The Korean Commercial Code (KCC) recognises the following five types of companies:

• joint stock companies (jusik hoesa in Korean);
• limited companies (yuhan hoesa);
• limited liability companies (yuhan chaegim hoesa);
• general partnerships (hapmyeong hoesa); and
• limited partnerships (hapja hoesa).

The most popular type is the joint stock company, accounting for about 90% of the companies established and existing in Korea as of July 2023.

Unless otherwise specified, the scope of review herein is limited to joint stock companies.

When foreign investors establish subsidiaries or joint ventures in Korea, the two most popular entity forms have traditionally been joint stock companies and limited companies. Recently, many foreign investors are also using limited liability companies, which are modelled after (and thus comparable to) limited liability companies in the United States.

The joint stock company, the limited company and the limited liability company each provides for the limitation of equity holders’ liability to the capital amounts they have invested in the relevant company.

When selecting the corporate form, foreign investors typically consider the following.

Corporate Formalities

More corporate formalities are required for a joint stock company than for a limited company or a limited liability company. For example, only a joint stock company is required to have a board of directors and a statutory auditor (unless its paid-in capital is less than KRW1 billion); such corporate governance structure is optional for limited companies and limited liability companies. In addition, the shareholders of a joint stock company are generally not permitted to adopt resolutions by written consent, but rather must adopt resolutions at a general meeting of the shareholders. On the other hand, the members of a limited company or limited liability company may adopt resolutions by unanimous written consent.

External Audit of Financial Statements

A joint stock company and a limited company must have its financial statements audited by an external auditor and file such audited financial statements with the Financial Services Commission of Korea if it has total assets or annual sales of at least KRW50 billion, or if it has at least two of the following:

• total assets of at least KRW12 billion;
• total liabilities of at least KRW7 billion;
• annual sales of at least KRW10 billion; or
• 100 employees (all applicable figures as of the previous fiscal year end).

Limited liability companies are not subject to these external audit and public disclosure requirements.

Business Activities, Public Offerings and Bonds

Other than certain limited exceptions, there are no restrictions on the types of businesses that may be conducted by all three types of entities. However, only a joint stock company is permitted to make a public offering or issue bonds or debentures. Furthermore, limited liability companies may not declare or pay interim dividends, while a joint stock company or a limited company can do so according to its articles of incorporation (AOI).

Public Perceptions

Generally, joint stock companies are viewed as having more “prestige” in Korea; most of the major domestic companies are joint stock companies. Foreign parents often set up their Korean subsidiaries as limited companies; in fact, a number of well-known multinational companies formed their Korean subsidiaries as limited companies. By comparison, limited liability companies have not been widely adopted by either domestic or foreign investors since such corporate form was first introduced in 2012, although increasing numbers of limited liability companies have been incorporated recently.

Tax Treatment

All three entity types are treated the same for Korean tax purposes. However, tax treatment in other jurisdictions may differ by entity type: for instance, for US tax purposes, a limited company or a limited liability company may be treated as a partnership or a branch under the so-called check-the-box rule, while a joint stock company is ineligible for such treatment.

A joint stock company can issue common shares and class shares. Common shares carry voting and economic rights pursuant to the terms of the KCC and/or the AOI of the company. Class shares refer to types of shares that have special rights as set forth in the company’s AOI, which are different from the rights attached to common shares and include:

• shares entitled to preferred dividends;
• shares entitled to the distribution of residual assets;
• shares with or without limited voting rights;
• redeemable shares; and
• convertible shares.

In order for a joint stock company to issue class shares, the terms and the authorised number of each class of shares must be prescribed in the company’s AOI.

Shareholders of a Korean joint stock company have certain statutory rights pursuant to the provisions of the KCC, including the following:

• the right to receive dividends;
• in the event of a new share issuance, the right to subscribe for new shares in proportion to the number of shares held (ie, pre-emption rights);
• the right to claim and receive the distribution of residual assets;
• the appraisal right for dissenting shareholders in the event of a business transfer, merger or similar corporate event;
• voting rights (except for any class shares with no or limited voting rights);
• the right to propose that certain items be included on the agenda for a general meeting of the shareholders;
• the right to call an extraordinary general meeting of the shareholders; and
• the right to inspect the company’s books and records and receive copies thereof.

Some of these rights are available only if certain shareholding thresholds are met. The company’s AOI may set forth additional shareholder rights based on the type of shares and the shareholding percentage.

Generally, there is no minimum capital requirement for joint stock companies, limited companies or limited liability companies, unless the business licence of such company provides for certain minimum capital requirements.

