Commercial Code Revision: Unbalanced Intervention Stifles Business

On July 15, following deliberation and approval at the Cabinet meeting, the revised Commercial Act was finally promulgated. Its key provisions include the expansion of directors’ duty of loyalty to shareholders, the renaming of outside directors as independent directors and the increase in the mandatory appointment ratio, the introduction of electronic shareholder meetings, and the application of the so-called “3% rule,” which limits the voting rights of the largest shareholder to 3% in the appointment and dismissal of audit committee members.

While the stated purpose of the reform is to strengthen shareholder rights and improve corporate governance, a closer look reveals a number of provisions that could undermine the autonomy and stability of corporate management. As a result, concerns are growing that legislation driven by short-term political interests could, in the long run, end up constraining the competitiveness of Korean companies.

First, the “duty of loyalty of directors” was expanded to apply not only to the company but also to shareholders. At first glance, this may appear to strengthen shareholder protection, but directors are not legally in a fiduciary relationship with shareholders; rather, they are in a contractual relationship with the company. If direct responsibility to shareholders is regulated by law, boards of directors will be exposed to shareholder backlash and the possibility of lawsuits in every decision they make. In the end, this could discourage managerial judgment and lead companies to abandon medium- to long-term growth strategies that require taking risks.

The provision that changes outside directors to independent directors and raises the mandatory appointment ratio from 1/4 to 1/3 is also out of touch with reality. At present, companies already face difficulty securing directors who possess both expertise and independence due to legal disqualification grounds, restrictions on concurrent positions, and information asymmetry. Excessively strengthening legal requirements may instead distort the composition of boards and create inefficiencies in corporate operations.

The core issue in this amendment is the expanded application of the 3% rule. Previously, the voting rights of the largest shareholder were limited to 3% only with respect to non-executive directors serving on the audit committee, but this has now been extended to all audit committee members. The largest shareholder has effectively been stripped of meaningful influence in the appointment of audit committee members, while the likelihood has increased that foreign activist funds or private equity funds holding only small stakes could take control of the audit committee. There is also a risk that the audit committee may fail to be constituted, or that internal information may be leaked externally, thereby undermining the stability of corporate management.

Moreover, unlike listed companies in the United States or Europe, Korea does not have effective mechanisms to protect managerial control. A system that restricts even the right to appoint audit committee members without providing such defensive measures ends up undermining even the minimum balance needed for the defense of managerial control.

The original purpose of revising the Commercial Act—protecting shareholder rights and strengthening directors’ responsibility—can in itself be seen as a positive direction. However, if it is designed in a way that infringes upon corporate autonomy and management stability, it may instead produce side effects such as reduced investment, impeded innovation, and weakened global competitiveness.

What is needed now is a sense of balance in institutional design that faces market realities squarely. Legislative supplementation is needed to guarantee companies some degree of autonomy in the appointment of audit committee members, while also introducing, in parallel, management control defense mechanisms that align with global standards, such as poison pills in the United States and dual-class voting rights in France and Japan. Even at the level of subordinate legislation such as enforcement decrees, follow-up efforts are needed to carefully refine the details—such as the scope of the 3% voting rights restriction, standards for independent directors’ concurrent positions, and policy support for cultivating a candidate pool—in order to narrow the gap with market realities.

The law must not become a tool for controlling companies. It should serve as a framework that enables companies to operate more creatively and responsibly. A structure that excessively constrains corporate management in the name of shareholder democracy will ultimately cause the economy to lose its engine of growth.

Gwang yong Go

Policy Director, Center for Free Enterprise (CFE)

---

Original title: 상법 개정, 균형 잃은 개입이 기업을 위축시킨다

Author: Gwang yong Go

Date: 2025-07-31

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=27935