[Shareholder Capitalism]② "This Is the Last Chance"... Companies Go All-In on Defending Control Amid Commercial Act Revisions

Adjustments to Directors' Terms Ahead of Cumulative Voting

Surge in Exchangeable Bond Issuance and Treasury Share Swaps Last Year

National Pension Service: "Opposing Agenda Items That Circumvent the Purpose of the Revised Commercial Act"

Editor's NoteWith the advent of the revised Commercial Act, the Korean capital market is facing a new turning point toward "shareholder capitalism." The institutional changes resulting from the enforcement of the law are expected to have a significant impact on corporate governance and overall capital market practices. Through a five-part series, The Asia Business Daily examines the changes brought about by the amended Commercial Act, how companies are responding, and the regulatory challenges ahead for the establishment of shareholder capitalism.

① The Era of the Revised Commercial Act Begins... March Shareholder Meetings in Focus
② "This Is the Last Chance"... Companies Go All-Out to Defend Control in Response to Commercial Act Revision
③ 'Anti-Stock Price Suppression Law' in Full Swing... Experts Say "The Key Is Gift and Inheritance Tax Reform"
④ "Ultimately, Institutions Must Act"—The Reality of the Stewardship Code
⑤ The Final Piece Is the Disclosure System... "Need to Overhaul 'Results Disclosure' That Excludes Shareholders"

With the revised Commercial Act taking effect, companies are now scrambling to make their last-minute moves. Ahead of the mandatory retirement of treasury shares, there was a surge in the issuance of exchangeable bonds (EB) using treasury shares and treasury share swaps last year. At this year’s annual general meetings, many agenda items are focused on helping controlling shareholders defend their influence. These actions are in preparation for the cumulative voting system and the election of board directors and audit committee members, which are set to be fully implemented in the second half of the year. For listed companies, this year’s shareholder meetings are virtually the last opportunity to structure the board of directors in favor of controlling shareholders.

However, there are concerns in the market that such "operational efficiency" measures are being exploited as loophole strategies that circumvent the intent of the law revision. In order for these changes to truly strengthen shareholder rights, the monitoring roles of institutional investors and proxy advisory firms are expected to become even more important.

"Dodging the Cumulative Voting System"... Companies' Last-Minute Strategies

According to the Korea Corporate Governance Forum on March 17, of the 328 companies listed on the KOSPI 200 and KOSDAQ 150 that had completed their meeting notices by last week, 23 companies—including Samsung Electronics, Samsung SDS, Hanwha Solutions, Ottogi, GS, Green Cross, and HiteJinro—submitted amendments to their articles of incorporation to change director terms from three years to "within three years." Additionally, 32 companies, including Celltrion, Lotte Chemical, Kakao, and HYBE, decided to reduce the maximum number of directors.

This is interpreted as a company-side response strategy to minimize the impact of the amended Commercial Act provisions such as the cumulative voting system, which will take effect in the second half of the year. Namwoo Lee, Chairman of the Korea Corporate Governance Forum, criticized, "It is obvious that these companies are submitting amendments to their articles of incorporation in hopes of avoiding the implementation of the cumulative voting system by introducing staggered terms." If a large number of directors must be elected at a shareholder meeting in a given year, minority shareholders can concentrate their votes on specific candidates, increasing the likelihood of those candidates joining the board. The intent is to diffuse the effectiveness of the cumulative voting system itself.

Setting or reducing the cap on the number of board members is also interpreted as a move to limit the opportunities for shareholder-nominated candidates to join the board. Since last year, institutions related to corporate governance, including the Korea ESG Research Institute, have argued that companies could attempt to neutralize the amended Commercial Act by introducing staggered terms and reducing board size.

The trend of companies taking action to defend management rights under the pretext of responding to the amended Commercial Act was already evident last year. Notably, there was a sharp increase in the issuance of exchangeable bonds using treasury shares and treasury share swaps between companies. As the mandatory retirement of treasury shares became imminent, companies sought to use their holdings for funding or strategic equity relationships before retiring them. According to the Korea Securities Depository, the amount of exchangeable bonds issued by Korean companies surged from 934 billion won in 2023 to 1.984 trillion won in 2024, and is expected to reach 4.779 trillion won in 2025. In just two years, the issuance has increased more than fivefold.

There have also been a series of cases where companies secured friendly stakes by swapping treasury shares. While treasury shares held by a company do not carry voting rights, disposing of them to a third party restores those rights—a strategy used to defend management control. Such treasury share swaps were particularly notable among companies with little business relevance. For example, Muhak, an alcoholic beverage company, exchanged treasury shares worth about 4.1 billion won with Samsung Climate Control, an auto parts manufacturer. Aurora World, a toy company, swapped treasury shares with Daekyo, an education firm, and Dongin Engineering, an outdoor equipment company. One asset management expert pointed out, "In contrast to Japan, where cross-shareholding practices have been targeted for reform as a structural inefficiency and a form of cartel that hinders long-term investment, these practices in Korea stand out."

"Market Oversight Is Crucial"... Proxy Advisors' Role Expected to Grow

Capital market experts agree that, for the amended Commercial Act to fulfill its original intent of strengthening shareholder rights, the market's oversight function will become even more important as the system settles in. Corporate governance expert Attorney Hyesub Sim noted, "Even though the revised Commercial Act mandates the retirement of treasury shares, there remains room for companies to use treasury shares for management control under the pretext of 'business necessity.' If the articles of incorporation provide the grounds, it is also possible to transfer such shares to other companies or affiliates under the guise of strategic investment." Chairman Lee said, "Even after three rounds of Commercial Act revisions, it is clear that there is still much to be done. At the very least, listed companies should set the basic term of office for directors at one year so that they are re-elected by shareholders annually, which would better reflect the intent of introducing the cumulative voting system."

Accordingly, not only minority shareholders but also institutional investors and proxy advisory firms are expected to play increasingly important roles. The National Pension Service, which announced it would actively exercise its voting rights in line with the purpose of the Commercial Act revision starting with this year’s shareholder meetings, has decided to vote against the director term amendment (to within three years) to be discussed at the Samsung Electronics meeting on March 18. The National Pension Service also set a "principled opposition" policy for other key proposals submitted by major companies—including ▲establishing or reducing the maximum number of directors ▲reducing the number of auditors ▲establishing grounds for holding or disposing of treasury shares—citing concerns that these could circumvent the intent of the Commercial Act revision.

Seungjae Oh, Co-CEO of Sustinvest, commented, "It is no longer enough for companies to simply focus on whether an agenda item passes at the shareholder meeting. It is now important to analyze and communicate why an item was approved or rejected. Given that controlling shareholders have previously used treasury shares or third-party paid-in capital increases as tools to defend management rights, institutional investors remain highly concerned. If these measures are not intended as management control defense tactics, companies need to clearly state their intentions and explain how they will use them to enhance long-term value."

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