The KCC requires the par value per share of a joint stock company to be at least KRW100. Therefore, a joint stock company can be formed with the minimum capital of KRW100.

A joint stock company, a limited company and a limited liability company must each have at least one shareholder or member.

Generally, there are no residency or other eligibility requirements for such shareholders or members; however, there may be applicable laws and regulations restricting foreign persons or entities from acquiring or holding shares for companies in certain industries, such as telecommunications, broadcasting and airlines.

While the KCC provides for certain shareholder rights and company obligations, such provisions are mostly applicable to listed companies or other companies with a large shareholder base. Therefore, Korean private companies often have shareholders’ agreements or joint venture agreements setting forth the terms and conditions of their corporate governance and the relationship among the shareholders.

Shareholders’ agreements or joint venture agreements typically include provisions regarding:

• the shareholding structure, subsequent financing obligations of the shareholders and pre-emption rights of shareholders;
• the board of directors (including composition, board nomination rights, procedural requirements, quorum for meetings and resolutions and a list of matters requiring a super-majority resolution of the board of directors);
• the management team of the company (including composition and officer nomination rights);
• minority shareholders’ consent rights regarding key management matters;
• the meeting of shareholders (including procedural requirements, quorum for meetings and resolutions, a list of matters requiring a special resolution of the meeting of shareholders and a list of matters requiring the approval or consent of certain shareholders);
• transfer restrictions (including lock-up periods, permitted and/or prohibited transfers, rights of first offer or refusal, drag-along or tag-along rights and call or put options);
• shareholder information and inspection rights and other covenants, such as non-compete undertakings;
• the occurrence and resolution of deadlock events; and
• the termination and effect of termination (such as dissolution or the exercise of penalty call or put options).

Once duly executed and delivered by the parties, shareholders’ agreements or joint venture agreements constitute a valid and binding obligation that is enforceable against each of the parties thereto. However, in the case of any breach of the terms or conditions of such agreement, the non-breaching party would only have a breach of contract claim against the breaching party, unless the provisions at issue also constitute a legal requirement under the KCC or other applicable laws, or are otherwise reflected in the company’s AOI.

Copies of private companies' shareholders’ agreements or joint venture agreements are not publicly available.       

Under the KCC, joint stock companies are required to convene an annual general meeting (AGM) of the shareholders once a year, within three months after the end of each fiscal year. At an AGM, shareholders vote on the approval of the financial statements for the previous fiscal year and the declaration of dividends (if any).

Shareholders may also vote on the appointment of a director or a statutory auditor at the AGM, or the amendment of the AOI. As the fiscal year of most joint stock companies ends on 31 December, joint stock companies typically hold an AGM within the first quarter of each calendar year.

Meanwhile, a joint stock company may convene an extraordinary general meeting (EGM) of the shareholders from time to time as necessary. There is no statutory obligation to convene an EGM meeting at any certain interval, and it is possible that an EGM meeting may not be convened if there is no particular agenda to be resolved.

In convening either an AGM or an EGM, a notice of convocation must be sent to each shareholder at least two weeks prior to the date of such meeting (or ten days in the case of a joint stock company with paid-in capital less than KRW1 billion). A shorter notice period can be applied with the consent of all shareholders.

The notice of convocation of a general meeting of the shareholders should state the date, time, place and agenda of the meeting, and if the agenda includes any important matter such as an amendment of the AOI, capital reduction or merger; the key points of the agenda should also be stated in the notice of convocation.

Such notice does not have to be sent to those shareholders who have individually consented to waive the notice requirement. Therefore, it is generally interpreted that, with the consent of all shareholders, a general meeting of the shareholders may be convened without the notice procedure.

In addition, in lieu of delivering a notice of convocation to shareholders holding no more than 1% of the total number of issued and outstanding voting shares, a listed company may give a public notice of convocation of the general meeting of the shareholders in two or more daily newspapers or on the Data Analysis, Retrieval and Transfer System (commonly known as DART), as prescribed in the AOI.

In principle, the board of directors has the authority to call a general meeting of the shareholders. An auditor or the audit committee may also request the convocation of an extraordinary general meeting of the shareholders by submitting a written statement of the meeting agenda and the reason for convocation to the board of directors.

In addition, holders of at least 3% of the total issued and outstanding shares may request the board to convene an extraordinary general meeting of the shareholders. In the case of a listed company, holders of at least 1.5% of the total issued and outstanding shares for six consecutive months may also exercise such convocation rights. In this case, such holders should submit a written statement of the meeting agenda and the reason for convocation to the board. If the board fails to convene a general meeting after such request, such holders may directly convene a meeting with the court’s permission.

