Fair Economy 3 Laws Pushing Companies to the Corner "Threat to Management Rights Is Obvious" (Comprehensive)

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[Asia Economy Reporters Changhwan Lee and Hyesun Lim] Executive A, in charge of government relations at a top 10 conglomerate, has been frequently visiting the National Assembly and economic organizations recently. As the so-called 'Fair Economy 3 Acts' pushed by the government and ruling party approach, A is meeting lawmakers to explain the problems of the bills and the difficulties faced by companies. While heads of economic organizations such as the Federation of Korean Industries, the Korea Chamber of Commerce and Industry, and the Korea Employers Federation have been visiting the National Assembly to convey the economic sector's hardships, individual companies have judged it necessary to directly appeal their urgency.

A said, "In recent weeks, employees related to the Fair Economy 3 Acts have continuously visited the National Assembly to meet with lawmakers and their aides to communicate the damage that the passage of the bills would cause not only to companies but also to the national economy," adding, "I have a visit scheduled even today, and I plan to shuttle between the office and the National Assembly throughout this week."

As discussions on the Fair Economy 3 Acts, including the Commercial Act, the Fair Trade Act, and the Financial Group Supervision Act, accelerate in the government and political circles, companies' concerns are growing day by day. If the bills pass, they could even affect management rights, leading to criticism that these are the worst possible bills from a corporate perspective.

Among the Fair Economy 3 Acts, the top 10 conglomerates are most concerned about the bill mandating separate election of audit committee members and limiting major shareholders' voting rights to 3%, as it could directly infringe on management rights. Audit committee members are key personnel of the board of directors, the highest decision-making body of a company, and can be involved not only in audits but also in corporate management.

Currently, audit committee members are selected from directors appointed by major shareholders, but under the government's proposed amendment to the Commercial Act, companies will have to elect at least one audit committee member separately from directors at the shareholders' meeting. This means audit committee members must be elected separately at the shareholders' meeting, not from directors appointed by major shareholders. Furthermore, major shareholders' voting rights will be limited to only 3%.

Although general shareholders can also exercise voting rights up to 3%, the regulations on related parties are unclear, so if multiple minority shareholders unite, their voting power could become much stronger than that of major shareholders.

This creates an opening for hostile external forces such as speculative capital to enter the company's board of directors. In fact, Korean companies have been exposed to management rights threats by speculative capital several times in the past. Representative examples include the management rights threats posed by the U.S. activist fund Elliott to Samsung and Hyundai Motor.

Around 2004, Sovereign Asset Management, which engaged in a management rights battle with SK, split its 14.99% stake in SK into five funds, each exercising 2.99% voting rights. Sovereign threatened management rights by demanding the resignation of SK executives, opposing support for underperforming affiliates (SK Global), and calling for improvements in corporate governance based on its high voting power.

Among the amendments to the Fair Trade Act, companies are particularly burdened by the expansion of regulations on private profit appropriation (internal transactions) and the reform of the exclusive prosecution system. According to the amendment, the criteria for regulating internal transactions have been strengthened from the current 30% ownership by the controlling family in listed companies and 20% in unlisted companies to 20% ownership in all companies, which increases the number of companies subject to regulation.

For example, as of the end of June, the controlling family's stake in Glovis of Hyundai Motor Group is 29.9%. To be exempt from the law, the controlling family would have to sell 9.9% of their shares. Major holding companies such as LG and GS will also face increased internal transaction regulations.

A Group official said, "The abolition of exclusive prosecution rights, the introduction of multiple derivative lawsuits, and restrictions on major shareholders' voting rights are each provisions that can significantly hinder normal business activities," adding, "We fear that after a year of being embroiled in management-external disputes unrelated to competitiveness, we will remain stuck at the starting line without even entering the competition with global companies, and the economy may end before we can start."

The retail industry shares similar concerns. Lotte Group, whose retail business is a core pillar, is worried about the abolition of the exclusive prosecution system due to the amendment to the Fair Trade Act. This could make normal management difficult due to indiscriminate accusations by civic groups or competitors. If the bill passes, anyone could file complaints about price collusion and other issues.

CJ Group, while not greatly concerned about the Commercial Act due to its stable governance structure, is not pleased with the strengthened regulations on private profit appropriation. The company has vertically integrated production from food ingredients to ready meals across affiliates, and the scope of regulation continues to expand. Although no affiliates currently violate the strengthened standards, corporate activities are inevitably constrained.

A retail industry official said, "It's not just one aspect that is worrisome; all of these laws significantly impact large corporations," adding, "In these difficult times, companies need to invest and seek new opportunities, but if such regulations continue to emerge, companies are more likely to manage defensively rather than aggressively."

The amendment to the Insurance Business Act, known as the 'Samsung Life Act,' is also an issue shaking Samsung Group's governance. The core of the amendment is that the evaluation of an insurer's affiliate shareholdings must be calculated at market value, and this amount must be within '3% of total assets.'

If this is implemented as is, Samsung Life Insurance would have to dispose of Samsung Electronics shares worth 20.59 trillion won (5.8% stake), which exceeds 3% of its total assets of 317.8256 trillion won by 9.53 trillion won. The securities industry points to Samsung C&T as a potential buyer of Samsung Life's Samsung Electronics shares, but this could make Samsung C&T a holding company, a difficult choice for Samsung Group.

Experts warn that the government's Fair Economy 3 Acts could become irrational regulations. Choi Joon-sun, emeritus professor at Sungkyunkwan University Law School, said, "Currently, Korea only has regulations limiting management rights, and there are no management rights defense laws," adding, "Even if the separate election system for audit committee members is introduced, it should be accompanied by the introduction of management rights defense laws such as dual-class shares or poison pills."

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