Revision of commercial law, realization of governance restructuring... What is the company's response?

As the Commercial Act Amendment Bill, one of the key legislative tasks of the Lee Jae-myung administration, passes the National Assembly, major changes are expected in corporate activities. This revision was promoted with the purpose of strengthening the rights of minority shareholders and increasing transparency in corporate governance. Although the business community sympathizes with the purpose of this amendment, they are expressing concerns about the side effects it may have. This is because it includes some toxic provisions that have a significant impact on corporate governance.

So what provisions are the business community concerned about? Looking at the main contents, there are ① the introduction of directors' obligation to remain loyal to shareholders, ② the introduction of the independent director system, ③ the expansion of the application of the combined 3% rule when electing and dismissing audit committee members, and ④ the introduction of the electronic general shareholders' meeting system.

First, Article 382-3 of the current Commercial Act stipulates the director's duty of loyalty to the company, but does not provide for the duty of loyalty to shareholders. Accordingly, it was stipulated that directors should perform their duties for the benefit of not only the company but also the shareholders. For this reason, if the board of directors' decisions infringe on the interests of minority shareholders, they can now be held legally responsible. In the end, it is pointed out that this could lead to a decline in management activities as the likelihood that shareholders will file excessive lawsuits, such as seeking compensation for damages or accusing directors of breach of trust, increases.

The introduction of an independent director system is also a big concern for companies. This system includes changing the name of outside directors to independent directors and increasing the mandatory appointment ratio (from more than 1/4 to more than 1/3). This is a system originally used in the United States, and its purpose is to separate ownership and management and prevent arbitrary decision-making. The purpose is to increase fairness and transparency in management, but there is also the problem of excessively restricting autonomous management rights.

The following is a revision to the election and dismissal of audit committee members. The amendment strengthened the regulations related to the appointment of audit committee members for listed companies with total assets of 2 trillion won or more. Accordingly, the so-called 'combined 3% rule', which limits the combined voting rights of the largest shareholder and related parties to 3% when appointing audit committee members of a listed company, will be expanded to apply to all audit committee members. The purpose is to increase the independence of the audit committee by expanding the regulations that previously applied only to inside directors to include outside directors.

However, since the majority of companies form audit committees with outside directors, such revisions are bound to be a burden. In particular, as minority shareholders, institutional investors, etc. can exercise substantial influence in the audit committee selection process, related disputes are likely to increase. Some argue that the management rights of major shareholders are the right to form the board of directors, and that this is being violated.

The last thing to consider is the introduction of electronic general shareholders' meetings. Previously, shareholders exercised their voting rights by physically attending the general meeting of shareholders, but with this revision, participation in resolutions through electronic methods became possible from a remote location. As time and space constraints disappear, minority shareholders can conveniently participate in general shareholders' meetings and participate in management. However, from the company's perspective, there remain legal responsibilities such as security issues and the cost burden associated with establishing an electronic voting system, so many trials and errors are expected to be required for complete introduction.

In summary, companies are concerned that management uncertainty will increase due to the unprecedented situation of a board of directors led by external forces rather than a board centered on existing major shareholders. Even from a professional standpoint, realistically, it seems close to impossible to combine the interests of all the various shareholders. What should we do to minimize damage to companies during this crisis? First, it is necessary to establish a response plan tailored to each company's situation. This is because strategies are bound to vary depending on listing status, shareholder equity ratio, board structure, etc.

Once you have established your initial direction, you must begin practical preparations to support it. Specifically, it is necessary to document and manage the actual roles and responsibilities of the board of directors. In addition, it is recommended that risks be minimized by closely examining the confrontational structure before submitting the future audit committee appointment proposal. In addition, preemptive preparations such as ensuring the stability and security of the electronic shareholders' meeting system and maintaining the manual will be necessary. Through this, we believe that we can ultimately improve management transparency and improve corporate governance to increase corporate value.
 

Small Business Team

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