"Problem-Filled 3% Rule, Forced Implementation Could Cause Nationwide Jeonse Crisis and Severe Chaos"

Lee Jae-hyuk, Head of Policy Division 2 at the Korea Listed Companies Association, is giving a presentation at a briefing session on the issues and reasonable alternatives following the introduction of the three corporate regulation laws held in Yeouido, Seoul.

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[Asia Economy Reporter Minwoo Lee] The Korea Listed Companies Association has warned that the amendment to the Commercial Act, one of the so-called 'Fair Economy 3 Laws (Fair Trade Act, Commercial Act, Financial Group Supervision Act),' poses a significant threat to corporate management rights and could ultimately trigger chaos comparable to the recent real estate 'Jeonse crisis.'

On the 10th, the Listed Companies Association held a briefing session in Yeouido, Yeongdeungpo-gu, Seoul, to explain the problems arising from the introduction of the three corporate regulation laws and propose reasonable alternatives. Jaehyuk Lee, Head of Policy Division 2 (Executive Director) at the Korea Listed Companies Association, emphasized, "The amendment to the Commercial Act seriously threatens corporate management rights and could lead to disputes on the scale of the Jeonse crisis. In particular, holding companies could suffer severe damage, which is inconsistent considering the government has encouraged conversion to holding companies to ensure transparent shareholding relationships."

The amendment to the Commercial Act, scheduled for discussion at the National Assembly plenary session next month, includes ▲limiting the voting rights of the largest shareholder to 3% (the so-called '3% rule'), ▲introduction of separate election of audit committee members, ▲codification of optional application of minority shareholder rights exercise requirements, and ▲introduction of multiple derivative lawsuits.

As of the end of March this year, the Listed Companies Association analyzed the status of largest shareholders and related parties, shareholders holding 5% or more, institutional investors such as collective investment managers, trust companies, asset management companies, securities and insurance firms, and their voting rights disclosures submitted to the Financial Supervisory Service's electronic disclosure system. They forecast that if the 3% rule is applied, the probability of appointing audit committee members proposed by external shareholders could increase up to 11.4 times compared to the current situation. Lee said, "External shareholders holding around 3% each pose individual risks capable of attacking management rights. Once exposed to such attacks, companies inevitably divert their focus from their core business to securing friendly forces for management defense, allowing hedge funds and others to realize short-term profits and exit."

To address this, they proposed expanding the limit on the largest shareholder's voting rights from 3% to 20%. Lee explained, "Although proposals to expand it to 6% have emerged, the likelihood of shareholder-nominated candidate appointments increases about 10.6 times, which is not significantly different from the original 3% rule's 11.4 times. Expanding to 20% would reduce the regulatory impact by about half, making it manageable for companies."

Provided by Korea Listed Companies Association

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They also proposed excluding holding companies from the separate election of audit committee members. This is due to concerns that holding companies often have smaller market capitalizations than operating companies, which could expose operating companies to risks if hedge funds attack the management rights of holding companies. According to the Listed Companies Association, the average market capitalization of domestic holding companies is 987.6 billion KRW, about half of the 1.9569 trillion KRW average market capitalization of major operating companies.

They expressed significant concern about the codification of optional application of minority shareholder rights. To exercise minority shareholder rights in listed companies, shareholders must hold a certain level of shares for more than six months. Lee stated, "The amendment allows choosing between holding shares or holding them for more than six months, effectively enabling hedge funds to easily attack management rights, which can be called the 'hedge fund stroll law.' The timing for external shareholder proposals should also be extended from six weeks to three months before the general shareholders' meeting."

They also rebutted claims made at the 'Fair Economy Legislative Issues Public Debate' held on the 3rd. At that time, Woochan Kim, Professor of Business Administration at Korea University, argued, "In Israel, regulations prevent major shareholders from exercising voting rights," and "The Fair Economy 3 Laws impose burdens on managers rather than companies." In response, Lee pointed out, "While Israel restricts voting rights in this way, it also has provisions preventing the appointment of outside directors if shareholders holding more than 2% oppose, which differs from the current Commercial Act amendment."

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