Analysis of the 3% Rule Commercial Act Amendment and Suggestions for Follow-up Tasks

1. Introduction: The Legislative Process of the Commercial Act Amendment and the Need for Follow-up Discussions

On July 3, the amendment to the Commercial Act—including the so-called “3% rule”—was passed by the National Assembly with bipartisan agreement, and twelve days later, on July 15, it was finally promulgated following approval by the Cabinet. The recent legislative process leading to the enactment of this amendment can be summarized as follows.

On November 19, 2024, a bill was introduced by Rep. Lee Jung-moon as the lead sponsor, containing provisions on expanding directors’ duty of loyalty to shareholders, introducing cumulative voting, increasing the number of audit committee members, and converting outside directors into independent directors. Many of these elements were later incorporated into the final amendment. On March 13, 2025, the bill passed the National Assembly plenary session with the support of more than two-thirds of the incumbent members. However, on April 1, then–Prime Minister Han Duck-soo, acting as President, exercised a veto, citing concerns over potential constraints on corporate management and the need to consider alternative measures, such as amendments to the Capital Markets Act. As a result, the National Assembly held a revote on April 17, but the bill was rejected after failing to meet the two-thirds requirement.

Following the election of President Lee Jae-myung and the change of administration on June 3, 2025, the ruling and opposition parties reached a renewed consensus on processing the Commercial Act amendment. On July 2, an agreement was reached on an amended bill that included restrictions on voting rights of controlling shareholders—specifically, the 3% cap—when appointing audit committee members. The bill was subsequently passed by the National Assembly on July 3 and promulgated after Cabinet approval on July 15. Under the amendment, provisions expanding directors’ duty of loyalty to shareholders took effect immediately upon promulgation, while provisions concerning the 3% voting cap for the appointment and dismissal of audit committee members in listed companies, the independent director system, and hybrid electronic shareholders’ meetings will take effect after a one-year grace period.

The key elements of the promulgated amendment include:

the expansion of directors’ duty of loyalty toward shareholders;

the reclassification of outside directors as “independent directors” and an increase in the mandatory appointment ratio from one-quarter to one-third;

a limitation on the voting rights of controlling shareholders to 3% of total issued shares in the appointment and dismissal of audit committee members; and

the mandatory parallel holding of electronic shareholders’ meetings.
In particular, the 3% rule has been expanded to apply to all audit committee members. As a result, controlling shareholders—including related parties—may exercise voting rights only up to 3%, and voting restrictions that previously applied only to certain non-executive directors now extend to independent directors (formerly outside directors).

These legislative measures are intended to block the influence of controlling shareholders over audit committees. However, substantial criticism has been raised that the institutional design is excessively rigid and misaligned with market realities, thereby generating a range of structural side effects. Against this backdrop, this legislative policy issue report aims to analyze the key problems of the recently promulgated Commercial Act amendment and to propose follow-up policy tasks.

2. Analysis of Key Problems in the Final Commercial Act Amendment Incorporating the 3% Rule
◩ Expansion of Directors’ Duty of Loyalty to “Shareholders”: Increased Litigation and Abuse of Criminal Charges

At first glance, extending directors’ duty of loyalty from the company alone to include shareholders appears to significantly strengthen “shareholder democracy.” However, while directors are entrusted with authority by the company, they have no contractual relationship with individual shareholders. It is well established in both case law and international standards that directors do not owe direct fiduciary duties to shareholders. Moreover, the current Commercial Act already embeds shareholder-protection principles in all duties performed by directors, raising concerns that the amendment may reflect a populist approach (Choi Jun-seon, 2025).

As the influence of minority shareholders and institutional investors grows, the number of lawsuits holding directors liable—such as derivative suits or direct shareholder actions—is likely to increase, along with indiscriminate criminal complaints for breach of fiduciary duty. The board of directors has authority to resolve approximately 69 types of matters, including entry into new businesses and dividend distributions. Each resolution may become subject to shareholder opposition or damages claims against directors. Until a final judgment is rendered, directors cannot use company funds to defend themselves against allegations of personal wrongdoing and must bear legal costs personally, potentially suffering prolonged psychological, temporal, and financial harm (Choi Jun-seon, 2025).

Concerns have also been raised that decisions involving corporate restructuring—such as mergers or spin-offs among affiliated companies—could escalate into criminal litigation when conflicts arise between controlling shareholders and minority shareholders (Shin & Kim Law Firm, 2025). Faced with heightened shareholder conflicts under the amended Act, companies may be forced to over-engineer decision-making procedures and protocols. Ultimately, this may encourage excessively cautious management, increasing the likelihood of stagnation in corporate growth.

◩ Expansion of Independent Director Appointments: Difficulty in Securing Qualified Directors and Disruption to Board Operations

Under the current Commercial Act, restrictions on concurrent positions and disqualification rules limit the pool of eligible outside directors. As independent directors are external to the company, they often face disadvantages in terms of understanding firm-specific operations and acquiring and analyzing internal information. Expanding mandatory independent director appointments in listed companies therefore raises serious concerns about the difficulty of securing directors with sufficient expertise, as well as potential disruptions to board composition and corporate operations. Listed companies will need to proactively identify, cultivate, and manage suitable independent director candidates well in advance.

◩ Problems with the 3% Voting Cap for Controlling Shareholders in Audit Committee Appointments (1): Risk of Undermining Governance Balance

First, appointing audit committee members has always been challenging due to quorum requirements. Applying the 3% rule to all audit committee members significantly increases the likelihood that appointments will fail due to insufficient voting participation. As a result, situations in which audit committees remain unconstituted or effectively incapacitated for extended periods may become a reality.

