Table of Contents
- The Dawn of the Era of Shareholder Capitalism
- Key Change 1: The Duty of Loyalty of Directors Towards 'Shareholders'
- Key Change 2: Strengthening the Independence of the Audit Committee, 'Aggregated 3% Rule'
- Key Change 3: Expanding Shareholder Participation, Mandatory Electronic Shareholder Meetings
- Conclusion: A New Order, Challenges for Corporations and Investors
- Frequently Asked Questions (FAQ)
The Dawn of the Era of Shareholder Capitalism
On July 3, 2025, the 'Partial Amendment to the Commercial Code' was passed by the National Assembly of South Korea, ushering in a new phase for the Korean capital market.
This amendment is considered a significant measure aimed at solving the long-standing 'Korea Discount' issue and reinforcing the rights of 14 million individual investors. It is expected to have a positive impact on the Korean economy.
This amendment aims to expand the focus of corporate management from 'the company's interests' to 'the interests of the company and all shareholders.'
This change is expected to bring about fundamental innovations across corporate governance and the overall management environment.
It embodies a strong will not just for a simple legal amendment, but for a comprehensive improvement of the Korean capital market.
Key Change 1: The Duty of Loyalty of Directors Towards 'Shareholders'
The most essential change in this
Commercial Code amendment
is the expansion of the duty of loyalty of directors.
Previously, the law stated that the duty of directors was for 'the company,' but the amended law clarifies this to 'for the company and shareholders.' Furthermore, a new clause has been added requiring that "the interests of all shareholders must be protected, and fair treatment given to all shareholders," legally establishing the responsibility of directors to all shareholders rather than specific major shareholders. This change contributes to making the role of directors more transparent and encourages consideration of the interests of all shareholders.
In the past, it was common for business divisions to be spun off or merger ratios harmful to minority shareholders to be calculated in ways favorable to major shareholders. It was difficult to hold directors legally accountable, but change has now occurred. Shareholders can now file lawsuits against directors if they determine that 'their proportional interests as shareholders' have been infringed, even if the director did not cause harm to the company's financial statements. This change is expected to further strengthen the rights of minority shareholders.
This clause takes effect immediately upon the law's promulgation, imposing a significant obligation on all corporate boards to answer the question, "Is this decision fair to all shareholders?" during decision-making.
Key Change 2: Strengthening the Independence of the Audit Committee, 'Aggregated 3% Rule'
The second significant change includes strengthening the '3% Rule,' which limits the influence of major shareholders in appointing members of the audit committee. This is expected to enhance the transparency of corporate governance.
Previously, major shareholders and related parties could exercise 3% voting rights each, allowing major shareholders to appoint favorable audit committee members through a loophole known as the 'individual 3% rule.' This practice is no longer valid.
The amended Commercial Code includes measures to block the undue influence of major shareholders. Now, when appointing or dismissing audit committee members in large publicly traded companies, the voting rights of the maximum shareholder and related parties are limited for holdings exceeding 3%.
This provision, the 'Aggregated 3% Rule,' greatly reduces the authority of major shareholders and increases the likelihood that candidates recommended by minority shareholders or institutional investors will be elected as audit committee members. Such change is expected to enhance the transparency of corporate governance.
It is essential to enhance the independence of audit committees to monitor corporate accounting fraud and unfair internal transactions. Critical mechanisms for this have been established and will be implemented with a one-year grace period after promulgation.
Key Change 3: Expanding Shareholder Participation, Mandatory Electronic Shareholder Meetings
Thirdly, to effectively guarantee shareholders' voting rights, the electronic shareholder meeting system will be fully implemented. This provides an opportunity for shareholders to more easily participate in decision-making.
Publicly traded companies will be allowed to hold shareholders' meetings both onsite and online through board resolutions. Especially large publicly traded companies will be required to implement this electronic shareholder meeting format starting January 1, 2027.
It can be seen as a significant advancement of shareholder democracy. In the past, many minority shareholders and foreign investors who could not attend shareholders' meetings due to time or location restrictions now have the opportunity to check agenda items in real time, ask questions, and vote online.
This change is expected to greatly increase shareholder meeting participation rates. Through this, it becomes possible to check unilateral decisions by major shareholders or management, significantly enhancing the transparency of management.
Conclusion: A New Order, Challenges for Corporations and Investors
The amendment to the Commercial Code in 2025 marks a significant turning point that brings major changes to the management environment of Korean companies.
