Contributed By Lee & Ko
There are five principal forms of corporate/business organisations under the Korean Commercial Code (KCC), namely, Chusik Hoesa (joint stock company or corporation), Yuhan Hoesa (closely held company), Hapmyung Hoesa (similar to an unlimited partnership), Hapja Hoesa (similar to a limited partnership) and Yuhan Chaekim Hoesa (similar to a limited liability company). Under the KCC, the two most frequently used types of companies are Chusik Hoesa and Yuhan Hoesa. Of the two, Chusik Hoesa is more prevalent in South Korea due to, among others, (i) its convenience and flexibility in issuance, securitisation, and transferability of shares and debentures, and (ii) the stability in its operation resulting from sufficient corporate precedents.
In a Chusik Hoesa, the liability of each shareholder is limited to the amount that the shareholder has invested by subscribing to, or acquiring, the shares of the company. The shares of a corporation are freely transferable, unless otherwise provided (ie, a requirement of board approval for the transfer) in the articles of incorporation (AOI). A Chusik Hoesa may issue various classes of shares, such as common stock and preferred/convertible/redeemable stock.
A Yuhan Hoesa consists of members with limited liabilities who are responsible only to the extent of their capital investment. Although the units of the corporation are transferable, a Yuhan Hoesa may not issue bonds or different classes of units and the units issued by a Yuhan Hoesa may not be listed on a stock exchange or publicly traded.
A Hapmyung Hoesa consists of members with unlimited liabilities. A member of a Hapmyung Hoesa must obtain the approval of all the other members before transferring his or her equity interest in a Hapmyung Hoesa.
A Hapja Hoesa consists of members with unlimited liabilities and those with limited liabilities. Those with unlimited liabilities are required to obtain the approval of all other members for the transfer of equity.
A Yuhan Chaekim Hoesa is a type of limited liability company that has the characteristics of a partnership (internally) and a limited liability company (externally). However, a Yuhan Chaekim Hoesa is rarely used in Korea as it was recently introduced in the Korean jurisprudence in 2012.
The main statute relating to the fundamental guiding principles for corporate governance is the KCC, which applies to listed and unlisted companies. The AOI sets forth more specific principles for corporate governance and operation. In detail, the name, objectives, total number of authorised shares, location of the head office and other basic matters relating to the company, as well as matters regarding its operation, including the number of directors, matters for resolution by the meeting of the board of directors or shareholders, and matters in relation to new shares and dividends are addressed in the AOI.
In addition, a Chusik Hoesa that meets certain thresholds, regardless of whether it is listed on a stock exchange, is required to undergo an accounting audit by an independent external auditor, pursuant to the Law on External Audit of a Chusik Hoesa, etc (External Audit Law). The same requirements are applicable for a Yuhan Hoesa due to a recent amendment effective as of 1 November 2018.
For listed companies, additional mandatory regulations relating to public disclosure, the establishment of audit committees, the election of outside directors, restriction on insider trading and prohibition of unfair trade practices, among other matters, are contemplated in the Financial Investment Services and Capital Market Act (Capital Markets Act) as well as the KCC. Listed companies must also mandatorily comply with the regulations set by the Financial Services Commission (FSC), including the Rules on Issuance of Securities and Disclosure that are derived from the Capital Markets Act, as well as the applicable listing rules of the Korea Exchange (KRX), including the KOSPI Market Listing Rules, the KOSDAQ Market Listing Rules, the KOSPI Market Disclosure Rules and the KOSDAQ Market Disclosure Rules.
The KCC stipulates certain mandatory requirements for listed companies in terms of corporate governance, including the minimum number of outside directors, the establishment of specific committees and the appointment of a full-time statutory auditor.
For listed companies, at least a quarter of all directors must be outside directors and for companies with total assets of KRW2 trillion or more, there must be at least three outside directors and a majority of the board of directors must be composed of outside directors. To ensure the independence of an outside director, persons having certain relationships with the company or a major shareholder are prohibited from becoming an outside director (please refer to 4.5 Rules/Requirements Concerning Independence of Directors).
