The Corporate Governance Review: South Korea
Overview of governance regime
i Sources of law and enforcement
The Korean Commercial Code (KCC) is the basic law on corporate governance in South Korea. Additional matters regarding the governance of listed companies are stipulated in the Listing Rules on the Securities Market, the Listing Rules on the KOSDAQ Market and other rules set forth by the Korea Exchange (KRX), which have been established by the Financial Investment Services and Capital Markets Act (FSCMA) and the special rules for listed companies set forth in the KCC.
The Act on Corporate Governance of Financial Companies (the Corporate Governance Act) shall apply in preference to the KCC with respect to the corporate governance of financial companies.
Although they do not relate to corporate governance, the FSCMA sets forth separate rules for financial matters such as the issuing of new shares of a listed company or restructuring (including mergers and spin-offs), as well as various disclosures, such as the registration statement.
The Ministry of Justice (MOJ) is responsible for the issuance of ex ante rulings under the KCC and for the ex post facto imposition of fines or other sanctions for any breach of the KCC.
The Financial Services Commission (FSC), and the Financial Supervisory Service (FSS), which has been delegated with certain authorities of the FSC, are responsible for the issuance of rulings under the Corporate Governance Act and the enforcement thereof (including sanctions).
The KRX manages and regulates listed companies through the examination and management of listings.
ii Nature and recent development of the corporate governance regime
Under the KCC, joint-stock companies and limited companies, which are the most common forms of corporate entity in South Korea, have four corporate governance bodies:
- the general shareholders' meeting;
- a board of directors composed of registered directors of the company;
- a representative director or directors appointed from among the directors; and
- a statutory auditor or auditors, or an audit committee.
Of these, the general shareholders' meeting is the supreme decision-making body and determines fundamental matters pursuant to the KCC and the articles of incorporation of a company. The board of directors makes decisions on important operational matters that are not specially reserved for the resolution of the general shareholders' meeting by the KCC and the articles of incorporation. Boards of directors consist of executive directors, outside directors, and non-executive, non-outside directors. Given that executive directors generally become members of the management, the management and the board of directors are not always clearly distinguished. The representative director has the authority to perform matters resolved by the board of directors, and to decide and perform ordinary management activities. The statutory auditor or the audit committee supervises the management of the company's business and audits the company's finances and accounts.
Amendments to the KCC in 2012 introduced the executive officers governance structure, consisting of officers who are not registered directors but who are responsible for carrying out the company's daily operations and implementing decisions of the board of directors, and decisions of the general shareholders' meeting under the supervision of the board of directors.2 If a company decides to have executive officers under its articles of incorporation, there will be no representative director. Accordingly, the company will be able to clearly distinguish the management and the board of directors by separating the executive functions from the board of directors; however, there have not been many cases where this structure has been actually used.3
Following the introduction of a stewardship code, which is accepted by the National Pension Service and other institutional investors, and the increased role of proxy advisory organisations, demands for improvement of the governance regime, including management transparency, board diversity and the expertise of outside directors, has been growing. Accordingly, there has been an increase in the number of women, foreigners and professional managers being appointed as outside directors, and increased emphasis has been placed on the qualification of the independence of outside directors and audit committee members.
In particular, seeking board-focused management, the Corporate Governance Act stipulates that the chief operating officer, who is in charge of strategic planning, financial management, risk management and other major issues, shall be appointed or dismissed by a resolution of the board of directors.
In December 2020, proposed amendments to the KCC, the Monopoly Regulation and Fair Trade Act, and the Bill to the Act on the Supervision of New Financial Consolidated Business Groups, which are referred as the three laws of fair economy, passed the plenary session of the National Assembly. These bills are notable in that they each incorporate new or amended provisions that have a considerable impact on corporate governance in Korea.
First, the proposed amendment to the KCC (effective from 29 December 2020):
- introduced a multi-step derivative action that allows for shareholders of parent companies to bring derivative lawsuits directly against directors of certain subsidiaries;4
- mandated a separated election for directors who become audit committee members;5 and
- relaxed the quorum requirements at general shareholders' meetings for election of statutory auditors for companies that have implemented an electronic voting system.6
Second, the proposed amendment to the Fair Trade Act (effective from 30 December 2021) prohibits financial and insurance companies belonging to a business group that is subject to restricted mutual investment from casting their votes in respect of their shares in their Korean affiliates. Further, it exceptionally allows financial and insurance companies to exercise their voting rights only with respect to the appointment or removal of officers, amendments to the articles of incorporation of their listed affiliates, mergers, business transfers (only with non-affiliates) but only up to 15 per cent of issued and outstanding voting shares combined with those held by their specially related parties.7
Last, the Act on the Supervision of New Financial Consolidated Business Group (effective from 30 June 2021) designates the business group that has financial companies with combined assets of no less than 5 trillion won, and introduces obligations in respect of internal control, risk management, evaluation relating to sound management, and monitoring and disclosure.
i Board structure and practices
Under Korean law, boards of directors shall have a single-tier structure. Except with regard to small companies, a board of directors may not be replaced, as it is an essential body that is required under the KCC.
