{"id":51428,"date":"2025-08-22T10:48:24","date_gmt":"2025-08-22T10:48:24","guid":{"rendered":"https:\/\/my.legal500.com\/developments\/?post_type=legal_developments&#038;p=51428"},"modified":"2025-08-22T10:48:24","modified_gmt":"2025-08-22T10:48:24","slug":"client-alert-the-korean-commercial-code-approved-by-the-national-assembly-key-implications-and-what-to-do","status":"publish","type":"legal_developments","link":"https:\/\/my.legal500.com\/developments\/thought-leadership\/client-alert-the-korean-commercial-code-approved-by-the-national-assembly-key-implications-and-what-to-do\/","title":{"rendered":"Client Alert: the Korean Commercial Code Approved by the National Assembly \u2013 Key Implications and What To Do"},"content":{"rendered":"<div class=\"box-temp-wrap box-editor-wrap\">\n<p><strong>On July 3, 2025, the National Assembly of Korea passed a set of significant amendments to the Korean Commercial Code aimed at enhancing corporate governance and shareholder equality. Based on subsequent debates following the previous presidential veto of April 2025, the new amendment embodies significant changes to corporate governance featured by (i) expansion of\u00a0fiduciary duty of directors vis \u00e0 vis the shareholders\u00a0as well as the company, (ii) a narrow increase of the required number of independent directors\u00a0which forewarns further potential amendments to secure substantive independency of the board, (iii) application of the\u00a0aggregated 3%\u00a0rule to appointment of\u00a0all\u00a0members of the\u00a0audit\u00a0committee\u00a0which would create ripples in the board composition and operation, and (iv) introduction of\u00a0electronic shareholder meetings\u00a0which is mandatory to large scale public companies. This package of amendments is expected to have significant impact upon how companies operate, take steps in making decisions, fulfill compliance requirements, and engage with shareholders.<\/strong><\/p>\n<p>1.<strong>Directors\u2019 Duty of Loyalty Expanded vis \u00e0 vis Shareholders<\/strong><\/p>\n<p>2.<strong>One-third Requirement of Independent Directors in Public Companies<\/strong><\/p>\n<p>3.<strong>Application of the Aggregated 3% Restriction for All Audit Committee Members<\/strong><\/p>\n<p>4.<strong>Mandatory Electronic Shareholder Meetings for the Large-scale Public Companies<\/strong><\/p>\n<p><strong>1. Directors\u2019 Duty of Loyalty Expanded vis \u00e0 vis Shareholders<\/strong><\/p>\n<p>Under the amended Article 382-3, directors\u2019 duty of loyalty, previously owed only to the company under the code, is expanded to expressly include shareholders. Additionally, directors are now explicitly required to protect the interests of the\u00a0<strong>shareholders in general<\/strong>\u00a0and treat\u00a0<strong>all shareholders fairly and equally<\/strong>\u00a0in performing their duties. This amendment is expected to take effect immediately upon promulgation, which is expected to occur before within July or August 2025.<\/p>\n<p><i><strong>Key Implications<\/strong><\/i><\/p>\n<ul>\n<li>Directors must now carefully <strong>balance the interests of the company and shareholders<\/strong>, particularly under the situations involving corporate restructuring, mergers and acquisitions, capital transactions, takeover bids and management disputes.<\/li>\n<li>Directors face <strong style=\"font-size: 1rem\">higher litigation risk<\/strong><span style=\"font-size: 1rem\">, for the minority shareholders may bring claims directly against directors on the basis of alleged breaches of the expanded duty vis \u00e0 vis all shareholders, particularly in the circumstances where the interests of the company and shareholders deviate from each other (e.g., a director\u2019s act appears to be neutral to the company and yet causing unfair prejudice to certain shareholders).<\/span><\/li>\n<li>Directors must be cautious of exposure to a <strong style=\"font-size: 1rem\">heightened risk of criminal liability<\/strong><span style=\"font-size: 1rem\">, for the breach of the expanded duty may lead to criminal prosecution if it results in self-benefit or benefiting third parties (e.g., frequently major shareholders or the managements) at the cost of unfair loss of other shareholders.