[Aftermath of the Commercial Act Amendment] The ‘3% rule’ reduces the influence of major shareholders… Complicated calculations for companies

We examine the impact of the Commercial Act amendments on corporate management.

Among the core contents of the commercial law amendment, the so-called '3% rule', which limits the influence of major shareholders when appointing and dismissing audit committee members, is scheduled to be implemented in July of next year. The 3% rule is intended to reduce the influence of major shareholders and strengthen the monitoring function of management.

Although the legal community seems to sympathize with this purpose, there are concerns that it will be inevitable for companies to prepare all-round countermeasures, from securing the expertise of audit committee members to securing friendly shares to defend management rights.

According to the legal community on the 17th, the 3% audit committee rule (Article 542-12 of the Commercial Act) is expected to play a positive role in improving corporate governance. Previously, when electing or dismissing audit committee members who are outside directors, the 'individual 3% rule' was applied, which allowed each 3% of voting rights to be exercised without adding the stocks held by the largest shareholder and the stocks owned by related parties, and the 'combined 3% rule', which recognized voting rights up to a maximum of 3% in total, was reflected when electing and dismissing audit committee members who are internal directors.

However, in the revised bill, the voting rights of the largest shareholder and specially related persons, regardless of whether they are inside or outside directors, were unified at 3%. It has become difficult to appoint audit committee members that suit the tastes of controlling shareholders. Seunggyu Byun, an attorney at law firm Seum, explained, “The influence of major shareholders on the audit committee is expected to weaken and the supervisory function of the audit committee will be strengthened.”

Lim Dong-han, an attorney at Dongin Law Firm, said, "It will contribute to establishing a sound governance structure by strengthening the objective monitoring function of the audit committee. It is expected to play a positive role in protecting shareholders' rights and interests by increasing the possibility of appointing audit committee candidates recommended by minority shareholders."

Shin Jong-su, a lawyer at Daeryun Law Firm, said, “It will be able to supplement accounting transparency and internal checks.”

Need to secure expertise of audit committee members and transparent disclosure of decision-making process

However, it is pointed out that it may be difficult to secure suitable audit committee members as the largest shareholder's voting rights are restricted. Kim Ji-ho, a lawyer at Lin Law Firm (Lihan), said, "There is a concern that a person recommended by a minority shareholder will be appointed as an audit committee member even if he or she lacks expertise in the relevant industry or audit work," and added, "In particular, there is a possibility that sensitive internal information shared with the board of directors may be leaked to the outside."

In addition, Attorney Shin, who mentioned the possibility of failing to meet the quorum when electing or dismissing audit committee members due to the expanded application of the 3% rule to audit committee members, pointed out that "confusion is expected in practice."

In addition, Attorney Lim pointed out, "The decision-making process of the audit committee has become more complicated, and there is a possibility that the time required for this will increase excessively. In addition, the risk that hostile M&A forces such as foreign private equity funds or activist funds will take control of the audit committee to avoid the 3% rule has also increased."

As many changes are expected in the business environment of companies, it is necessary to review countermeasures along with revising the Articles of Incorporation to reflect the amendments. First, secure the pool of audit committee candidates and strengthen their capabilities. Attorney Lim emphasized, “We need to discover and secure qualified candidates in advance and prepare educational programs to develop their capabilities.”

Attorney Kim said, “It is important to secure the expertise of audit committee members by strengthening the qualifications for audit committee members in the Articles of Incorporation,” and added, “We must strive to appoint people with expertise and a will to protect corporate value by strengthening shareholder communication and expanding corporate information session (IR) activities.” He added that there is a need to prevent concerns of minority shareholders by transparently disclosing information on the audit committee appointment process and decision-making.

Among the commonly proposed countermeasures, there was also mention of the need to increase communication with friendly shareholders to protect the management rights of the largest shareholder. Attorney Yoo Seok-hyeon of the law firm Mission said, “The largest shareholder must make more efforts to communicate and secure power of attorney with friendly shareholders who are not related parties at a legal level.”

Attorney Shin said, "In case the majority shareholder is unable to clearly appoint an audit committee member due to the 3% rule, we must seek ways to secure friendly shares and cooperate with minority shareholders, and companies with a distributed governance structure must also prepare a response strategy to proxy competition in advance."

Reporter Park Seon-woo (closely@bloter.net)

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[Aftermath of the Commercial Act Amendment] '3% rule' to reduce the influence of major shareholders... Complicated ‘calculation method’ for companies (Shortcut)