Commercial Act Amendment May Adversely Affect Management Activities

The Ministry of Justice is planning to amend the Commercial Act and enterprises are expressing concerns over adverse effects such as intervention in management by speculative capitalists. The purpose of the revision is to introduce audit committee member appointment separate from directors selected by major shareholders and parent company shareholders’ representative action against subsidiary directors causing subsidiary-side business losses.

According to the current law, directors are appointed first and then audit committee members are elected from the directors. According to the amendment, however, at least one audit committee member must be elected at a shareholder meeting separately from director appointment. The idea is for an audit committee member to independently monitor management activities outside the influence of a major shareholder. On an enterprise’s part, however, this can mean excluding major shareholders from audit committee member appointment.

In addition, funds and institutional investors may have more influence. This is because the largest shareholder’s voting right is already limited to 3 percent and funds and institutional investors, even with less equity, can unite themselves for more influence once the separate election is introduced. External entities focusing on short-term profits may concentrate on dividend expansion or the like by taking advantage of audit committee member appointment, and then enterprises’ long-term growth potentials may be affected. Another problem arises in that an audit committee member has access to every corporate information and data. Foreign hedge funds or those related to competitors may misuse the access to obtain confidential data and information.

The possibility of infringement on management rights is higher in holding companies where owner families’ shareholdings are larger. The examples include LG Group and GS Group. At present, the owner family’s ownership in the holding company of LG is 46.15 percent and the percentage amounts to 50.96 percent in the case of GS. Under the current administration, the two groups have been regarded as best practices of conglomerate governance. Ironically, however, they are likely to be more affected by the separate election.

It has few legislation precedents worldwide. “It is actually to limit a major shareholder’s voting right to 3 percent from the very stage of director appointment in that an audit committee member is also a director,” said the Korea Employers Federation, adding, “Voting right limitation during director appointment is infringement on shareholder rights and has no legislation precedents abroad.”
 

The representative action, in the meantime, can be initiated even by one who owns only 1 percent of a non-listed company or only 0.01 percent of a listed company. According to enterprises, the representative action will result in parent companies’ excessive intervention in subsidiary management and more passive management activities. “This is why a large number of countries, such as Germany, France and Britain, have not introduced the litigation and the United States and Japan are very strict in approving the initiation of such procedures,” the federation remarked.