All shareholders are entitled to receive a notice of the convocation of a general meeting from the company and to ask questions about or participate in a discussion on whether to approve the agenda in the course of exercising their voting rights at the general meeting.

Shareholders may also request access to or receive copies of the shareholders’ register, the AOI, the minutes of general meetings and other documents kept at the head office of the company.

Under the KCC, a general meeting of the shareholders should be held at a physical location, and shareholders must attend the meeting in person to adopt resolutions. The KCC does not recognise a general meeting without a physical location in which all attendees are present online.

Some companies recently provided an online broadcast of a general meeting in parallel with the meeting held at a physical location in order to prevent COVID-19 transmission, allowing shareholders to view the meeting online. However, even in such case, the shareholders viewing the meeting online are deemed to have not attended the meeting.

Under the KCC, only the concept of a quorum required for a resolution exists; a quorum for a general meeting of the shareholders is not recognised.

An ordinary resolution at a general meeting of the shareholders requires the affirmative vote of “a majority of the voting shares present at the meeting”, representing “at least one-fourth (¼) of the total number of issued and outstanding shares”.

In practice, the requirement for the affirmative vote of “at least one-fourth (¼) of the total number of issued and outstanding shares” tends to serve as a de facto quorum. However, such requirement may be waived solely in the case of the resolution on the appointment of auditors or audit committee members, if voting by electronic means is permitted. In such case, only the affirmative vote of a majority of the voting shares present at the meeting is required.

Resolutions adopted at a general meeting of the shareholders include ordinary resolutions, special resolutions and extraordinary special resolutions.

• Ordinary resolutions are passed by the affirmative vote of “a majority of the voting shares present at the meeting” representing “at least one-fourth (¼) of the total number of issued and outstanding shares”.
• Special resolutions require the affirmative vote of “at least two-thirds (²∕₃) of the voting shares present at the meeting” representing “at least one-third (¹∕₃) of the total number of issued and outstanding shares”.
• Extraordinary special resolutions need the consent of all shareholders.

Statutory requirements under the KCC are the baseline threshold. Companies may adopt stricter voting requirements (but may not ease requirements) through their AOI beyond such statutory requirements under the KCC.

Agenda items requiring approval by an ordinary resolution at the general meeting of the shareholders include:

• the appointment of directors and auditors;
• the determination of remuneration for directors and auditors;
• the approval of yearly financial statements as of the end of each fiscal year;
• the distribution of dividends;
• the reduction of capital to compensate for deficit; and
• the reduction of legal reserves.

Agenda items requiring approval by a special resolution at the general meeting of the shareholders include:

• amendments to the AOI;
• the transfer of all or a material part of the business;
• the removal of directors or auditors;
• the reduction of capital (except for the purpose of compensating for deficit);
• any merger, split-off, split merger, comprehensive share exchange or comprehensive share transfer; and
• the grant of stock options.

Extraordinary special resolutions requiring the consent of all shareholders include resolutions to exempt a director from liability to the company and resolutions on organisational change to convert a joint stock company to a limited company.

A shareholder may cast their vote in person at a general meeting of the shareholders or designate a proxy to exercise their vote at such meeting.

Shareholders may also cast their vote themselves (without using a proxy) without attending the shareholder meeting in person, by way of electronic voting if the company has adopted an electronic voting system by board resolution, or in writing if the AOI allows the casting of votes in writing, in each case without duplication with any other method of voting.

There is no restriction on the specific voting method at a shareholder meeting, which may be conducted by a show of hands, standing up or polling, etc, so long as it is a reasonable method by which the intent of shareholders can be confirmed.

At a general meeting of the shareholders, shareholders may only resolve on the matters set forth as the meeting agenda in the notice of convocation. Matters not listed in the notice are not allowed to be resolved at such meeting without the consent of all shareholders, even if the shareholders present at the meeting consent to the inclusion of such new matters in the agenda. For example, a shareholder may not request the appointment of directors to be presented as an agenda item at a general meeting of the shareholders convened for the approval of financial statements; even if such agenda item is presented and resolved, such resolution at the general meeting of the shareholders is unlawful and may be revoked.