However, the system adopted through the KCC is of a committee within the board of directors, whereby a committee established within the board of directors may be delegated with certain authorities of the board of directors and resolve on relevant matters.8 Under the KCC, the board of directors may decide whether to establish any committee at its own discretion pursuant to the company's articles of incorporation.
A listed company with total assets equal to or greater than 2 trillion won as at the end of the latest fiscal year (thus being a large listed company) must establish an audit committee and a committee to recommend outside director candidates.9
Financial companies are obliged to establish:
- a committee in charge of recommending candidates for outside directors, representative directors and audit committee members;
- an audit committee;
- a remuneration committee; and
- a risk management committee.10
At least two-thirds of the audit committee of a financial company or a large listed company is required to be composed of outside directors.
In addition to these legally required committees, listed companies are increasingly requiring the professional examination of a separate committee: for example, an internal transaction committee that examines the fairness of transactions between affiliates and specially related parties, or a remuneration committee that examines the remuneration system for directors and officers.
Composition of the board
The board of directors shall be composed of at least three directors, but there is no limit on the maximum number of board members. However, a company whose paid-in capital is less than 1 billion won may elect not to establish a board of directors.11
Specifically, at least one-quarter of the total number of directors appointed in listed companies shall be outside directors, and large listed companies (i.e., those with assets of 2 trillion won or more) shall have at least three outside directors who will constitute a majority of the total number of directors.12 Furthermore, an amendment to the FSCMA in 2020 prohibits a large listed company's board from having members of only a single gender.13
In principle, the representative director represents the company externally and has the authority to undertake matters resolved by the board of directors, and to decide on and perform ordinary management activities internally. The board of directors has the authority to make material decisions regarding the company (e.g., the disposal or transfer of its material assets and the borrowing of large-scale property).14
In addition, Korean courts consider that a resolution of the board of directors shall be required for important matters that have not been generally and specifically delegated to the representative director by the board of directors and that do not constitute ordinary day-to-day operations.15
Directors participate in the decision-making processes of the board of directors, and exercise a supervisory role over the operations of the representative director or representative executive officer. However, in principle, a director may not represent a company without a delegation of the board of directors, the representative director, or both.
Legal responsibilities of the board
The board of directors is an institution that has the decision-making authority with respect to material business affairs of a company, as well as the authority and responsibility to supervise the performance of duties by directors, including the representative director.16 More specifically, the board of directors is required to manage, monitor and supervise whether a director has duly and faithfully performed his or her duties in accordance with his or her fiduciary duty with respect to matters decided by the board of directors. To ensure the effectiveness of such exercise of supervisory authority, the KCC grants each director the right to require the representative director to report to the board of directors on duties of other directors or employees.17 Further, each director, including the representative director, shall report the status of performance of his or her duties to the board of directors at least once every three months.18
Directors shall be jointly and severally liable for damage suffered by the company if they have violated any law or the articles of incorporation through their wilful misconduct or negligence, or if they have neglected their duties. If the foregoing acts have been conducted in accordance with a resolution of the board of directors, the directors who have consented to that resolution shall assume the same liability against the company.19
Directors may be liable under the Criminal Act for breach of fiduciary duty if they have breached their duty of care as bona fide managers or their fiduciary obligation to the company, and if the company has suffered damage because of the breach and that director or a third party profited therefrom.20
Recently, the Supreme Court ruled that 'a director of a joint-stock company has a duty to monitor not only his or her duties but also the performance of other directors, and thus he or she shall not only personally comply with laws and regulations, but also have a duty to monitor and supervise other directors' performance of duties in compliance with laws and regulations', and that 'especially, as a member of the board of directors, a representative director has the authority and responsibility to monitor the overall performance of directors in charge of duties, including other representative directors, and therefore, if he or she neglects his or her duty to monitor due to his or her wilful misconduct or negligence even though there is a reason to suspect that the performance of other representative directors or directors in charge of duties is unlawful, he or she shall be liable for damages under Article 399(1) of the KCC for the damage suffered by the company'.21
Control of the board
The articles of incorporation typically provide that the representative director is authorised to convene meetings of the board of directors. However, in principle, any director may convene meetings of the board of directors if he or she is authorised to convene a meeting by a resolution of the board of directors.22
Usually, the representative director concurrently holds the position of chair of the board of directors, and has the authority to convene board meetings. Accordingly, in most cases the representative director, who doubles as chief executive officer and chair of the board, also leads the board of directors and management.
