The ruling and opposition parties agreed on the revision of the Commercial Act, focusing on enhancing transparency in the capital market and protecting the rights of minority shareholders, during a plenary session on the 3rd. The revision expands the scope of directors' duty of loyalty from 'corporations' to 'corporations and shareholders' and includes the expansion of the '3% rule' limiting the voting rights of large shareholders during the appointment of audit committee members, as well as mandating electronic shareholder meetings and converting outside directors into independent directors.

On the 3rd, the partial amendment bill to the Commercial Act passes in the National Assembly plenary session. /Courtesy of Yonhap News Agency

This revision is evaluated as the 'first cooperative bill of the Lee Jae-myung government' in that it revives a bill that was discarded due to the presidential veto (request for reconsideration) during the administration of Yoon Suk-yeol. With the KOSPI recovering the 3,000 level for the first time in 3 years and 6 months, the political understanding that has taken into account the favor of 14 million retail investors has led to a dramatic conclusion of negotiations by both parties.

On that day in the afternoon, the ruling and opposition parties introduced and voted on the Commercial Act revision in the National Assembly, passing it with 220 votes in favor, 29 votes against, and 23 abstentions out of 272 voting members present. When the bill passed, applause erupted in the plenary hall.

The revision legally enshrines the obligation of directors to be faithful not only to the 'corporation' but also to the 'shareholders'. This is a legal mechanism to protect the rights of minority shareholders and is intended to curb the existing shareholder-centered governance structure. The rule limiting the voting rights of large shareholders and related parties to 3% when electing audit committee members has also been extended to outside directors. By expanding this provision that previously applied only to inside directors to outside directors, political circles expect that the influence of large shareholders on the composition of the audit committee will be limited and external oversight functions will be strengthened.

The revision also allows listed companies to hold electronic shareholder meetings alongside offline meetings, and mandates that listed companies with assets of 2 trillion won or more introduce electronic shareholder meetings. The designation of outside directors has been changed to 'independent directors', and the ratio of independent directors within the board has been raised from one-fourth to one-third.

These provisions are stronger than those included in the Commercial Act revision that had been passed by the Democratic Party of Korea while it was in opposition in March, which was automatically discarded when Yoon Suk-yeol exercised his veto right. At that time, it only included 'expanding the duty of loyalty of directors' and 'mandating the holding of electronic shareholder meetings'.

The day before, the ruling and opposition parties reached a last-minute agreement on processing the Commercial Act revision in the National Assembly. Following agreements on major issues such as expanding the duty of loyalty to shareholders, mandating electronic shareholder meetings, and converting to independent directors, they also decided to include the long-debated 'expansion of the 3% rule' in this revision.

However, the plan to expand the election of audit committee members from one to two or more or to all members, along with the introduction of a cumulative voting system that allows minority shareholders to cast concentrated votes for certain director candidates, has been excluded from this revision and will be pursued after gathering opinions from various sectors at future public hearings.

The ruling and opposition parties also decided to pursue amendments to the exemption regulations for the crime of breach of trust in the criminal law, considering concerns from the business community. According to a representative from the People Power Party, it will be a direction that includes the principle that 'business judgment is an exception' in the regulations regarding breach of trust to acknowledge grounds for exemption from illegality. Exemption from illegality means that illegal acts are committed but are not punished due to special reasons.

By agreeing on the handling of this Commercial Act revision, the ruling Democratic Party was able to avoid criticism of 'unilateral handling of livelihood reform bills' while the People Power Party has been assessed to have reserved some provisions that the business community has been strongly opposed to.

The People Power Party has been opposing the Commercial Act revision due to concerns about management judgment restraint and excessive litigation. Instead, they had advocated for pursuing a Capital Market Act to protect the rights of minority shareholders during the mergers and acquisitions process, but recently, leader Song Eon-seok noted, 'We will review the Commercial Act revision positively,' changing their position and accelerating negotiations between the parties.

A key official from the People Power Party met with reporters and said, 'We have opposed the directors' duty of loyalty to shareholders until now. The situation in which shareholders could directly hold directors accountable for violations of this duty could increase uncertainty in corporate management.' He added, 'If the five provisions of the Democratic Party pass as they are, it would lead to great chaos in corporations, so we participated to mitigate the worst and achieved an agreement.'

However, there were still lawmakers within the party who expressed opposition to the handling of the Commercial Act revision. Seong Il-jong, a People Power Party lawmaker (three-term, Seosan), stated, 'I agree with expanding the duty of loyalty to shareholders and introducing electronic shareholder meetings. However, I cannot agree with the 3% voting rights restriction,' arguing that 'if this law passes, corporate management will be excessively restrained and only focus on defensive management, which will be critically harmful to the national economy in the future.'

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