This amendment clearly includes shareholders in the duty of loyalty of directors, introduces a strengthened 3% rule and electronic shareholder meetings, significantly enhancing the protection of shareholder rights.
These measures are the first steps to resolve the 'Korea Discount' issue, aimed at enhancing the transparency and reliability of businesses.
These changes present various new challenges for companies. As legal responsibilities of directors expand and the risk of lawsuits increases, concerns regarding strategic decisions such as M&A and large-scale investments are growing.
Companies need to thoroughly review their board's operating practices, accurately document decision-making processes, and reinforce communication with shareholders. The need to streamline internal control systems has become urgent.
On the other hand, investors, based on their enhanced rights, have a greater responsibility to act as responsible shareholders, closely monitoring corporate governance and actively voicing their opinions for long-term corporate value enhancement.
For the recent amendment to the Commercial Code to advance the Korean capital market while minimizing side effects of lawsuit proliferation and management stagnation, cooperation among corporations, investors, and the government is essential. This joint effort is anticipated to solidify a successful reform.
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Frequently Asked Questions (FAQ)
Q. What turning point did the 2025 amendment to the Commercial Code bring to the Korean capital market?
The 2025 amendment to the Commercial Code established a significant turning point for the Korean capital market aimed at strengthening shareholder rights and enhancing corporate governance transparency.
The Commercial Code amendment passed by the National Assembly on July 3, 2025, focuses on solving the long-criticized 'Korea Discount' issue and reinforcing the rights of 14 million individual investors. This amendment expands the focus of corporate management from the company's interests to those of all shareholders and introduces fundamental changes, such as clarifying the scope of directors' duty of loyalty and enhancing shareholder participation and audit committee independence. This represents a major turning point to increase the overall transparency and reliability of the Korean capital market.
Q. How has the duty of loyalty of directors changed in the amendment to the Commercial Code?
The duty of loyalty of directors has been expanded to include not only the company but all shareholders, enhancing shareholder rights protection.
The existing Commercial Code stipulated the duty of loyalty of directors as being 'for the company,' but the amendment specifically states this as 'for the company and all shareholders.' Additionally, a clause was added mandating that all shareholders must be treated fairly, preventing decisions biased towards specific major shareholders. Directors must now transparently manage activities considering all shareholders' interests, and shareholders now have the legal right to challenge decisions by directors they believe are unfair.
Q. What is the 'Aggregated 3% Rule' related to the audit committee and what changes has it brought about?
The 'Aggregated 3% Rule' limits the voting rights of major shareholders and related parties to a combined total of 3%, thereby strengthening the independence of the audit committee.
Previously, major shareholders and related parties could each exercise 3% of voting rights, allowing major shareholders to exert undue influence in appointing audit committee members. The amended Commercial Code improves this by limiting the voting rights of the maximum shareholder and related parties to those exceeding a combined total of 3%. This change increases the likelihood of audit committee members recommended by minority shareholders and institutional investors being selected, significantly enhancing transparency and fairness in corporate governance.
Q. What is the significance of the introduction of the electronic shareholder meeting system in the amended Commercial Code?
The electronic shareholder meeting facilitates the exercise of voting rights by shareholders, expanding participation and increasing management transparency.
The amendment allows publicly traded companies to hold shareholders' meetings simultaneously in-person and online, and large companies will be required to implement electronic shareholder meetings starting in 2027. This allows shareholders to verify agenda items, ask questions, and vote in real-time without the constraints of time and location, significantly improving shareholder democracy. Increased participation in shareholder meetings is expected to enable checks on unilateral decisions made by major shareholders or management, further enhancing transparency in corporate governance.
Q. What challenges have corporations and investors faced since the amendment to the Commercial Code?
Companies need to strengthen internal controls and enhance communication, while investors must focus on exercising their rights and responsible oversight.
With the increase in legal responsibilities of directors and higher potential for lawsuits following the amendment, corporations must comprehensively review their board’s operations, decision-making records, and shareholder communication methods, systematically strengthening internal control systems. At the same time, investors have become more important as responsible shareholders actively voicing their opinions for the long-term enhancement of corporate value, based on their strengthened rights. These changes present new challenges and opportunities for both corporations and investors, necessitating cooperation with the government to successfully advance the capital market.