Listed companies with total assets of KRW2 trillion or more must have (i) an audit committee in which at least two thirds of the members must be outside directors, with at least one member who is an accountant or financial professional, and (ii) an outside director nomination committee in which a majority of such board must be composed of outside directors.
The audit committee has a similar role to that of a statutory auditor, overseeing other directors and accounting matters of the company. The outside director nomination committee functions as a body recommending outside directors to be appointed at the general meeting of shareholders and only such candidates recommended by the committee may be elected as outside directors.
Lastly, for listed companies with total assets of KRW100 billion or more, at least one full-time statutory auditor should be appointed unless the company establishes an audit committee pursuant to the KCC.
The main responsibility of a director is to make decisions on the management of the company through the board of directors, and in that process, the director bears a fiduciary duty to the company. Each director additionally has a duty to observe the other directors’ execution of their duties and to maintain confidentiality on the confidential information of the company. Decisions made by the board of directors are executed by the representative director.
While the board and individual directors have a right and duty to supervise the management of the company, it is the statutory auditor or the audit committee that has the ultimate supervisory function over company affairs. Such function is served based on the right to participate in and make statements at board meetings, the right to demand a report from directors, and the right to inspect the affairs and assets of the company. Although the statutory auditor and audit committee are part of the internal body of the company, it maintains its independence to a certain extent in overseeing the management and accounting matters of the company.
The ‘shadow voting system’ formerly permitted under the Capital Markets Act, which enables the Korea Securities Depository to exercise proxy voting for shares deposited in its name in proportion to the affirmative and negative votes of shareholders who actually participate in the general meetings of shareholders, was abolished in 2018. As a result, it has become problematic for many companies to establish a quorum for general meetings of shareholders. Alternatives such as electronic and written voting have been contemplated, but it is perceived that such measures are not sufficient to address adequately the issue of establishing a quorum and the usage of proxy voting by the companies or their shareholders is expected to increase.
Starting on 16 September 2019, an electronic securities system will be implemented to register securities such as shares and bonds of companies electronically, thereby eliminating the need for the issuance of physical securities certificates. This will enable holders of uncertificated shares to issue, trade and exercise the rights electronically by registering on the system. Listed companies are obligated to implement the electronic securities system for all outstanding shares and will no longer be able to issue physical securities certificates, while unlisted companies will have the option to implement the system at their discretion.
Conventionally, shareholder activism has not been active in Korea, but there has been an increase in the involvement of activist funds trying to voice their concerns over the management and corporate governance of Korean companies. In addition, the Korea Corporate Governance Service released the ‘Stewardship Code’ in 2016 in which it recommended that major institutional shareholders should actively participate in matters of corporate governance. As a result, large institutional investors maintaining significant interests in Korean listed companies such as the National Pension Service are increasingly becoming active in exercising their voting rights to influence corporate governance.
Lastly, there are discussions to amend the KCC to increase the participation of minority shareholders. The major issues being considered as part of the amendment include (i) mandatory cumulative voting for listed companies with assets in excess of a certain threshold amount, (ii) the introduction of ‘multiple derivative actions’ that allow shareholders holding 1% or more of a parent company to pursue claims against the directors of the subsidiary, (iii) mandatory nomination by the outside director nomination committee of one outside director from each of the employee stock ownership association and shareholders who hold at least 1% of the issued voting shares, and (iv) the introduction of a mandatory electronic voting system for listed companies with shareholders in excess of a certain threshold number. If all or some of the above-mentioned proposals are implemented and enacted into law, the corporate governance structure of Korean companies will be drastically affected.
The principal bodies involved in the governance and management of a company are the board of directors, the representative director and the statutory auditor (or the audit committee).
Except for the decisions to be determined by the general meeting of shareholders under the KCC and the AOI, material matters relating to the management and operation of a company are generally decided by the board of directors. The representative director, appointed by the directors (or by the resolution of the general meeting of shareholders if stipulated as such in the AOI), has the authority to execute the company’s day-to-day operations. In turn, the board oversees the representative director’s activities, and the statutory auditor or the audit committee conducts audits on the affairs of the board and the representative director.