In principle, a financial company shall appoint an outside director as the chair of the board of directors. If a financial company appoints a person who is not an outside director as chair, a representative of the outside directors shall be appointed separately.23
Generally, although they are not legally obliged to do so, listed companies are increasingly appointing an outside director as the chair of the board of directors to ensure the objectivity and independence of the board's examination procedures.
Delegation of board responsibilities
As the representative director represents the company, the general practice is to affix the seal of the company and attach the certificate of the corporate seal impression issued by the court on him or her so that he or she can carry out the company's external activities (including the execution of agreements).
In principle, the board of directors has the authority to make material company decisions, and to delegate certain authorities to committees within the board of directors.24
The board of directors may also delegate certain duties (except for matters requiring a resolution of the board of directors or any committee) to the representative director. Generally, a company's internal regulations stipulated by a resolution of the board of directors determine the matters on which the representative director is authorised to make decisions at his or her own discretion without obtaining a resolution of the board of directors.
Separation of the roles of CEO and chair
There is no express provision on the authority or responsibility of the chair of a board of directors under the KCC. However, it is usually provided in the articles of incorporation that the representative director shall concurrently hold the position of chair of the board of directors. The chair shall assume the same responsibilities as other directors.
The representative director has the authority to perform business on behalf of the company, and the chair has the authority to convene and proceed with meetings of the board of directors.
Direct communication with shareholders
There is no law or regulation restricting the representative director or the chair from directly communicating with shareholders.
However, as the regulations on fair public disclosure apply to listed companies, and the FSCMA sets forth regulations on insider trading, a listed company's communications with its shareholders are subject to the limits set forth therein.
Remuneration of directors and senior management
The general practice is to have a cap on remuneration for all directors resolved at the general shareholders' meeting, and the amount of remuneration for respective directors resolved by a resolution of the board of directors.25
For financial companies, matters regarding the methods for the determination and payment of the remuneration of officers (excluding outside directors, non-standing directors, audit committee members, compliance officers and risk management officers) need to be resolved by the remuneration committee, which is a committee established within the board of directors.26
There is no special provision on the amount of remuneration of non-registered officers (senior management). The general practice is to determine the amount at the representative director's own discretion or under regulations on officer remuneration resolved by the board of directors.
The board of directors may establish internal committees under the board, such as an audit committee.27
Large listed companies must establish an audit committee and a committee to recommend outside director candidates.28 Financial companies are also required to establish an officer candidate recommendation committee, audit committee, remuneration committee and risk management committee.29
Matters resolved by the committees (excluding the audit committee) may be resolved by the board of directors.30
Board and company practice in takeovers
In the event of a hostile takeover, it may be possible for a board of directors to use defence tactics such as the acquisition of treasury shares or the issuance of new shares to friendly third parties, including specific shareholders. To issue new shares to friendly third parties, however, express grounds should be given in the articles of incorporation, and other regulatory issues exist (e.g., the issuance price will be restricted under the FSCMA). Furthermore, in a dispute over management control, the issuance of new shares to friendly shareholders for the purpose of defending against the dispute is likely to be invalidated by a court.
A listed company may acquire treasury shares by a resolution of the board of directors in an amount up to its distributable profits, and may use methods such as tender offers or purchases on exchange.31
To defend against a hostile takeover, the articles of incorporation can stipulate the supermajority voting system for certain agendas of the general shareholders' meeting, including the dismissal of directors, or the golden parachute system, which requires the payment of a substantial amount of severance pay upon the dismissal of directors; however, it remains controversial whether these systems are permitted under the KCC.
Under Korean law, there is no difference between outside directors and executive directors in terms of their authority, obligations and responsibilities.32
Owing to their independent status, there has been a lot of criticism about outside directors, the contention being that they merely act as a rubber stamp without assuming actual roles in supervising the management of companies. However, outside directors have been expanding the scope of their participation in board of director decision-making processes by raising their opposition to specific agenda items or requesting additional examination.