<\/span><\/li>\n<\/ul>\n<p><i><strong>Suggested Actions<\/strong><\/i><\/p>\n<p>In light of the upcoming changes, the companies are well advised to:<\/p>\n<ul>\n<li>conduct <strong>proactive compliance assessments\u00a0<\/strong>of procedural and substantive fairness, and proactively engage\u00a0<strong>external counsel<\/strong> when undertaking significant business decisions to mitigate exposure to potential disputes which might otherwise be escalated to civil and\/or criminal actions;<\/li>\n<li>implement clear <strong style=\"font-size: 1rem\">internal policies\u00a0<\/strong><span style=\"font-size: 1rem\">and enhanced\u00a0<\/span><strong style=\"font-size: 1rem\">director training programs<\/strong><span style=\"font-size: 1rem\"> to clarify the scope of directors\u2019 fiduciary duties owed to shareholders as well as the company itself and reinforce the level of shareholders\u2019 trust in the business operations and the management\u2019s business decisions;<\/span><\/li>\n<li>consider establishing <strong style=\"font-size: 1rem\">independent special committees<\/strong><span style=\"font-size: 1rem\">\u00a0on an ad-hoc basis consisting of\u00a0<\/span><strong style=\"font-size: 1rem\">disinterested directors<\/strong><span style=\"font-size: 1rem\"> to review and oversee transactions at hand and the matters relating to fair market value involving potential conflicts of interest among shareholders and\/or the management; and<\/span><\/li>\n<li>enhance <strong style=\"font-size: 1rem\">shareholder communications<\/strong><span style=\"font-size: 1rem\">\u00a0and IR program, and adopt shareholder friendly policies to procure support from shareholders and investors with regard to business operations and managerial decisions.<\/span><\/li>\n<\/ul>\n<p><strong>2. One-third Requirement of Independent Directors in Public Companies<\/strong><\/p>\n<p>Under the amended Article 542-8, \u201coutside directors\u201d are now renamed as \u201c<strong>independent directors<\/strong>.\u201d The independent directors are expected to perform their functions independently from inside directors, executive officers, and any person who directs business operations. For public companies, the minimum number of independent directors is raised from a quarter to\u00a0<strong>one-third\u00a0<\/strong>of the board. This amendment is expected to take effect one year after promulgation which is speculated to be around July or August 2026.<\/p>\n<p><i><strong>Key Implications<\/strong><\/i><\/p>\n<ul>\n<li>The amendment aims to reinforce the board\u2019s oversight function by requiring public companies to appoint directors who are <strong>substantively independent\u00a0<\/strong>from the possible influence of the management and controlling shareholders.<\/li>\n<li>The large-scale public companies in Korea with total assets of KRW 2 trillion or more (approximately USD 1.47 billion) have been already required to have 3 or more \u201coutside\u201d directors which should be majority of the board.<\/li>\n<li>One might call it a narrow increase in number with mere change of name to \u201cindependent\u201d directors, for there is no additional change in qualification of the \u201cindependent\u201d directors at this time. However, this amendment sets an alert to <strong style=\"font-size: 1rem\">possible further legislation\u00a0<\/strong><span style=\"font-size: 1rem\">which would potentially diversify models for qualification and procedural requirements of appointing independent directors by benchmarking the best practices in other jurisdictions (e.g., minority shareholder involvements in appointment of independent directors including the minority veto, minority proposal or affirmative minority resolution).<\/span><\/li>\n<\/ul>\n<p><i><strong>Suggested Actions<\/strong><\/i><\/p>\n<p>To prepare for these changes, the Korean companies will need to:<\/p>\n<ul>\n<li><strong>reassess corporate governance structure<\/strong>\u00a0to align with the requirements in board composition and to ensure their\u00a0<strong>substantive independency<\/strong> from the management and controlling shareholders; and<\/li>\n<li><strong style=\"font-size: 1rem\">establish procedures and protocol for appointment<\/strong><span style=\"font-size: 1rem\">\u00a0of genuinely independent directors to better achieve shareholder equality and fairness by applying standards that would ensure substantive independency of the board.<\/span><\/li>\n<\/ul>\n<p><strong>3. Application of the Aggregated 3% Restriction for All Audit Committee Members<\/strong><\/p>\n<p>Under the amended Article 542-12, the large-scale public companies (with total assets of at least KRW 2 trillion) will now be required to apply the so-called \u201c<strong>aggregated 3% rule<\/strong>\u201d (which limits the voting rights of the largest shareholder in aggregation with its specially related persons to 3%, in contrast to all other shareholders whose voting rights are individually subject to 3% limit on a non-aggregation basis) when electing\u00a0<strong>each and every member of the audit committee<\/strong>. The amended provision will take effect one year after promulgation which is speculated to be around July or August 2026.<\/p>\n<p>The audit committee has been mandatorily required for large-scale public companies, and optional for other companies. The audit committee consists of 3 or more directors, of which 2 or more should be outside directors (which will now be called an independent director). Before the amendment, the aggregated 3% rule applied only to the election of audit committee members who were not outside directors. This provision served as the ground upon which the largest shareholder could effectively avoid the aggregated 3% rule by filling all members of the audit committee with outside directors, which will no longer be the case under the new amendment.