Third Commercial Act Amendment Drives KOSPI 2600...Which Governance Reforms Will Take It to 2700?

Lee: "There is a mountain of work to do, including the Stock Price Suppression Prevention Act (amendment to the Inheritance and Gift Tax Act)"
Mandatory tender offers and the stewardship code expected to bolster minority shareholders
Numerous follow-up legislative tasks pile up ahead of the amended Commercial Act's implementation

With the third Commercial Act amendment, centered on the mandatory cancellation of treasury shares, passing the plenary session of the National Assembly on the afternoon of February 25, market attention is now shifting to the remaining corporate governance agenda items. Following the so-called "Stock Price Suppression Prevention Act," major discussions are lined up on reforming inheritance and gift taxes, introducing a mandatory tender offer system, strengthening the stewardship code, and supplementing the Korea Exchange and the Corporate Value-Up program. With the full-fledged implementation of the amended Commercial Act, including the expansion of directors' duty of loyalty in the second half of this year, there are also many follow-up legislative tasks that urgently need to be completed.

Third Commercial Act amendment passes plenary session...Next major battleground is the tax system

The first to third Commercial Act amendments, passed under the leadership of the Democratic Party, have each focused on overhauling the basic framework of corporate governance, including expanding the scope of directors' duty of loyalty, making cumulative voting mandatory and broadening the separate election of audit committee members, and mandating the cancellation of treasury shares.

In the financial investment industry, the next biggest issue following the third Commercial Act amendment is seen as the tax regime, especially reform of inheritance and gift taxes. Critics have repeatedly pointed out that under the current system, premium valuation for controlling shareholders and similar rules result in an excessive tax burden during management succession. Because of this, there has also been considerable criticism that companies opt for internal reserves instead of increasing dividends or actively returning capital to shareholders, leading to distorted decision-making. Lee Namwoo, Chairman of the Korea Corporate Governance Forum, highlighted the tax system as a key corporate governance issue going forward, stressing that "the tax system is important" and that "beyond the Stock Price Suppression Prevention Act, there ultimately needs to be a rationalization of inheritance and gift taxes."

The Stock Price Suppression Prevention Act is already under an active policy push. The core of this bill is that, for listed companies with a price-to-book ratio (PBR) of less than 0.8 times, inheritance and gift taxes would be levied based not on the "stock price" but on the valuation method used for unlisted companies (fair value assessment of assets plus earnings). President Lee Jaemyung reiterated his determination to push ahead on this day, saying, "There is a mountain of work to do, including the Stock Price Suppression Prevention Act." The Democratic Party expects that, once the law is implemented and the incentive to artificially depress stock prices for succession purposes disappears, companies with a PBR below 0.8 times will voluntarily move to raise their stock prices.

However, tax experts are also voicing caution. In the case of the Stock Price Suppression Prevention Act, they point out that the PBR indicator is not absolute and warn that the bill could instead encourage more sophisticated tax-avoidance schemes. Accordingly, some argue that a predictable tax rate structure is needed, including abolishing the premium for controlling shareholders, introducing conditional tax relief for companies that pursue long-term investment and dividend increases, extending installment payment periods, and applying separate taxation to dividend income. If the first to third Commercial Act amendments are the "stick" that disciplines corporate governance, reform of inheritance and gift taxes could serve as the "carrot" that reduces owners' distorted decision-making. Park Hoon, a professor in the Department of Taxation at the University of Seoul, suggested that "easing the top marginal tax rate will be politically polarizing and therefore difficult to pursue," but added that "it may be an option to broadly relax measures such as premium valuation for controlling shareholders, which have already been eased for small and medium-sized enterprises."

On the introduction of separate taxation for dividend income, he also noted, "It is somewhat regrettable that a progressive tax rate is applied once dividend income exceeds 20 million won," and diagnosed that "this is not simply a system that grants benefits to the wealthy, but one that can provide a channel through which returns can be distributed to all shareholders, so it needs to be improved in a way that does not apply progressive taxation." Bold adoption of separate taxation for dividend income has long been cited as a factor that can remove the incentive for major shareholders to maintain opaque governance structures.

Mandatory tender offers and stewardship code expected to strengthen minority shareholders

In addition, the Democratic Party has flagged the strengthening of minority shareholders' rights through the introduction of a mandatory tender offer system and the stewardship code as the next tasks. Kim Namgeun, a lawmaker on the Democratic Party's Special Committee on K-Capital Markets, appeared on a YouTube radio program on this day and said, "Minority shareholders cannot freely put forward their own proposals at general meetings of shareholders. We must allow shareholders' views to be reflected so that (controlling shareholders) cannot abuse their power." Shin Jangshik, a lawmaker from the Cho Kuk Innovation Party, likewise emphasized that, as a follow-up task to the Commercial Act amendment, "the direction going forward is to continuously enhance the rights of retail investors and level the tilted playing field by strengthening the authority of minority shareholders."

The introduction of a mandatory tender offer system is seen as a mechanism to enhance fairness in the transfer of control. The idea is that when a controlling shareholder sells shares at a control premium, minority shareholders should also be guaranteed an opportunity to sell under the same conditions. To achieve this, an amendment to the Capital Markets Act is required. The stewardship code, which strengthens responsible investment by institutional investors, is also a mechanism that can protect minority shareholders. Given that it has repeatedly been at the center of debates over its effectiveness, further discussions are inevitable. Chairman Lee noted, "The current stewardship code is a soft law, so compliance is not a legal obligation," and added, "Some argue that it should be elevated to a legal obligation and that the Financial Supervisory Service should be tasked with monitoring compliance." Debates over how the National Pension Service should exercise its voting rights are also expected to be reignited. In the market, there is discussion of adopting a Japanese-style model of delegating voting right execution to external asset managers.

At the same time, restructuring of the Korea Exchange and reactivation of the corporate value-up program are also drawing market attention. Analysts warn that if the exchange fails to function properly as the Lee Jaemyung administration's capital market reform enters its second phase, it will be difficult for the amended Commercial Act to take root. Among experts, there are calls to introduce a certain degree of mandatory force into the value-up policy, which has so far remained only a voluntary recommendation.

There are also growing calls for the swift promotion of follow-up legislative tasks after the first to third Commercial Act amendments. Cheon Junbeom, managing partner at Wise Forest, said, "There is still an enormous number of minor follow-up legislative tasks remaining," and pointed out that "the most urgent work is to clearly define merger ratios under the Capital Markets Act based on fair value and to address the blind spots in the Commercial Act regarding cash-settled comprehensive share exchanges." He explained that, for the Commercial Act amendments to be more than mere declarations, follow-up measures aligned with the Capital Markets Act are necessary. Hwang Hyunyoung, a research fellow at the Korea Capital Market Institute, likewise suggested that "follow-up legislation in line with the Commercial Act amendments must also be put in place."

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