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Tougher Commercial Act revision must weigh corporate concerns

Published: 12 Jun. 2025, 00:00

President Lee Jae-myung listens to a question from a participant during an on-site roundtable on eradicating unfair trading practices in the stock market, held at the Korea Exchange in Yeongdeungpo District, Seoul, on June 11. [PRESIDENTIAL OFFICE POOL]

Korea’s stock market has rallied sharply since the inauguration of President Lee Jae-myung. On Wednesday, the Kospi surpassed the 2,900 mark for the first time in three years and five months, driven by renewed investor confidence following the end of political uncertainty surrounding martial law, the presidential impeachment, and a hotly contested election. Market optimism about the Lee administration’s goal of lifting the Kospi to 5,000 has contributed to what some are calling a “honeymoon rally.” Hopes are rising that reforms, including changes to the Commercial Act, could help close the persistent “Korea discount” in the capital market.

Lee visited the Korea Exchange on June 11 and held a roundtable with market participants. He stressed the importance of swiftly detecting unfair trading practices and strictly punishing stock manipulation through a one-strike-out system. He also pledged to reclaim unjust profits and pursue tax and regulatory changes to encourage dividend payouts — steps in line with a broader push to advance the capital market.

Lee’s remarks on spinoffs and mergers were notable. “The stock I hold may seem solid and profitable, but it can suddenly become worthless,” he said, alluding to the sense of betrayal some investors feel during corporate restructuring. While this supports his push to revise the Commercial Act, such concerns could arguably be addressed through changes to the Capital Market Act instead.

Although the ruling party has temporarily put the proposed legislation on hold, the president’s campaign pledge to revise the Commercial Act is expected to proceed. The issue is that the Democratic Party’s new proposal is significantly more aggressive than a similar bill that was vetoed under the previous administration. In addition to expanding directors’ fiduciary duties to shareholders, the revised draft includes mandatory cumulative voting and an expanded system for separating the election of audit committee members.

Under the new bill, companies would be required to elect more than one audit committee member separately, with the voting rights of major shareholders capped at 3 percent for each. They would also be prohibited from opting out of cumulative voting, which enables shareholders to concentrate votes on specific board candidates. Critics argue that this could leave Korean companies vulnerable to foreign activist funds and destabilize board governance.

Lee Jae-myung, then the liberal Democratic Party's presidential candidate, campaigns in front of Seoul Express Bus Terminal in Seocho District, southern Seoul on May 29. [NEWS1]

If the law expands shareholders’ rights at the expense of corporate control, it should also offer companies corresponding defensive tools. These could include dual-class shares, golden shares with veto power over key decisions, or poison pill provisions that allow existing shareholders to buy additional shares at a discount. These measures, commonly used in the United States and Japan, would help preserve balance. Any revision to the Commercial Act should be phased in alongside protections for management control, in line with the administration’s emphasis on practical reform.

The goal of breaking the dominance of founding families over corporate boards and protecting minority shareholders is valid. However, the process must avoid creating uncertainty that deters investment. Korea's low dividend culture needs to change, but that shift should not come at the cost of undermining companies' capacity to invest.

As the new president prepares to meet business leaders later this week, he would do well to listen carefully to concerns from the private sector. After all, it is corporate investment that drives economic growth.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.