In principle, notice shall be given to directors and statutory auditors no later than one week prior to a meeting of the board of directors to convene such a meeting. This period may be shortened by the articles of incorporation, and the meeting may be held without convocation subject to the unanimous consent of all the directors and statutory auditors.33
There is no express statutory provision on whether outside directors are allowed or obliged to directly visit a subsidiary of the relevant company or engage in direct communication with lower management or employees. However, it would be difficult for outside directors to force visits or communication without the permission of the management of a subsidiary, since the independence of an entity cannot be denied even for subsidiaries.
Legal duties and best practice
In terms of legal duties, there is no distinction between executive (inside) directors and outside directors. Both are obliged to perform their duties for the company in good faith in accordance with their duty of care as bona fide managers, and in accordance with the law and the articles of incorporation.34
Liability of directors
A director shall be liable for damage suffered by the company if he or she has violated any law or the articles of incorporation by his or her wilful misconduct or negligence, or has neglected his or her duties.35 If the foregoing acts were performed in accordance with a resolution of the board of directors, the directors who have consented to that resolution shall assume joint and several liability against the company.
Directors may be exempted from the foregoing liabilities pursuant to the unanimous consent of shareholders (although this is highly unlikely for listed companies). As previously mentioned, if a director's liability exceeds six times his or her annual salary (three times, in the case of an outside director), that director may be exempted from liability if the company's articles of association set forth relevant matters in this regard.36, 37
If a company fails to do so, shareholders may file a lawsuit against the directors on behalf of the company based on the directors' breach of their duties.38 As noted in Section I, this also includes a multi-step derivative action, which has been introduced under the amended KCC and allows the parent company's shareholder to bring derivative actions directly against directors of certain of its subsidiaries.
Directors may be liable under the Criminal Act for breach of fiduciary duty if they have breached their duty of care as a bona fide manager or a fiduciary obligation to the company, and the company has suffered damage because of that breach and the director or a third party profited therefrom.39
Election, term of office and qualification of directors
Directors are appointed by a resolution of the general shareholders' meeting. When appointing two or more directors, use of a cumulative voting system may be requested, although most companies restrict the system through their articles of incorporation.40, 41
If a listed company convokes a general shareholders' meeting to appoint directors, it shall provide certain information about the candidates to the shareholders. Directors may be appointed only from the candidates notified as above.42
Large listed companies shall appoint outside directors from those candidates recommended by the committee formed to recommend outside director candidates.43 The election of at least one director (or more directors as may be permitted in the articles of incorporation) who becomes a member of the audit committee must be conducted separately from elections for other directors to ensure independence of members of audit committees of listed companies. In this case, the 3 per cent voting limit44 applies to the director who will be an audit committee member from the moment he or she is appointed as a director at the general meeting of shareholders.
For financial companies, candidates for outside directors, representative directors and audit committee members are recommended by the committee to recommend officer director candidates.45
The term of office of directors shall not exceed three years; however, this period may be extended by the articles of incorporation until the adjournment of an annual general shareholders' meeting convened with respect to the last fiscal year during a term of office.46
Although there are no special qualification requirements for executive directors, outside directors should satisfy certain qualification requirements that mainly concern their independence.47
For large listed companies, at least one member of the audit committee should be an expert in accounting or finance.48 As for financial companies, certain qualification requirements are specified for the executive and outside directors.49
Conflicts of interest
To prevent a conflict of interest between a company and a director, when a director, or any of his or her relatives and entities he or she controls, intends to engage in a transaction with the company (self-dealing), the relevant party shall disclose the material facts regarding the self-dealing to the board of directors in advance, and obtain approval therefor by an affirmative vote of at least two-thirds of the total number of the directors. Any self-dealing shall be fair in terms of its conditions and procedures.50
According to the 2012 amendment to the KCC, a director shall also obtain the approval of the board of directors by an affirmative vote of at least two-thirds of the total directors to exploit business opportunities that are likely to present current or future profits to the company for his or her own benefit or that of a third party.51
Since outside directors cannot engage in the regular business of a company,52 they are not able to directly engage in the performance of a company's business. However, they shall monitor the management as members of the board of directors by, inter alia, reviewing and examining matters reserved to the board of directors, participating in the board of directors, engaging in discussions or exercising voting rights.
Companies of a certain minimum size (including listed companies) are subject to an external auditor's audit. Under the Act on External Audit of Stock Companies, the restatement of which became effective in 2018:
- the independence of external auditors has been strengthened by requiring the FSS to designate an external auditor for a period of three years after a listed company's appointment of an external auditor for six years at its own discretion; and
- the external audit system has been reinforced by stipulating the obligation to submit internal accounting management systems to an external audit.53
All external audit reports shall be publicly disclosed under the applicable laws.