Under the KCC, the following matters shall be resolved by a majority of affirmative votes of shareholders present at the general meeting of shareholders, which represents more than a quarter of the total outstanding shares of the company:
For the following matters that are reserved to the shareholders under the KCC, the KCC requires a special resolution at the general meeting of shareholders (ie, more than two thirds of the votes of shareholders present at the meeting, which shall also represent more than a third of the total outstanding shares of the company):
Other than the items above, the board of directors decides the material issues of corporate governance and business of the company, including transactions involving any disposition or transfer of material assets of the company, the borrowing of significant amounts of money, the appointment or dismissal of managers and the establishment, change or closure of branch offices. In addition, the KCC specifically vests the board of directors with certain powers, including the following:
Please refer to 5.3 Shareholder Meetings.
Board of Directors
In principle, each director has a right to convene a board meeting, but such right may be given exclusively to a designated director by the AOI or a board resolution. However, even when there is such a designation, a director can request the designated director to convene a board meeting and the designated person should comply with the request unless justifiable causes exist.
A board meeting may be held at any time, and a notice must be sent to each director and statutory auditor at least one week before the meeting date. This notice period may be shortened through the AOI, and the meeting may be held at any time without notice by consent of all the directors and the statutory auditor.
Although there is no minimum or set number of board meetings per year required by law, the representative director must report the performance of the company to the board of directors at least once every three months, which will require the board to convene at least four times a year.
The directors must be physically present at a board meeting, but it is allowed for the directors to participate in the resolution by means of a mode of communication whereby audio signals are simultaneously transmitted (eg, by conference call), unless such method is prohibited under the AOI.
A board resolution requires the presence of a majority of all directors and affirmative voting of a majority of the directors present at a meeting, unless such voting requirement is enhanced by the AOI, but an approval of usurpation of corporate opportunities and self-dealing transactions requires a supermajority vote of two thirds or more of all directors.
Unlike certain other jurisdictions where they permit or mandate by law a two-tier board structure consisting of two separate boards of directors (a supervisory board and a management board), such two-tier board structure is not recognised under Korean law. Since the predominant board structure in Korea combines supervisory functions and managerial functions within a single structure, it can be best categorised as a single-tier structure.
Under the KCC, directors can be categorised into three types: inside directors, outside directors and non-executive directors. Outside directors are not engaged in the regular business of the company and are viewed as independent from the controlling shareholders and management of the company. Non-executive directors may be defined as directors that do not directly engage in the regular business of the company, but are not considered outside directors.
In principle, the rights and responsibilities of directors under the KCC do not differ based on the type of directors.
In principle, the board must consist of three or more directors (there is no ceiling on the maximum number of directors), but a company with less than KRW1 billion in paid-in capital may have only one or two directors. Meanwhile, the election of outside directors is not required in the case of private companies, but there are certain mandatory requirements for listed companies regarding the appointment of outside directors (please refer to 1.3 Corporate Governance Requirements for Companies with Publicly Traded Shares).
The company may have a committee consisting of two or more directors in accordance with the AOI and the board may delegate its authority to such committee, except with respect to certain matters prescribed in the KCC. As explained in 1.3 Corporate Governance Requirements for Companies with Publicly Traded Shares, in the case of a listed company with total assets of KRW2 trillion or more, the establishment of an audit committee and an outside director nomination committee is mandatory.
Directors are elected by resolution at a general meeting of shareholders and their term of office is determined by the AOI or shareholders’ resolution, and the term should not exceed three years. Unless the AOI provides to the contrary, directors should be elected by cumulative voting (a system of voting where, in the case of electing two or more directors, each shareholder may concentrate the number of his or her voting shares multiplied by the number of directors to be elected on one or more candidates) upon request of a shareholder with 3% or more shares (in most companies, the AOI specifically excludes cumulative voting).
A director retiring from office due to the expiration of his or her term or due to resignation shall continue to have the rights and obligations as a director until his or her replacement has been elected, if the number of directors remaining in office would not meet the minimum number prescribed by law or the AOI.
