competitiveness of our companies." He made a final appeal, saying, "If it is difficult to withdraw the voting rights restrictions, the restriction level should be significantly raised to at least 20% so that our companies can conduct business activities without concerns about technology leakage or threats to management rights." In a survey conducted by KIAF at the end of October targeting 381 companies including 213 listed companies regarding the amendment to the Commercial Act, 8 out of 10 companies responded that the amendment should be revised, especially the provision on separate election of audit committee members.

◆Legislative responsibility should be taken in case of management losses such as information leakage= In the business community, there are calls for establishing mechanisms to hold responsible parties accountable if significant losses occur in corporate management activities in the future. The remark by Park Yongman, chairman of the Korea Chamber of Commerce and Industry, the day before, that "If side effects or unforeseen problems arise after the bill is forcibly passed, those who approved it must take full responsibility," is interpreted in the same context.

Some have even examined the legal possibility of claiming indemnity or damages against lawmakers involved in the legislation, but the consensus in the legal community is that it is nearly impossible. Heo Yoon, chief spokesperson of the Korean Bar Association, said, "There must be a significant connection between the lawmaker's legislation and the technology theft by speculative capital or hostile forces, but legally it is difficult to establish causality." Choi Junseon, emeritus professor at Sungkyunkwan University Law School, explained, "Since laws enacted by lawmakers are considered the will of the people, it is impossible to claim indemnity or damages against lawmakers." Nevertheless, a senior official of an economic organization said, "If claiming indemnity is difficult, it is necessary to try somehow to inflict political damage or actively utilize a recall system for lawmakers as a check and balance mechanism."

Six economic organizations including the Korea Employers Federation, Korea Federation of Small and Medium Business, Korea International Trade Association, Korea Federation of Medium-sized Enterprises, Korea Listed Companies Association, and KOSDAQ Association urged the relevant standing committees to reconsider the bill, stating, "In fact, the ruling party is pushing for a surprise passage alone."

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