"Amendment to the Commercial Act Expanding Separate Election of Audit Committee Members... Increased Management Risk"

KCCI Analyzes '3% Rule' Impact on 112 Listed Holding Company Group Affiliates
Internal Shareholding Drops from 48.7% to 5.1%, External Shareholding from 49.7% to 45.4%
"External Forces Lead Audit Committee... Concerns over Opposition to New Businesses and Confidentiality Leaks"

Concerns are growing in the business community that if the amendment to the Commercial Act encouraging the separate election of audit committee members passes the National Assembly, external forces such as pension funds, investment funds, and minority shareholders could take control of the audit committees of listed subsidiaries within holding company groups. The Democratic Party of Korea plans to pass the amendment during the regular session of the National Assembly, which includes provisions to increase the number of separately elected audit committee members from one to two or more.

The business community pointed out that if the amendment to the Commercial Act passes, a majority of the audit committee (three members) could be appointed under the leadership of external forces, increasing management instability. Audit committee members have authority over directors' duty execution audits, investigations of company operations and assets, data investigations, and access to important information.

Prime Minister Han Duck-soo is delivering the policy speech on the 2025 budget proposal and fund management plan on behalf of President Yoon Suk-yeol at the plenary session held at the National Assembly on the 4th. Photo by Kim Hyun-min

On the 5th, the Korea Chamber of Commerce and Industry (KCCI) stated in a report titled "Impact on Holding Companies of Expanding the Number of Separately Elected Audit Committee Members" that "Since the 2020 amendment to the Commercial Act requiring the separate election of one audit committee member, holding companies have only exercised 5.1% of their internal shareholding of 48.7% when electing audit committee members. If the amendment to increase the number of separately elected members to two or more passes, the risk of management control attacks led by external forces dominating the audit committee could increase."

KCCI analyzed changes in voting rights under the '3% rule,' which limits major shareholders' voting rights to 3% when separately electing audit committee members, targeting 112 listed subsidiaries of 43 holding company groups (with assets over 2 trillion KRW) that filed business reports on the Financial Supervisory Service's electronic disclosure system.

The investigation found that internal shareholding by holding companies and related parties dropped by 43.6 percentage points from 48.7% to 5.1%, while external shareholding by pension funds, investment funds, and minority shareholders only decreased by 4.3 percentage points from 49.7% to 45.4%.

KCCI pointed out that the separate election and expansion of audit committee members contradict the government's policy encouraging holding companies. As a result of the government's encouragement of corporate conversion to holding companies under the pretext of making complex governance structures more transparent, 43 out of 88 publicly disclosed business groups (48.9%) have converted to holding company systems.

Under the holding company system, holding companies must hold at least 30% of the shares of listed subsidiaries, and subsidiaries must hold at least 30% of the shares of listed sub-subsidiaries. When the separate election of audit committee members and the 3% rule are applied, voting rights are more restricted than in general companies. This means that converting to a holding company structure could shrink voting rights and increase the likelihood of management disputes with external forces.

KCCI ran simulations on internal shareholding ratios of holding company group subsidiaries and sub-subsidiaries, as well as voting battles with pension funds and investment funds, assuming the separate election of audit committee members under the 3% rule at general meetings of shareholders. Minority shareholders were excluded from the survey due to their large shareholding but low attendance rates and unpredictable voting directions. Simulations were conducted dividing cases where pension funds and investment funds hold external shares and where they do not. If the company's internal shareholding is 5 percentage points higher than that of pension funds and investment funds, it is considered 'Company Advantage'; if the difference is less than 5 percentage points, 'Close Contest'; and if pension funds and investment funds hold more, 'Pension/Investment Fund Advantage.'

Among the 69 companies with pension and investment fund shareholdings out of the 112 surveyed, 17.4% were classified as 'Company Advantage,' 10.1% as 'Pension/Investment Fund Advantage,' and 72.5% as 'Close Contest.' For the 43 companies without pension and investment fund shareholdings, it is likely that company-recommended audit committee members will be elected, but if organizational changes such as mergers or splits occur, there is a possibility of voting battles with minority shareholder coalitions and activist funds.

In this context, the business community expressed concern that if the number of separately elected audit committee members is increased from one to 'two or all' as per the amendment to the Commercial Act, the burden on holding companies will increase further. If two or more external members who are not friendly to the company are appointed as audit committee members, they could dominate the audit committee.

Kang Seok-gu, head of the KCCI Research Department, said, "Rather than expecting the amendment to expand minority shareholder rights by increasing the number of separately elected audit committee members, there are concerns that it could increase risks of management interference by speculative capital or activist funds and technology leakage to competitors. This system does not align with the basic principles of joint-stock companies and has no overseas legislative precedent. Recklessly strengthening it could damage corporate competitiveness, so we urge caution in legislation."

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