A director may be removed at any time with or without cause, by a special resolution of the general meeting of shareholders. The removed director, however, may claim damages if the removal was decided without justifiable cause. The damages are generally evaluated as loss of earnings for the remainder of his term.
The statutory auditor is elected by the general meeting of shareholders and may be removed at any time, with or without cause, by a special resolution of the general meeting of shareholders. The term of office of a statutory auditor is until conclusion of the annual general meeting of shareholders for the last fiscal year falling within three years following the date of election. A shareholder with more than 3% of voting shares may not vote in excess of 3% in regards to the election of a statutory auditor. For listed companies, if the largest shareholder (together with specially related persons) holds more than 3% of the voting shares, the largest shareholder and the specially related persons may not vote the shares in excess of 3% in the election or removal of a statutory auditor, or an audit committee member who is not an outside director.
In order to resolve potential conflicts of interest between the directors and the company, the KCC prohibits directors from engaging in businesses that compete with those of the company – a director may not, without prior board approval, (i) engage in transactions that fall within the scope of the business of the company with the assets of him/herself or a third party or (ii) become a general partner or director of a company having a purpose of business that is the same as that of the company.
In addition, a director may not, without the approval of two thirds or more of the board, use a business opportunity that may presently or in the future be beneficial to the company for his or her or a third party’s benefit. 'Business opportunity' in this context is interpreted as not only being limited to opportunities that may generate profits or have marketability, but any opportunity that may present the company with potential profits.
Finally, a director may not, without the approval of two thirds or more of the board, engage in transactions with the company with the assets of him/herself or a third party. 'Transactions' in this context means any act that involves assets and has a potential to cause a conflict of interest.
Any violations of the above constitute a cause for removal of the director and the director may additionally face civil/criminal liability.
Furthermore, a person who falls within any of the following cannot be an outside director of a company:
In addition, the KCC stipulates further reasons for disqualification of an outside director of a listed company, including the following:
A director has a duty to execute his or her duties for the company faithfully in compliance with the law and the AOI. This fiduciary duty towards the company applies to all directors, whether or not the company is listed, whether the director is inside, outside or non-executive and regardless of their respective qualifications or experience.
The key challenges for the management body would be the civil or criminal liability (breach of fiduciary duty) resulting from a management decision that later causes damage to the company. In this regard, the courts have adopted the so-called business judgement rule in relation to the fiduciary duty of a director and have held that a director shall not be deemed to have breached his or her fiduciary duty if he or she has made an informed decision in the interest of the company, following due inquiry and research to a reasonable degree and an appropriate review process.
According to court precedents, a director is deemed to have fulfilled his or her fiduciary duty even if his or her decision results in loss or damage to the company, when the relevant director has (i) sufficiently collected, investigated and examined the necessary and appropriate information to the extent reasonably available, (ii) reasonably believed that such decision is in the best interest of the company, and (iii) reached such decision in good faith following due process, unless (iv) the decision-making process or the content of such decision is significantly unreasonable.
The court’s adoption of the business judgement rule does provide some flexibility to avoid legal liability for the management’s business decisions. However, mainstream court precedents have been quite liberal in finding civil/criminal liability of directors. It has been pointed out that this promotes passive management by the directors and delays of management decisions affecting competition in the global field. Thus, whether the business judgement rule should be specified in the KCC is currently being considered by the National Assembly.
If a director is found to have breached his or her fiduciary duty, he or she is liable for damages incurred by the company as a result of such breach. If the company fails to claim such damages against the director then the shareholders may do so through a derivative action.
Despite the fact that directors are elected by the shareholders of the company, the directors only represent and owe their fiduciary duties to the company, even for companies wholly-owned by a single shareholder, based on the rationale that the shareholders and the company are separate legal entities. Therefore, the directors are required to take into account the interests of no entity other than the company in fulfilling their duties, and if the director manages the company in favour of any third party other than the company (including the shareholders), the director will be held liable for any damages incurred to the company.
