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Corporate 'good faith' bill passes in parliament to forwarnings of stunted growth, activist fund meddling

Published: 03 Jul. 2025, 19:25 Updated: 03 Jul. 2025, 20:12

The Kospi closes at 3,116.27 on July 3, 1.34 percent higher than the previous trading day. [NEWS1]

A long-debated amendment to the Commercial Act that shifts the focus of corporate governance from majority shareholders to broader shareholder participation passed in the National Assembly’s plenary session on Thursday.

Just 20 minutes after the bill’s passage, eight major business organizations issued a joint statement expressing regret, warning that it “raises the risk of speculative forces entering the market.”

The eight business groups — the Federation of Korean Industries, the Korea Chamber of Commerce and Industry, the Korea Enterprises Federation, the Korea International Trade Association, the Korea Federation of Small and Medium Business, the Federation of Middle Market Enterprises of Korea, the Korea Listed Companies Association and the Kosdaq Listed Companies Association — said they "agree with the spirit of the reform" but were worried that "companies may be rendered exposed to speculative players to influence the selection of audit committee members under the strengthened 3 percent rule, as well as the lack of protections for directors facing lawsuits."

The specified grievance stipulates that, when appointing audit committee members at listed companies, the voting rights of the largest shareholder and related parties will be capped at 3 percent. The rule is intended to prevent undue influence and abuse of control by majority shareholders.

Also at the heart of the revision is a provision that codifies the extension of directors’ fiduciary duty from only the company to shareholders as well. The bill also mandates greater use of electronic shareholder meetings to enhance shareholder value. The title of “outside director,” long viewed as a rubber-stamp position, will be replaced with “independent director,” and their proportion of seats on boards will increase.

Investors responded positively. Thursday's Kospi jumped more than 1 percent on strong foreign and institutional buying, recovering to the 3,110 level and setting a new yearly high. Analysts said the rally reflected hopes that the reform would reduce the so-called Korea discount by expanding shareholder rights. Hana Securities predicted foreign capital inflows, while Yuanta Securities said it could help close the valuation gap for holding companies.

Commercial Act amendment graphic table

“Korea has long suffered from a perception that controlling shareholders can make decisions in their own interests due to the lack of separation between ownership and management," said Yi June-suh, a professor of business administration at Dongguk University and former president of the Korean Securities Association. "This reform aims to fix that distortion.”

Companies scramble to respond

Corporations are now racing to devise countermeasures, with many anticipating higher costs for investor relations and legal compliance.

Several large company insiders are most concerned that “as shareholder proposals and complaints increase, even simple inquiries will require legal review, pushing up costs for internal review teams, law firms and accounting consultants," according to insiders.

Concerns are especially acute in capital-intensive industries like semiconductors and AI, where short-term stock performance could interfere with long-term investment strategies. Companies overly focused on returning value to shareholders could jeopardize their own future competitiveness.

The National Assembly passes the Commercial Act amendment on July 3 in western Seoul. [YONHAP]

A recent report from the Bank of Korea also cautioned against short-termism. It found that in high-growth IT sectors, where capital investment is essential, such investment is more effective than shareholder returns in enhancing corporate value.

“When stock prices are rising, new industry investments may be tolerated, but if they fall, shareholder criticism will be relentless,” said a representative from a major conglomerate who requested anonymity.

In response, the eight business groups called for legal safeguards, including clearer definitions of managerial judgment and more reasonable standards for applying breach-of-trust charges. They argued that Korea should follow Germany in codifying a business judgment rule to protect executives acting in good faith.

Reform may open doors to hedge funds

Controversy lingers over the expanded scope of the 3 percent rule, which now applies not only to internal directors but also to independent directors appointed to audit committees.

“Activist investors now face a lower barrier to entry into the boardroom — an unprecedented and distorted form of legislation globally," said Choi June-sun, an emeritus professor at Sungkyunkwan University Law School and former president of the Korea Commercial Law Association.

"Activist hedge funds will increasingly seek board seats, not just dividends, to influence management," Choi said.

Other legislative items — including mandatory cumulative voting and an increased number of elected audit committee members — are expected to reignite debate. Rep. Oh Gi-hyoung of the Democratic Party, chair of the Kospi 5000 Special Committee, said, “A tougher Commercial Act is in the works,” signaling more amendments ahead.

“If the separate election of audit committee members is expanded under the current 3 percent rule, it will become even easier for activist funds and other outside forces to take control,” said one business insider. “We should be wary of repeating Japan’s experience, where a wave of delistings followed aggressive hedge fund activity.”

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
BY KIM SU-MIN [[email protected]]