<\/p>\n<p>When applied together with another provision which requires that at least one director who will serve as the audit committee member shall be separately elected at the time he or she is elected as the director (as opposed to an election for audit committee members among the elected directors)(i.e., a \u201c<strong>separate election<\/strong>\u201d requirement), the new amendment has practical importance in that it significantly increases the possibility of at least one director serving as the\u00a0<strong>audit committee member<\/strong>\u00a0being elected\u00a0<strong>against the vote of the largest shareholder<\/strong>\u00a0who is subject to the aggregated 3% rule. Indeed, a critical debate continued as to the possible increase of this separate election requirement to two or more directors and audit committee members, which is yet open for further discussion for future amendments.<\/p>\n<p><i><strong>Key Implications<\/strong><\/i><\/p>\n<ul>\n<li>The application of the aggregated 3% rule to all audit committee members would significantly increases the <strong>potential influence of the second or third largest shareholders<\/strong>, minority shareholders, institutional investors, and activist funds in the election of at least one director serving as the audit committee member.<\/li>\n<li>If nominees backed by minority shareholders or activist funds secure seats on the board and the audit committee, the committee is likely to exert a more independent and active oversight, potentially resulting in <strong style=\"font-size: 1rem\">heightened scrutiny of management.<\/strong><\/li>\n<li>Yet, increased oversight by audit committees may lead to <strong style=\"font-size: 1rem\">potential conflicts or disputes<\/strong><span style=\"font-size: 1rem\"> within the management and the board, delay in decision-making, and a higher risk of corporate governance-related disputes and hostile takeover attempts.<\/span><\/li>\n<li>Attention is called to directors who are now subject to the enhanced duty of loyalty vis \u00e0 vis shareholders, for they will be required to <strong style=\"font-size: 1rem\">weigh the interests\u00a0<\/strong><span style=\"font-size: 1rem\">of the company, the shareholder in general, and the\u00a0<\/span><strong style=\"font-size: 1rem\">shareholder equality\u00a0<\/strong><span style=\"font-size: 1rem\">and\u00a0<\/span><strong style=\"font-size: 1rem\">fairness\u00a0<\/strong><span style=\"font-size: 1rem\">in every aspect of the acts of the board and the audit committee, particularly where there are advocates of the conflicting interests which could possibly deviate from the best interest of the company.<\/span><\/li>\n<\/ul>\n<p><i><strong>Suggested Actions<\/strong><\/i><\/p>\n<ul>\n<li>The large-scale public companies, particularly those with substantial ownership concentration among controlling shareholders, should proactively <strong>develop strategies\u00a0<\/strong>to address the increased influence of the runner ups, minority shareholders, institutional investors, and activist funds in election of the directors and the audit committee.<\/li>\n<li>Companies should review and update <strong style=\"font-size: 1rem\">internal governance regulations\u00a0<\/strong><span style=\"font-size: 1rem\">to align with the enhanced independency and authority of audit committees, closely monitor ongoing legislative and policy developments aimed at improving minority shareholder representation, and take necessary steps to\u00a0<\/span><strong style=\"font-size: 1rem\">renovate governance frameworks\u00a0<\/strong><span style=\"font-size: 1rem\">and enhance management accountability.<\/span><\/li>\n<\/ul>\n<p><strong>4. Mandatory Electronic Shareholder Meetings for the Large-scale Public Companies<\/strong><\/p>\n<p>Under the amended Articles 542-14 and 542-15, large-scale public companies must convene shareholders\u2019 meetings in a\u00a0<strong>hybrid electronic format<\/strong>, which requires that the shareholders shall be able to choose between (i) attending in-person at the meeting venue or (ii) if physical attendance is not feasible,\u00a0<strong>participating and voting remotely<\/strong>\u00a0by\u00a0<strong>electronic method\u00a0<\/strong>on a\u00a0<strong>real-time basis.<\/strong>\u00a0This amendment is expected to take effect on January 1, 2027.<\/p>\n<p><i><strong>Summary of Key Amendments<\/strong><\/i><\/p>\n<ul>\n<li>Public companies other than the large-scale public companies may, at their discretion and unless prohibited by their articles of incorporation, conduct shareholders\u2019 meetings allowing a part of the shareholders to participate and vote remotely by electronic method.