If a director is found to have breached his or her fiduciary duty, he or she is liable for damages incurred by the company as a result of such breach. Directors who intentionally or negligently violate the AOI or applicable laws, or omit to perform their duties, are jointly and severally liable for damages resulting from such acts or omissions.
If the company fails to claim such damages against the director then the shareholders may do so through a derivative action. A shareholder who holds more than 1% of the total outstanding shares of the company (0.01% for listed companies, held for the preceding six-month period) may demand that the company file a lawsuit against the director in respect of the foregoing acts or omissions. In addition, shareholders who hold more than 1% of the total outstanding shares of a company (0.05% for listed companies and 0.025% for a listed company with at least KRW100 billion in paid-in capital, each held for the preceding six-month period) may, on behalf of the company, file a claim with a court demanding the suspension of activities of a director who violates the AOI or applicable laws.
In addition to derivative actions that may be brought against a director in the event that the director’s failure to perform his or her duties causes losses to the company, if the director’s negligence to perform his or her duties to the company causes losses to a third party, the third party may file a damage claim directly against the director for recovery of such losses. However, the standard of care required for acknowledging such a damages claim would be the director’s intentional failure or gross negligence in performing his or her duties rather than simple negligence.
Meanwhile, in order to exempt the director from the liability to the company, the KCC provides (i) complete exemption by unanimous consent of the shareholders and (ii) partial exemption as permitted under the AOI.
For the unanimous consent of the shareholders in the first case, a director may be completely exempted from liability for damages incurred to the company.
In the second case, a company may, in accordance with its AOI, absolve a director from liability to the company with respect to the amount exceeding six times (in cases of outside directors, three times) his or her remuneration (including bonuses and the profit from the exercise of a stock option) for the last one year prior to the date of the act or misconduct by the director. These six and three multipliers, as applicable, can be increased under the AOI, but not reduced.
Pursuant to the KCC, the remuneration of a director is determined by shareholders at the general meeting of shareholders unless provided otherwise in the AOI. In practice, shareholders typically (i) set the aggregate amount of funds available for remunerating the directors and statutory auditors, and then (ii) authorise the board of directors to determine individual remuneration to each director and statutory auditor.
The grant of stock options is one of the means of remuneration and thus requires shareholders’ approval. However, the KCC prohibits the grant of stock options to a shareholder with 10% or more shares and specially related persons of such shareholder.
In order for any director to enter into a transaction with the company, they must first obtain the approval of a two-thirds majority of the board in advance, and the terms of such transactions must be reasonable and fair. Furthermore, listed companies are generally prohibited from granting credit (such as lease of property with economic value, including money, guarantees for the performance of obligations, purchase of securities intended for supporting funds, or other direct or indirect transactions accompanying credit risks) to its directors and statutory auditors.
Under the Capital Markets Act, a company that is required to submit annual reports (such as listed companies, companies that have made a public offering of securities and companies with 500 or more shareholders) must include in the annual report (i) the total remuneration of the directors; (ii) if the remuneration paid to a director exceeds KRW500 million, the individual remuneration paid to such director and the method of determination/calculation of such remuneration; and (iii) the individual remuneration paid to the top five officers or directors and the method of determination/calculation of such remuneration.
Although (i) and (ii) in the above paragraph only apply to registered directors, (iii) in the above paragraph refers to the top five paid persons out of all registered or non-registered officers, directors and employees of the company. 'Total remuneration' includes wages, incentives, profits derived from the exercise of stock options and retirement benefits, but does not include remuneration to be paid in the future (eg, stock options, stock grants, deferred payments).
Shareholders elect directors, who owe a fiduciary duty to the company, but in principle, shareholders do not owe any duties to the company or to other shareholders. That is, the management of the company is primarily carried out by the board of directors. Thus, the ownership and management of a company strictly remain separate under the KCC.
There is an academic viewpoint that the duty of loyalty and duty of faithfulness of shareholders should be recognised; however, the majority view remains that unless the controlling shareholder simultaneously holds a director position, such duties cannot be recognised as a duty of a shareholder.
