The Democratic Party of Korea and the People Power Party agreed on the 2nd to amend the Commercial Act, expanding the duty of care of directors from 'companies' to 'shareholders'. The '3% rule', which limits the voting rights of the largest shareholder and related parties to 3% during the election of audit committee members, was also included.

In the business community, there has been strong opposition to the amendment of the Commercial Act, citing increased uncertainty in corporate management. It is anticipated that shareholder breach of duty lawsuits will become more frequent regarding board decisions, and management protection measures will weaken, leading to frequent attacks from activist funds.

On July 2, at the National Assembly in Yeouido, Seoul, Kim Yong-min, the Commissioner, and the Commissioners engage in conversation with bright expressions ahead of the processing of the agenda after the agreement on handling the amendment to the Commercial Act by the ruling and opposition parties. /Courtesy of Yonhap News

According to the agreement between the ruling and opposition parties, the amendment of the Commercial Act will be processed at the National Assembly plenary session on the 3rd. This amendment includes expanding the duty of care of directors not only to 'companies' but also to 'shareholders' following the '3% rule', as well as mandating electronic voting during general meetings.

However, the expansion of the cumulative voting system and the number of outside directors on the audit committee from 1 to 2 or all members has been omitted from this amendment. Plans are in place to hold further discussions in a public hearing.

In the plenary session in March, the Democratic Party led the processing of the amendment of the Commercial Act, but the bill was discarded when former Prime Minister Han Duck-soo exercised his veto.

However, President Lee Jae-myung expressed his intention to process the Commercial Act amendment, and the Democratic Party reintroduced the bill. The People Power Party also withdrew its previously held opposing stance and began a proactive review, leading to an agreement between the ruling and opposition parties.

The amendment of the Commercial Act will take effect immediately after presidential promulgation, except for the institutional sector of electronic shareholders' meetings, without any grace period.

Graphic=Jeong Seo-hee

The business community is concerned that with the inclusion of the 3% rule in the amendment of the Commercial Act, they will face continuous management attacks from institutional investors and minority shareholders who advocate for shareholder activism.

While candidates for directors supported by minority shareholders can easily enter the board, the voting rights of the largest shareholders are limited, weakening management's defensive power.

Concerns are also raised that if the amendment to the Commercial Act passes, it will be difficult for directors to consolidate the interests of various shareholders, making quick investment decisions challenging and risking the leakage of internal management information.

A business community official noted, "This amendment to the Commercial Act heightens the uncertainty in corporate management and could stifle management activities, which is a significant concern. There is a need for more careful discussions to reduce the side effects of the amendment and enhance the competitiveness of our corporations."

Another business community official expressed concern, stating, "With the application of the 3% rule, the board could be operated primarily by hostile factions regardless of equity, which raises significant concerns. The side effects related to lawsuits against executives, such as the duty of care of directors, are also expected to be considerable."

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