Second, foreign activist funds or private equity firms may split their shareholdings and exit the scope of related-party definitions to secure greater voting power. This could allow them to effectively dominate audit committees, leading to tangible management risks such as internal information leakage, intensified boardroom conflict, and disclosure of strategic information.

Third, infringement on substantive management control becomes unavoidable. For example, the likelihood of hostile external capital appointing audit committee members—and thereby interfering with management control—may increase, undermining managerial autonomy. This concern is particularly acute in Korea, which lacks defensive mechanisms such as poison pills (as in the United States) or dual-class share structures (as in France and Japan). Against this backdrop, the one-sided nature of the institutional design has drawn considerable criticism.

◩ Problems with the 3% Voting Cap for Controlling Shareholders in Audit Committee Appointments (2): Investment Avoidance and Weakened Strategic Decision-Making

The expanded application of the 3% rule is not limited to board composition; it may also negatively affect long-term investment and risk-taking management. In industries requiring large upfront investments—such as semiconductors, batteries, and artificial intelligence (AI) robotics—companies often tolerate substantial short-term losses to secure future returns. However, concerns are spreading across the business community that directors may face lawsuits or criminal accusations for breach of duty based on short-term stock price declines or reduced dividends. This environment may incentivize management to avoid strategic decision-making altogether.

Similar issues arise in public enterprises with public-interest mandates. Decisions to suppress rate increases for the sake of macroeconomic stability could become targets of shareholder litigation, particularly from foreign funds, on the grounds of harming shareholder interests. This creates a structure in which policy compliance is transformed into criminal liability, exemplifying a conflict between public interest and shareholder value.

Financial institutions face comparable dilemmas. Participation in government-led policies—such as restricting lending or disposing of non-performing loans—may be construed by shareholders as “sacrificing profits,” thereby triggering legal disputes. Consequently, financial institutions may find themselves caught between policy cooperation and legal risk.

◩ Problems with the 3% Voting Cap for Controlling Shareholders in Audit Committee Appointments (3): Breakdown of Balance Between Shareholder Rights and Management Control

While the amendment was pursued under the banner of strengthening shareholder rights, no parallel discussion took place regarding mechanisms to protect management control. As a result, foreign speculative capital may gain greater influence in the absence of common global defense tools such as poison pills or dual-class shares. This not only undermines the stability of corporate control in Korean firms but may also exacerbate the “Korea discount” by eroding global confidence in Korean companies’ governance and long-term value.

3. Conclusion: Recommendations for Follow-up Measures
◩ Legislative Follow-up Tasks: Balancing Entrepreneurial Protection and Institutional Design

Protecting shareholder rights and strengthening directors’ accountability—the original objectives of the Commercial Act amendment—are in themselves positive goals. However, if these institutional directions are designed in ways that undermine corporate autonomy and management stability, they may instead produce adverse effects, such as reduced investment, hindered innovation, and weakened global competitiveness.

Accordingly, the following legislative supplements are necessary going forward. First, the diversity of the audit committee candidate pool should be expanded to address realistic quorum challenges, and supplementary provisions should be 마련 to allow temporary alternatives when appointments fail. Second, companies should be granted greater flexibility to design audit committee appointment procedures through their articles of incorporation. Third, consistency with existing and subsequent legislation—such as cumulative voting and separate election systems—must be carefully reviewed to prevent conflicts among legal frameworks. Fourth, meaningful defensive mechanisms to protect management control, including the introduction of poison pills and consideration of dual-class share structures, should be examined as parallel measures.

Ultimately, legislation aimed at enhancing corporate efficiency and market trust must rest on a balance between rights and responsibilities, and between autonomy and regulation. Continuous institutional review and policy coordination are required to ensure that shareholder democracy does not undermine overall market autonomy and growth potential.

◩ Follow-up Tasks for Subordinate Legislation

Equally urgent is institutional supplementation through the refinement of subordinate legislation, including enforcement decrees and regulations. The amended Commercial Act delegates many concrete procedures and requirements essential for the effectiveness of key systems to presidential decrees, yet these details remain underdeveloped.

First, at the enforcement-decree level, reasonable adjustments to concurrent-position limits and institutional support for cultivating independent director candidate pools should be implemented in parallel.
Second, given the expanded application of the 3% rule in audit committee appointments, enforcement decrees must be carefully designed to protect the reasonable voting rights of controlling shareholders while preventing abuse by speculative capital. This is particularly critical because Article 542-12(4) of the amended Act includes “persons prescribed by presidential decree” in the aggregation of 3% shareholdings, meaning that the scope defined in subordinate legislation can significantly affect corporate control structures.
Third, with respect to electronic shareholders’ meetings, the amended Act mandates that detailed operational standards be established through enforcement decrees (Articles 542-14 and 542-15). As this system may impose substantial technical and administrative burdens on listed companies, the decree-level framework should clearly specify minimum viable procedural standards, system standardization, and support mechanisms for small and medium-sized enterprises.

In conclusion, just as important as the adoption of the amended Commercial Act itself is the careful design of enforcement decrees and regulations that bridge the gap between the rigidity of statutory provisions and market realities. Going forward, the government must use subordinate legislation to establish flexible procedures and standards that reflect corporate realities, while also presenting measures to ensure institutional coherence and administrative support to prevent market disruption. Otherwise, the amendment’s original objective—protecting shareholder rights—may instead become a constraint on corporate growth.

Korean version: https://www.cfe.org/20250717_27905