DP Pushing to Amend the Commercial Act
While the 21st National Assembly has not been launched yet, the ruling Democratic Party of Korea (DPK) is preparing to amend the Commercial Act to provide for multiple derivative actions and cumulative voting, signaling that it will introduce anti-corporate bills in earnest.
The business community expressed concerns over the party’s movement, saying that politicians are focusing only on extending regulations that stifle corporate activities when they actually should be putting their efforts into helping businesses overcome challenges posed by the COVID-19 pandemic.
Park Yong-jin, a DP lawmaker, hosted a debate on corporate governance improvement on June 2 at the National Assembly to take opinions from various people regarding the amendment of the Commercial Act. Park plans to submit an amendment bill to the National Assembly early this month.
Park said, “It is imperative to find a solution to circumstances where outside directors are elected in the interests of controlling shareholders and specially related persons, making the board of directors a rubber stamp.” He also pointed out, “The current system lacks measures to impose restrictions upon or dismiss unqualified executive directors and outside directors.” Park also mentioned other issues including circumstances where the parent company suffers from damages incurred by the illegal activities of directors of subsidiary companies; circumstances where derivative suits are not pursued properly; circumstances where cumulative voting cannot be adopted due to the company’s articles; issues regarding electronic voting.
The ruling party appears determined to pass the bill through the National Assembly to provide for multiple derivative actions, cumulative voting and electronic voting, measures that are seen as anti-corporate by the business community.
Support on a government level is also expected. Joh Sung-wook, chairperson of the Korea Fair Trade Commission (KFTC) expressed through a congratulatory message the importance of revising the Commercial Act for qualitative improvement and fundamental change of corporate governance.
However, businesses worry that once the ruling party’s amendment bill is approved, there may be cases of foreign capital shaking up corporate governance of domestic companies, just as the U.S.-based hedge fund company Elliott Management attacked Hyundai Motor Group.
As for cumulative voting, some voice concern over the possibility of a structural problem that may make it easier for a director supported by a specific influence such as speculative capital to be elected. This means that a director elected at a shareholders’ meeting may represent the interests of a specific group only, not the entire company. The first request made by Elliott Management after it acquired Hyundai Motor Group’s shares was to introduce cumulative voting. Cumulative voting was mandatory in the U.S. and Japan, but the two countries later had the companies decide the voting system for themselves due to concerns over management disputes.
A multiple derivative suit system allows the shareholders of the parent company to file a suit against the board of directors of the subsidiary company for its illegal actions. It may violate the management rights of the subsidiary company. It may also be manipulated by speculative capital seeking short-term profit as the speculative capital can acquire the parent company’s shares and use the shares to intervene in the management of the subsidiary company. As such, most countries including Germany, France, and the United Kingdom do not allow multiple derivative suits.
Financial circles also feel uneasy about the system that gives shareholders the power to dismiss unqualified directors. An official from a large conglomerate said, “To give shareholders the power to dismiss directors, a system that provides protection for the directors should be given as well. If not, it can only become a great means for hedge funds to strategically disturb the corporate governance by dismissing board of directors.”