Under the KCC, a shareholder’s liability is limited to the acquisition or subscription price of their shares; however, the Supreme Court of Korea had previously held that there may be exceptions for situations where companies are essentially sole proprietorships or deemed to have no substance, but incorporated merely for the purpose of shielding legal implications that would otherwise apply against the individual proprietor, leading to a ruling that, in such cases, the corporate veil may be pierced, thereby imposing personal liability on the individual proprietor. In addition, under Korean tax law, a shareholder who owns more than 50% of the total outstanding shares of a company may, in certain cases, be liable for the company’s tax liability in proportion to his or her ownership interest.
As explained above, the controlling shareholders do not owe duties to the company under the KCC, but any person, including controlling shareholders, who (i) instructs a director to conduct business by using their influence over the company, (ii) conducts business under the name of a director or (iii) conducts business by using a title that may give the impression that they are authorised to conduct the business of the company will, in each instance, be deemed a director for purposes of the KCC, thereby resulting in liability and responsibility on the part of the company for compensating losses resulting from such actions.
As explained in 3.1 Bodies of Functions Involved in Governance and Management and 3.2 Decisions Made by Particular Bodies, except for certain matters reserved for a decision by the general meeting of shareholders, material matters relating to company management and operation are generally decided by the board of directors. In this regard, under the KCC, any direct involvement of the shareholders in the day-to-day management and business decisions of the company is limited.
The KCC states that a company must hold an annual general meeting of shareholders within three months after the last day of the preceding fiscal year and may hold an extraordinary general meeting of shareholders as necessary.
Under the KCC, in general, a general meeting of shareholders must be called by a board of directors. Yet a shareholder or group of shareholders holding 3% or more of the total outstanding shares (1.5% for listed companies, held for the preceding six-month period) may demand the board of directors to call an extraordinary general meeting of shareholders by submitting a written request.
In addition, a shareholder or group of shareholders holding 3% or more of the voting shares may propose an agendum for a shareholder meeting by submitting a written proposal to the board of directors at least six weeks prior to the meeting. In the case of a listed company, a shareholder or group of shareholders who has held 1% or more of the voting shares (0.5% in the case of a listed company with KRW100 billion or more in paid-in capital) for the preceding six months period is entitled to the same right as above.
In order to convene a general meeting of shareholders, a notice must be sent to all shareholders listed on the shareholders registry at least two weeks prior to the meeting (ten days in the case of a company with paid-in capital of less than KRW1 billion), but the meeting may be held at any time without notice by the consent of all shareholders.
Although the general requirement for general meetings of shareholders is to be held in person, a company with paid-in capital of less than KRW1 billion may, by unanimous agreement of all shareholders, resolve matters by way of written resolution in lieu of a meeting, which will have the same effect as if such written resolution was passed at a general meeting of shareholders. Virtual general meetings of shareholders are not permitted under the KCC. However, virtual ‘voting’ is permitted where a company has determined to allow shareholders to exercise their votes by electronic means and its shareholders vote electronically on the premise that a general meeting of shareholders is held in person.
A shareholders’ resolution may be (i) an ordinary resolution requiring a majority of shares held by shareholders present at the meeting, which shall also represent at least a quarter of all outstanding shares, or (ii) a special resolution requiring at least two thirds of shares held by the shareholders present at the meeting, which shall also represent at least one third of all outstanding shares. Other than those matters requiring special resolution as specified by law or the AOI (see 3.2 Decisions Made by Particular Bodies), an ordinary resolution is sufficient. Such voting requirements may be heightened (not mitigated) as provided for in the AOI.
In general, a shareholder may only participate in the management of a company indirectly through a shareholders’ resolution as explained in 5.2 Role of Shareholders in Company Management.
However, several direct measures may be enforced against the company or directors by shareholders holding more than a certain percentage of total outstanding shares, including (i) the right to demand a director to cease improper conduct, (ii) the right to file a derivative action against a misconducting director or statutory auditor and (iii) the right to demand the removal of a director or statutory auditor.