Listed companies and certain other companies are required to publicly disclose certain matters quarterly, including audit reports, and are also required to publicly disclose them in accordance with the FSCMA.54 The public disclosure regulations of the KRX are applicable to listed companies, including certain disclosure requirements in the event of any major decision, such as the issuance of new shares, the acquisition of treasury shares, a merger or spin-off, and the transfer of a material business or asset.55 In addition, listed companies are obliged to make public disclosures in a fair manner so as to prevent any information gap arising from the selective provision of important information to certain persons.56
Most public disclosures are mandatory, and the comply or explain model has been introduced for certain financial companies. As of 2019, under the amended KRX regulations, large listed companies are required to publicly disclose their corporate governance reports setting forth, inter alia, the current status of the protection of shareholders' rights, the independence of boards of directors, fairness in the course of the appointment of the directors, and the expertise of a company's internal and external audit organisations. In March 2020, the KRX established the guidelines for corporate governance reporting, pursuant to which it is seeking to expand the scope of mandatory public disclosure items to include:
- whether any guidance on prohibiting the appointment of officers who engaged in activities that undermined or violated shareholders' rights has been established;
- information on outside directors in office for six years or longer (or nine years including time served at affiliates) and the rationale for a long-term appointment;
- independence of the internal audit department; and
- a policy on dividends and shareholder returns as well as future plans thereon.
In addition to the foregoing environmental, social and governance-related matters, the KRX is pursuing the public disclosure of corporate governance items concerning environmental and social responsibilities.
Communication between management and shareholders usually takes place through investor relations activities, and shareholders are increasingly requesting meetings with management, including directors.
Corporate social responsibility / ESG
Financial companies are required to set up a risk management committee and appoint a compliance officer and a risk management officer.57
A listed company with total assets equal to or greater than 500 billion won should establish compliance guidelines, and appoint a compliance officer who is responsible for ensuring officers and employees comply with the compliance guidelines.58
The MOJ has been making efforts to facilitate the internal control processes by announcing the Standard Compliance Guidelines for Listed Companies to enhance the effectiveness of the compliance system. The Guidelines provide that:
- an internal reporting system for whistle-blowing may be established;
- personal information about whistle-blowers and details of related internal reports shall be kept confidential;
- extenuating circumstances shall be taken into consideration if a whistle-blower reports a tort or illegal act in which he or she has been involved; and
- no whistle-blowers shall be subject to any disadvantages as a result of their disclosure.
In addition, as corporate social responsibility has emerged as an important issue, there is growing interest in the ethical management of companies, and companies are increasingly disclosing their internal policies on these matters.
With an increased emphasis on the importance of the ethics of owners or officers of large enterprises, their abuse of authority against employees often becomes a social issue. There are cases in which officers have not only resigned but have also been held criminally responsible for committing abusive acts.
i Shareholder rights and powers
Every shareholder shall have one vote for each share held,59 and no extra vote or dividend shall be acknowledged for the reason that the shareholder has been holding shares for a long time. However, a company may issue shares without voting rights in accordance with the articles of incorporation. Because the appointment or dismissal of directors is a matter reserved to the general shareholders' meeting, shareholders have an indirect influence on the board of directors.60
The following matters, among others, require a resolution of the board of directors as well as a special resolution of the general shareholders' meeting:
- amendments to the articles of incorporation;
- reductions in paid-in capital;
- mergers or spin-offs of the company;
- the transfer of all or material parts of the business; and
- comprehensive share transfers and share exchanges.61
However, not all matters reserved to the board of directors need to be approved by the shareholders.62
Minority shareholders holding a certain equity interest have certain rights depending on their shareholding, including:
- shareholder proposal rights;
- the right to call a general shareholders' meeting;
- the right to request a cumulative vote with regard to the appointment of directors;
- the right to request an injunction (suspension) for a violation by the directors; and
- the right to institute a derivative action63 and the right to inspect accounting books.64, 65
In the past, opinions were divided as to whether the threshold for a minority shareholder of a listed company to exercise its minority shareholder rights should be based (exclusively or optionally) on general provisions applicable to non-listed companies (higher minimum shareholding threshold) or special provisions applicable to listed companies (lower shareholding threshold but minimum holding period required), and the court's rulings were not consistent. The amended KCC legislatively clarifies this issue so that minority shareholders are entitled to exercise their minority shareholder rights if either requirement is met.
ii Shareholder duties and responsibilities
A shareholder of a listed company is required to publicly disclose his or her equity interest with regard to certain matters if the equity interest constitutes at least 5 or 10 per cent,66 but shall not assume any other special legal obligations or responsibilities.