<\/li>\n<li>Large-scale public companies must hold hybrid electronic shareholders\u2019 meetings;<\/li>\n<li>Participation through electronic shareholders\u2019 meetings has the same legal effect as physical attendance at the meeting venue.<\/li>\n<li>Electronic shareholders\u2019 meetings must enable shareholders to participate in deliberations and vote on a real-time basis.<\/li>\n<li>Companies may retain a professional management entity for the operation of electronic meetings to ensure efficient and fair management.<\/li>\n<li>Companies must retain electronic meeting records for five years from the date of the meeting, and provide shareholders with access to electronic meeting records at the company\u2019s headquarters for no less than three months following the meeting.<\/li>\n<\/ul>\n<p><i><strong>Key Implications<\/strong><\/i><\/p>\n<ul>\n<li>The new amendment introduces the \u201c<strong>participatory hybrid electronic shareholder meeting<\/strong>,\u201d in which virtual participants in parallel with the physical attendants are legally recognized as attending the meeting, with full rights to vote electronically on a real-time basis.<\/li>\n<li>Companies will likely encounter a range of <strong style=\"font-size: 1rem\">legal and technical challenges<\/strong><span style=\"font-size: 1rem\">, including personal date protection and privacy concerns related to shareholder identity verification and data retention, preventive measures to manage the risk of duplicate voting or improper proxy voting and other potential disputes over the validity of resolutions due to network disruptions or technical failures.<\/span><\/li>\n<\/ul>\n<p><i><strong>Suggested Actions<\/strong><\/i><\/p>\n<p>Companies subject to hybrid shareholder meeting requirements should:<\/p>\n<ul>\n<li>take steps to secure <strong>technical infrastructure\u00a0<\/strong>incorporating authentication methods (such as encryption and multi-factor authentication), appropriate network security measures, stress-testing, penetration testing, and real-time incident monitoring system to ensure compliance readiness;<\/li>\n<li>develop and adopt detailed <strong style=\"font-size: 1rem\">internal governance rules\u00a0<\/strong><span style=\"font-size: 1rem\">and\u00a0<\/span><strong style=\"font-size: 1rem\">procedural manuals\u00a0<\/strong><span style=\"font-size: 1rem\">for electronic shareholders\u2019 meetings, clearly outlining contingency measures for technical failures and delineating the chairperson\u2019s authority regarding meeting adjournments, suspensions, or postponements; and<\/span><\/li>\n<li>proactively consider engagement with <strong style=\"font-size: 1rem\">external service providers\u00a0<\/strong><span style=\"font-size: 1rem\">to ensure effective risk management and compliance, especially if the companies lack internal technical resources and capabilities.<\/span><\/li>\n<\/ul>\n<p><i><strong>Conclusion<\/strong><\/i><\/p>\n<p>The new amendment represents a\u00a0<strong>substantial shift<\/strong>\u00a0in Korea\u2019s corporate governance framework. All companies should be aware of the scope of the changes, assess their internal governance and compliance frameworks, and implement timely measures to minimize potential risks and effectively navigate through the evolving compliance landscape. A special attention and alert are called for the large-scale public companies which are subject to the aggregated 3% rule for the audit committee and the electronic shareholders\u2019 meeting requirements.\u00a0<strong>Potential minority representation<\/strong>\u00a0at the board and the audit committee should now be regarded as a\u00a0<strong>constant<\/strong>, not a variable.<\/p>\n<p>Given the explicit addition of fiduciary obligations vis \u00e0 vis shareholders, the director should always cast questions of whether any of the board decision would\u00a0<strong>affect the interest\u00a0<\/strong>of any shareholder, whether there is any\u00a0<strong>conflict\u00a0<\/strong>of interests affected by the decision, and whether any such conflicts could be\u00a0<strong>resolved or mitigated\u00a0<\/strong>with any measure incidental to the decision.<\/p>\n<\/div>\n<dl class=\"relevant-area\">\n<dd><\/dd>\n<\/dl>\n","protected":false},"featured_media":0,"template":"","class_list":["post-51428","legal_developments","type-legal_developments","status-publish","hentry"],"acf":[],"_links":{"self":[{"href":"https:\/\/my.legal500.com\/developments\/wp-json\/wp\/v2\/legal_developments\/51428","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/my.legal500.com\/developments\/wp-json\/wp\/v2\/legal_developments"}],"about":[{"href":"https:\/\/my.legal500.com\/developments\/wp-json\/wp\/v2\/types\/legal_developments"}],"wp:attachment":[{"href":"https:\/\/my.legal500.com\/developments\/wp-json\/wp\/v2\/media?parent=51428"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}