If a director is engaged in conduct that violates a law or the AOI and such conduct is likely to cause irreparable harm to the company, a shareholder or group of shareholders with 1% or more of the total outstanding shares may, on behalf of the company, file a claim with a court demanding the director to cease his or her engagement in such conduct. In the case of a listed company, a shareholder or group of shareholders who has held 0.05% or more of the total outstanding shares (0.025% in the case of a company with KRW100 billion or more in paid-in capital) for the preceding six-month period is entitled to the same right.
If the company rejects the shareholder’s demand to impose sanctions on a misconducting director, a shareholder or group of shareholders holding 1% or more of the total outstanding shares is entitled to the right to file, on behalf of the company, a derivative suit against the director or the statutory auditor. In the case of a listed company, a shareholder or group of shareholders with 0.01% or more of the total outstanding shares who has held the shares for the preceding six-month period may exercise such right.
Additionally, the right to demand the court to remove a director or statutory auditor may be exercised by a shareholder or group of shareholders with 3% or more of the total outstanding shares if the director or statutory auditor is engaged in a material misconduct with respect to his or her duties or violation of the law or the AOI, and his or her removal is rejected at the general meeting of shareholders. In the case of a listed company, such right can be exercised by a shareholder or group of shareholders holding 0.5% or more of the total outstanding shares (0.25% in the case of a company with KRW100 billion or more in paid-in capital) but only if he has held the shares for six months or longer.
There are public disclosure obligations to be performed when a shareholders’ ownership of shares in a listed company hits a certain threshold, namely the 5% Rule and the 10% Rule.
Once a shareholder (including specially related persons of such shareholder) holds or will hold pursuant to a share purchase agreement 5% or more of the total voting shares of a listed company, such person must file a report with respect to such shareholding with the FSC and KRX within five business days from (i) the execution of the share purchase agreement, to the extent applicable, and (ii) the acquisition, respectively. In the case of a shareholder’s investment that involves the purpose of participating in the management of the company, a five-day cooling-off period is applied to such shareholder. During this period, the shareholder may not exercise voting rights or purchase additional shares. In addition, after reporting such shareholding, subsequent reports must be made for any change of 1% or more in the shareholding of such shareholder within five business days from the occurrence of such change.
If the holdings of a shareholder reach 10% or more of the total voting shares of a listed company, a separate report must be filed with the Securities and Futures Commission, and the KRX within five business days. Furthermore, any change in shareholding (except for minor changes prescribed in the Capital Markets Act) must be reported within five business days from the occurrence of such change.
In each fiscal year, directors must prepare financial statements indicating the financial status and management performance of the company, and obtain approval from the general meeting of shareholders, then give, without delay, public notice of the balance sheets. Financial statements, along with the business report and audit report, must be placed at the company’s head office and its branch offices, and any shareholder or creditor of the company may, at any time during its business hours, inspect them.
Furthermore, listed companies and companies that are obliged to submit an annual report are required to submit to the FSC and the KRX annual, semi-annual and quarterly reports. For the purpose of providing a broad view of the status of listed companies, these reports contain comprehensive information about the overall company operation, including the status of shares and voting rights, financial matters, matters on the board of directors, matters on the statutory auditor, changes in capital, dealings with the largest shareholder and other specially related persons, and matters relating to officers and employees. These reports are available on DART (Data Analysis, Retrieval and Transfer System; operated by the Financial Supervisory Service through a website designed to enable companies to submit and disclose various reports through the internet on a real-time basis).
Korean laws and regulations require limited disclosure of corporate governance arrangements, as follows.
Under the Capital Markets Act, since listed companies and companies that are obliged to submit an annual report must attach its AOI to the annual report, corporate governance arrangements governed by the AOI (eg, shareholder/board reserved matters, procedures/quorum of shareholder/board meetings, number and qualifications of directors/statutory auditors, existence of an internal committee) are publicly accessible. In addition, information relating to (i) the board of directors, including each director’s duties, credentials and term of office; (ii) the composition of the committee; (iii) the statutory auditor or audit committee, including each auditor/member’s personal data, evidence of independence and details of key activities; and (iv) the shareholding of the majority shareholder and its specially related parties are made available in the annual report submitted to the FSC and the KRX, which will then be disclosed to the public.