However, any person who instructs a director to perform business by using his or her influence over the company shall assume the same responsibility as that director with regard to the instructed or performed business.67 It is possible that the foregoing responsibilities would be recognised for the controlling shareholder.
In cases of self-dealing, the relevant party shall disclose the material facts regarding the self-dealing to the board of directors in advance, and obtain the approval of the board by an affirmative vote of at least two-thirds of the total number of the directors to prevent a conflict of interest between the company and the major shareholder. Any self-dealing shall be fair in terms of its conditions and procedures.68 In addition, no listed company shall grant certain credit or provide debt guarantees to major shareholders and their specially related parties.69
Although there have been theoretical discussions on the responsibilities assumed by a controlling party against minority shareholders, there is currently no legislation in this regard.
Institutional investors' duties and best practice
Although no special statutory provision of any special legal obligations or responsibilities is available with regard to the exercise of shareholders' voting rights, institutional investors have been introducing a stewardship code; accordingly, the role of proxy advisory organisations, which provide advice on the details of exercising voting rights based on their analysis of the agenda of the general shareholders' meeting, has been reinforced.
To secure trust in the expertise of proxy advisory organisations, an amendment to the FSCMA has been proposed, and the introduction of a declaration system for proxy advisory organisations has been discussed, granting rights to request the submission of information to the FSC and to prohibit unsound business activities of proxy advisory organisations.
iii Shareholder activism
Shareholder activism is increasing in Korea, and proxy battles frequently take place. One activist carried out a campaign to publicly oppose the agenda for the restructuring of a large listed company, and the relevant agenda was not adopted.
There seem to be conflicting views about shareholder activism: on the one hand, such activity is not optimal for long-term corporate value, as it merely seeks short-term profits; however, shareholder activism should be understood as a reasonable aim to protect minority shareholders and improve corporate governance.
Any person intending to solicit another person to exercise his or her voting rights by proxy for listed companies should publicly disclose this in advance and deliver the power of attorney or reference documents.70
iv Takeover defences
Given that every shareholder has one vote per share,71 dual-class share systems are not an appropriate defence in Korea against a hostile takeover.
In the case of a hostile takeover, it may be possible for the board of directors to use defence tactics such as the acquisition of treasury shares or the issuance of new shares to friendly third parties, including specific shareholders. As previously mentioned, express grounds must be included in the articles of incorporation to issue new shares to friendly third parties, and other regulatory issues exist. Furthermore, in a dispute over management control, the issuance of new shares to friendly shareholders to defend against a takeover is likely to be invalidated in court. Listed companies may acquire treasury shares by a resolution of the board of directors in an amount up to their distributable profits, and may use methods such as tender offers or purchases on exchange.72
Another possible measure is selling treasury shares to friendly third parties, given that the disposal of treasury shares is also a matter reserved to the board of directors and is not subject to regulations on the issuance of new shares. However, this practice is generally perceived in a negative light.
The staggered board system is not prohibited under the applicable laws and regulations, and some listed companies operate this system.
As previously mentioned, in defending against a hostile takeover, the articles of incorporation can stipulate a supermajority voting system for the agendas of certain general shareholders' meeting, including the dismissal of directors or the golden parachute system; however, whether these systems are permitted under the KCC remains controversial.
v Contact with shareholders
Contact with shareholders usually takes place through investor relations activities, and shareholders are increasingly keen to meet with management, including directors. In some cases, management will hold individual meetings with major shareholders. Although holding individual meetings with a shareholder or certain shareholders is not prohibited, the selective provision of internal information only to some shareholders is not permitted. If this is the case, a company has an obligation to make fair public disclosures, provided, however, that selective provision of information would be exceptionally permitted if the receiving party signs an agreement that it will keep the information confidential and not engage in share transactions by using the relevant information.
Notice on the convocation of a general shareholders' meeting shall be given to shareholders at least two weeks prior to the date set for the meeting,73 provided that if a company has made a public disclosure of the convocation of the general shareholders' meeting, it may elect not to give notice thereon to shareholders with an equity interest representing no more than 1 per cent.74
For listed companies, the system of soliciting a person to exercise a shareholder's voting rights by proxy is generally used. To this end, the person intending to do so should make public disclosure of this in advance, and deliver a power of attorney or reference document regarding this.75
Usually, shareholders do not expressly state whether they agree or disagree with the agenda submitted to the general shareholders' meeting. However, the National Pension Service has begun to announce how it would vote on certain agendas to the extent that specific conditions are met.
