Nice Investors Service: "Commercial Act Amendment Positive for Corporate Credit Risk in the Long Term"

Nice Investors Service analyzed on July 29 that the amendment to the Commercial Act, which strengthens transparency and accountability in corporate governance, is positive for corporate credit risk in the long term.

The amended Commercial Act, aimed at protecting minority shareholders and enhancing the functions of boards of directors, was approved by the Cabinet on July 15, 2025, and promulgated on July 22 of the same month. The provision expanding the duty of loyalty of directors from "the company" to "the company and its shareholders" took effect immediately upon promulgation. Other measures, such as the adjustment of voting rights exceeding 3% and the expansion of the ratio of independent directors for the appointment and dismissal of audit committee members in listed companies, which require subordinate regulations, will take effect on July 22, 2026. The mandatory holding of electronic general meetings of shareholders will be implemented from January 1, 2027.

Nice Investors Service stated, "The purpose of the recently discussed or amended Commercial Act is to protect the rights and interests of minority shareholders and to limit the excessive influence of controlling shareholders, thereby strengthening transparency and accountability in corporate governance." The company added, "Measures such as the expansion of directors' duty of loyalty, mandatory cancellation of treasury shares, and the activation of cumulative voting are expected to accelerate the shift toward shareholder-oriented corporate management."

They further commented, "Improvements in corporate governance have shown a meaningful correlation with enhancements in financial structure and credit ratings," and assessed, "This amendment to the Commercial Act may have a positive impact on mitigating domestic corporate credit risk in the long term."

However, they noted that during the institutionalization process of the amended Commercial Act, from the perspective of creditors, the reduction in resources available for debt repayment due to increased shareholder returns and the weakened possibility of support for affiliated companies could have negative effects.

Nice Investors Service evaluated, "This amendment to the Commercial Act emphasizes the protection of shareholder interests, so it is highly likely that shareholder returns, such as dividends and share buybacks, will increase in the future." They added, "The expansion of shareholder returns means that potential resources for debt repayment are being diverted outside the company, which, in principle, is negative for creditworthiness."

They further explained, "If companies restrict paid-in capital increases or expand external borrowing instead of using equity capital in order to maximize shareholder returns, this could become an additional burden on creditworthiness."

However, they also explained that it may be simplistic to conclude that such an expansion of shareholder returns will only be disadvantageous to creditors. Nice Investors Service emphasized, "If mature companies maintain a stable dividend payout ratio that meets market expectations, stock prices may rise, funding stability may improve, and debt repayment capacity may be enhanced." They stressed, "In the credit rating process, it is necessary to comprehensively consider changes in shareholder return levels and their impact on financial stability."

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