Effective from the beginning of 2019, a listed company with assets of KRW2 trillion or more is obligated to disclose its corporate governance report and accordingly must submit to the KRX information on material matters concerning the corporate governance, such as those concerning shareholders, the composition/management of the board, internal committees within the board, details of the activities of outside directors and statutory auditors, and the appointment/activities of audit committees and external auditors, which will then be disclosed to the public.
In addition, under the Capital Markets Act, listed companies and companies that are obliged to submit an annual report are obliged to submit timely reports to the FSC providing information on material events having a significant impact on corporate governance or assets of the company (eg, merger, spin-off, comprehensive exchange of shares, transfer of a material business (assets), acquisition or disposal of treasury stocks and issuance of convertible bonds or bonds with warrants, and other board resolutions on certain significant financial matters), which are also available on DART. Listed companies must file a report to the KRX or KOSDAQ under their disclosure regulations in the occurrence of material events.
Under the KCC, a newly established company must file a registration of incorporation at the court registry having jurisdiction over its main office and any subsequent changes to the registered information must constantly be registered. It normally takes two to four working days to complete the registration process.
The filings made with the court registry are publicly available and they could also be accessed online through the court registration system. The matters disclosed in the court register of the company include the trade name; the total number of shares authorised to be issued; the par value per share; the total number and class of shares issued and outstanding, and the details and number of each class of shares; the location of a principal office; and information on the directors/statutory auditors.
The External Audit Law stipulates that the accounting management of certain companies is subject to auditing conducted by external auditors, since auditing by a statutory auditor or an audit committee is not deemed sufficient to perform its function fully. In this respect, the independence of the external auditors from the company is the key requirement governing the relationship between the company and the auditors.
The External Audit Law has put in place various measures to ensure the independence of the external auditor. To be specific, a listed company, a company that intends to be a listed company in the relevant fiscal year or the following fiscal year and any other company that meets certain thresholds in terms of assets, liabilities, number of employees, or sales (eg, companies with over KRW50 billion in assets) shall be subject to external auditing by an auditor who is independent from the company. In addition, listed companies are required to appoint an external auditor upon approval of the external auditor appointment committee with proven expertise and experience, and to appoint the same person or accounting firm as external auditor for three consecutive years to ensure independence of the external auditor.
Meanwhile, an external auditor may, at any time, demand an inspection or a copy of the accounting books and documents or request the company to submit data on the accounting, and may investigate the company’s affairs and financial status as necessary. Upon such request, the company must comply without delay and submit the relevant data to the auditor. In addition, if an external auditor discovers any wrongful acts regarding any director’s performance of duties, he or she must promptly inform the statutory auditor or the audit committee, as applicable, and report to the shareholder meeting.
All directors have an obligation to inspect and be vigilant of the duties of the other directors. Specifically, a director must be generally aware of the duties of the other directors and a director’s failure to take any actions despite the knowledge of grounds indicating illegal acts performed by other directors will be deemed to be a violation of such inspection duties. Therefore, if a director discovers illegal or wrongful acts of another director, he or she is obligated to convene a meeting of the board or inform the statutory auditor or audit committee, as applicable, to ensure that appropriate measures be taken in response.
Additionally, pursuant to the External Audit Law, companies subject to external auditing (excluding an unlisted company with total assets of less than KRW100 billion) must build an internal accounting control system for preparing and publicly announcing reliable accounting information. The representative director must assume the responsibility for controlling and operating the system, and designate one of the full-time directors to be in charge of the system as an internal accounting manager.
The representative director is obliged to report the operational status of the internal accounting control system of the company to the general meeting of shareholders, the board of directors and the statutory auditor or the audit committee every fiscal year. Also, the statutory auditor or the audit committee must evaluate the operational status of the internal accounting control system and report the status to the board of directors every fiscal year. In such cases, if the statutory auditor or the audit committee has any corrective opinions on operation of the internal accounting control system, such opinions must be stated in the report.