In 2018, the state-run National Pension Service (NPS), which is the world's third-largest pension fund, adopted a stewardship code, and owing to certain highly publicised cases of misbehaviour by owners recently, there is growing public opinion in Korea that shareholders should actively exercise their shareholder rights.76 In connection with the foregoing, the NPS enacted its internal shareholder activism guideline, which became effective on 27 December 2019 and establishes detailed standards and processes for shareholder activism based on the stewardship code. With this guideline in effect, the NPS is expected to take a more active stance as a shareholder, and for certain portfolio companies selected by its fund management committee, exercise its shareholder rights to the fullest extent permitted under applicable laws and regulations.
Furthermore, shareholder activism has been on the rise in Korea, with an increasing number of domestic and overseas activist investors seeking to influence the management of large Korean conglomerates. We anticipate that the growth of activism will lead to increased attention being paid to corporate governance, especially regarding issues such as the re-election of owners as executive directors, concurrent directorships, and the independence and diversity of outside directors.
1 Hyeon Deog Cho and Min Yung Hong are senior attorneys, Yeong-Ik Jeon is an attorney and Jung-Chull Lee is a foreign attorney at Kim & Chang.
2 Articles 408-2 to 408-9.
3 Discussions continue regarding using governance restructuring to reinforce the independence of boards of directors and statutory auditors (and audit committees) from controlling shareholders. Related to this issue, the amendments to the Korean Commercial Code (KCC), which includes the introduction of multi-step derivative actions, a mandatory electronic and cumulative voting system for large public companies, and separate election of directors who become audit committee members, took effect on 29 December 2020. See footnotes 4 and 5 for details.
4 Under the amended KCC, shareholders of the parent company holding at least 1 per cent of the total issued and outstanding shares (and in the case of a company subject to the special rules for listed companies, shareholders who maintained at least 0.5 per cent of the total issued and outstanding shares for the previous six months) to institute a derivative action directly against a director of its subsidiary (including sub-subsidiaries); provided that the parent company holds more than 50 per cent in the applicable subsidiary. (Articles 406-2 and 542-6).
5 The election of any director who becomes a member of the audit committee must be conducted separately from elections for other directors to ensure independence of members of audit committees of listed companies. Further, the amended KCC limits all shareholders from casting votes in respect of their shares in excess of 3 per cent in respect of the appointment or removal of audit committee members; provided that the largest shareholder is restricted from casting votes in respect of its shares in excess of 3 per cent (which is aggregated with shares held by its specially related parties) in respect of the appointment or removal of audit committee members who are not outside directors (Article 542-12).
6 For companies that implemented an electronic voting system for election of auditors, it is possible to appoint an auditor with a majority of the voting rights present at the shareholders meeting (i.e., approval from one-quarter of total issued and outstanding shares no longer required). (Article 542-12).
7 Fair Trade Act, Article 25.
8 KCC, Article 393-2.
9 ibid., at Articles 542-8 and 542-11.
10 Corporate Governance Act, Article 16.
11 KCC, Article 383.
12 ibid., at Article 542-8.
13 The amendment became effective on 5 August 2020, subject to a two-year grace period from the effective date of the amendment for this obligation.
14 KCC, Article 393.
15 The courts' view that, if a representative director acts for and on behalf of a company at his or her own discretion without obtaining a resolution of the board of directors, even when such an act requires the resolution of the board of directors, the relevant transactional activity shall be effective unless the counterparty knew or should have known that the resolution of the board of directors had not been obtained. In this circumstance, the company asserting that the counterparty knew or should have known that the resolution of the board of directors had not been obtained shall assume the responsibility to verify that fact.
16 KCC, Article 393, paragraph (2).
17 KCC, Article 393(3).
18 KCC, Article 393(4).
19 KCC, Article 399.
20 Criminal Act, Article 355, paragraph (2).
21 Supreme Court Decision No. 2017Da222368 rendered on 11 November 2021.
22 KCC, Article 390.
23 Corporate Governance Act, Article 13.
24 KCC, Article 393.
25 ibid., at Article 388.
26 Corporate Governance Act, Article 22.
27 KCC, Article 393-2.
28 ibid., at Articles 542-8 and 542-11.
