2020. 8. 1.
Discussions on proposed amendment of the Korean Commercial Code (the “Proposed Amendment”), which was announced by the Ministry of Justice (the “MOJ”) last June 10, are getting heated. The MOJ is in a position to prevent the abusing of major shareholders' rights by strengthening minority shareholders' rights, while others argue that it is unconstitutional, raising the risk of foreign speculative capital interfering with management of companies in Korea and it will lead to lawsuits abuse against the companies.
The MOJ announced it will submit a final bill of the amendment to the National Assembly in this September after receiving various opinions about the Proposed Amendment.
The main controversial contents of the Proposed Amendment are as follows.
1. Introduction of A Multi-Level Derivative Suit
A shareholder holding a certain percentage of a parent company (at least 1% of shares, or at least 0.01% of shares of listed companies for more than six months) will be able to file a multi-level derivative suit against a director of the subsidiary (in which the parent company holds more than 50 percent of shares) for breach of fiduciary duty thereto.
Basically, the director's fiduciary duty is that the director is responsible for the company, so the director of the subsidiary has the fiduciary duty only for the subsidiary. Meanwhile, the parent company and its subsidiary are two companies with separate legal entities, but they also look like one company considering the influence of governance and profit and loss, etc. In this regard, a multi-level derivative suit has been discussed, which has been also pursued by the MOJ. The opposite’s opinion is that the multi-level derivative suit is against the law of legal entity, or it should be necessary to increase the standard ratio of the parent company’s holding shares of the subsidiary and that of the shareholder’s holding shares of the parent company, respectively.
2. Separate Election of a Director who is a Member of an Audit Committee
When electing a member of Audit Committee who serves as a director and an auditor as well, unlike other directors, 3% rule (shareholders are only allowed to exercise 3% of their voting rights even if the shares exceed 3% of all) applies to the 1st step of election for a director.
It is the most controversial. Unlike the director who makes a management decision, the auditor mainly functions as monitoring. It is not common for minority shareholders to appoint the director. Considering this, under the current Korean Commercial Code (the “KCC”), when electing the auditor, 3% rule is applied, giving the minority shareholders the opportunity to appoint the auditor as much as possible. Unlike being elected as the auditor directly, the election of a member of an Audit Committee has two steps processes. The member is elected among those who has elected as the director. Under current the KCC, 3% rule applies only to the 2nd step which is that the election of the member of an Audit Committee among the directors. The opposite’s opinion is that the protection of minority shareholders by applying 3% rule to the very 1st step is unconstitutional to excessively restrict shareholders’ rights.
3. Relaxed Requirements for Exercising Minority Shareholders’ Rights
Even if minority shareholders of listed companies do not meet the period requirements for exercising minority shareholders’ rights under the special provisions of the listed companies of the KCC, they can exercise minority shareholders’ rights under the general provisions of the KCC if they meet the requirements under the general provisions of the KCC.
In fact, this issue has been controversial that there have been conflicting precedent court cases. It was a matter of whether or not to expand or limit to exercise the minority shareholders’ rights and the opposite’s opinion is that it would lead to more disputes against companies.
4. Relaxed Requirements for Shareholder Resolution to Appoint an Auditor/Audit Committee Member in Case of Electronic Voting
In the case of the appointment of an auditor or a member of the Audit Committee at a shareholders’ meeting through electronic voting, the requirements to pass resolutions would be relaxed (a majority of attending shareholders) than those under the current KCC (1/4 of the total number of the shares issued and a majority of the attending shareholders).
There have been opinions that it is difficult to meet the requirements to pass resolution of shareholders’ meeting due to the abolition of shadow voting and the application of the 3% rule. Considering these opinions, the MOJ proposed to apply the relaxed requirements to pass resolutions when voting electronically at the shareholders’ meeting to elect an auditor or a member of the Auditor Committee. The opposite’s opinion is that the Proposed Amendment would only apply to the election of an auditor or a member of the Audit Committee, it would lead to more disputes between majority shareholders and minority shareholders.
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We should wait for the resolution by the National Assembly in this September, but considering the current ruling party’s position and the overall ratio of the National Assembly, it is likely to pass the same or very similar to the above.
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