29 Corporate Governance Act, Article 16.
30 KCC, Article 393-2.
31 Financial Investment Services and Capital Markets Act (FSCMA), Article 165-3.
32 There can be an actual difference, however, in the accessibility to a company's information between executive directors who are engaged in the ordinary business affairs of the company and who are members of the company's management, and outside directors who have limited involvement in the management of the company.
33 KCC, Article 390.
34 ibid., at Article 382, Paragraph (2) and Article 382-3; Civil Code, Article 681.
35 ibid., at Article 399.
36 ibid., at Article 400.
37 However, this limit on liability shall not apply in certain cases, for example, damage caused by a director's wilful misconduct, or gross negligence or violation of certain regulations, such as self-dealing, provided under the KCC.
38 KCC, Article 403.
39 Criminal Act, Article 355, Paragraph (2).
40 KCC, Articles 382 and 382-2.
41 There have been discussions about amending the KCC to make the cumulative voting system mandatory for listed companies of a certain minimum size.
42 KCC, Articles 542-4 and 542-5.
43 ibid., at Article 542-8.
44 See footnote 5 for details.
45 Corporate Governance Act, Article 17.
46 KCC, Article 383.
47 ibid., at Article 382, paragraph (3) and Article 542-8. Note that the amendment to the Enforcement Decree of the KCC that has been in force since 29 January 2020 sought to strengthen the independence of outside directors by expanding the grounds for disqualifying outside director candidates. This Decree stipulates that the following persons cannot serve as outside directors of a listed company: (1) anyone who worked as an outside director of the company for more than six years; and (2) anyone who worked as an outside director of the company or any of its affiliates for more than nine years in total.
48 KCC, Article 542-11.
49 Corporate Governance Act, Articles 5 and 6.
50 KCC, Article 398.
51 ibid., at Article 397-2.
52 ibid., at Article 382, paragraph (3).
53 Act on External Audit of Stock Companies, Articles 11 and 8.
54 The amendment to the Enforcement Decree of the KCC that requires public companies to provide their business plans and audit reports in conjunction with any notice or public announcement of convocation of shareholders' meetings took effect on 1 January 2021.
55 FSCMA, Articles 159 and 161; and Regulations on Public Disclosure on the Securities Market, Article 7.
56 Regulations on Public Disclosure on the Securities Market, Article 15.
57 Corporate Governance Act, Articles 16, 21, 25 and 28.
58 KCC, Article 542-13.
59 ibid., at Article 369.
60 ibid., at Articles 382 and 385.
61 ibid., at Articles 374, 434, 438, 522 and 530-3.
62 The appraisal rights of dissenting shareholders are acknowledged for some matters requiring the approval of the general shareholders' meeting as described above (e.g., merger and comprehensive share transfer).
63 Under the amended KCC, shareholders of the parent company holding at least 1 per cent of the total issued and outstanding shares (and in the case of a company subject to the special rules for listed companies, shareholders who maintained at least 0.5 per cent of the total issued and outstanding shares for the previous six months) to institute a derivative action directly against a director of its subsidiary (including sub-subsidiaries); provided that the parent company holds more than 50 per cent in the applicable subsidiary. (KCC Articles 406-2 and 542-6).
64 KCC, Articles 363-2, 366, 382-2, 402, 403, 466 and 542-6.
65 Requirements for the exercise of minority shareholders' rights shall be relaxed for listed companies with certain restrictions on holding periods (KCC, Articles 363-2, 366, 382-2, 402, 403, 466 and 542-6).
66 FSCMA, Articles 147 and 173.
67 KCC,, Article 401-2.
68 ibid., at Article 398.
69 ibid., at Article 542-9. Recently, the Supreme Court ruled that since KCC Article 542-9(1) is a mandatory provision, any credit extension made in violation of said provision shall be null and void, and may not be valid even with prior approval or ex post facto ratification by the board of directors. However, the Supreme Court added that even in the case of a credit extension made in violation of KCC Article 542-9(1), it shall not be deemed to be able to assert its nullity against the third party if the third party was not aware of such credit extension and was not grossly negligent in not being aware of it, (Supreme Court Decision No. 2017Da261943 rendered on 29 April 2021).
70 FSCMA, Article 152.
71 KCC, Article 369.
72 FSCMA, Article 165-3.
73 KCC, Article 363.
74 ibid., at Article 542-4.
75 FSCMA, Article 152.
76 An amendment to the Enforcement Decree (Article 154) of the FSCMA to relax the 5 per cent reporting obligation, whereby the legislative intent therefor is to enhance and support institutional investors' shareholder activism, became effective as of 1 February 2020.