However, specific details for resolving on a matter already listed as part of the meeting agenda in the notice of convocation may be changed at the meeting (although it is not permitted to change the details of the notice to such an extent that they are no longer recognised as identical). For instance, at a general meeting of the shareholders held for the purpose of appointing Candidate A as a director, it is allowed to change the ballot at the meeting to the appointment of Candidate B, instead of Candidate A. The agenda for such meeting would be deemed an appointment of a director, not the appointment of a specific person as a director. An exception exists for listed companies, however, as the KCC separately requires that directors of a listed company must be appointed only from among the candidates notified in advance. Also, at a general meeting of the shareholders convened with the agenda of the payment of dividends, it is permissible to request to increase the dividend amount, and a resolution to pay dividends in the increased amount will be held valid.

Even if a resolution is adopted by an affirmative vote that meets the quorum necessary for a resolution at a general meeting of the shareholders, a shareholder may file an action to revoke within two months from the date of resolution if:

• the procedures for convening such meeting or the method of adopting such resolution are in violation of any laws or the AOI, or are remarkably unfair; or
• the details of such resolution are in violation of the AOI.

However, even in the case of such defects, the court may dismiss the claim if it finds the revocation is improper in light of the details of the resolution, the current status of the company and other circumstances. In addition, if the details of the resolution are in violation of laws and regulations, a shareholder may file suit seeking affirmation of the invalidity of the resolution of the general meeting of shareholders, without limitation of the filing period.

Shareholders of a company may monitor the company's business activities and decision-making based on the company's disclosures, and may request the right to inspect and copy certain important documents from the company. Under certain conditions, a shareholder may also request the court to appoint an inspector to inspect the company's business and property.

• Disclosure: under Korean law, a company is required to comply with disclosure obligations applicable to listed companies (eg, ad hoc disclosure of key management matters, business reports and semi-annual/quarterly reports, reports on key matters and the disclosure of shares) and disclosure obligations applicable to companies belonging to a large business group under the Fair Trade Act (eg, disclosure of large-scale internal transactions, disclosure of the important matters of unlisted companies, and disclosure of the status of the business group). Institutional investors and shareholders' organisations may monitor the company's activities through such disclosure.
• Right to request inspection and copying of documents: shareholders have the right to request the inspection and copying of the following documents from the company, and the company may not refuse to allow inspection and copying unless it can prove that a shareholder's request is unreasonable. If the company unfairly refuses inspection and copying of the following documents, the shareholder may file an application with the court for a preliminary injunction to access and copy the documents:
1. the shareholders' registry (shareholders holding at least one share);
2. the minutes of the board meeting (shareholders holding at least one share);
3. the minutes of the general meeting of shareholders (shareholders holding at least one share);
4. the company’s accounting books (shareholders holding 3% or more of the total issued and outstanding shares or, in the case of a listed company, shareholders who have held 0.1% or more of the total issued and outstanding shares, or 0.05% or more for a large listed company, for the previous six months); and
5. financial statements, business reports and audit reports (shareholders holding at least one share).
• Right to request an inspector for the purpose of investigating business/property status: a shareholder holding 3% or more of the total issued and outstanding shares has the right to request the court to appoint an inspector in order to investigate the business and property status of the company if there is a reason to suspect that there is any misconduct or material violation of laws or the AOI.

Influence

The company's shareholders may seek to influence the company through non-legal and legal measures against the company or its directors, etc.

• Non-legal measures include requests for conversations to the management or the board of directors, distributions of shareholders' letters, media campaigns, etc.
• Legal measures – shareholders who hold a certain amount of shares may take measures including court actions/demand rights against the company and its directors. In addition, a shareholder holding a certain amount of shares may file a derivative suit against the company's directors on behalf of the company or a derivative suit against the directors of a company’s subsidiary on behalf of such subsidiary. See 10. Shareholders' Remedies for further details.

If shares are purchased not directly rather under the name of a nominee, and the nominee’s name is entered in the shareholders' registry, only the nominee (as the shareholder whose name appears in the shareholders' registry) may exercise shareholder rights vis-à-vis the company; barring special circumstances, the company may not deny the exercise of shareholder rights by a shareholder whose name appears in the shareholders' registry, nor can it acknowledge the exercise of such rights by a person whose name does not appear therein. Therefore, even when a company convenes a general meeting of shareholders, the notice of convocation of the general meeting of shareholders (which delivers information relating to the matters being voted on) is sent to the nominee, and the nominee exercises the voting rights.

In the case of shares that are part of the collective investment property of an investment trust or an undisclosed investment association among collective investment vehicles (funds), shareholder rights for the relevant shares vis-à-vis the company are also exercised in principle by the nominee (ie, the trustee who is listed as a shareholder in the shareholders’ registry) and the company also sends the notice of the convocation of a general meeting of shareholders to such trustee; however, voting rights for the relevant shares are exercised by the asset management company, not the trustee, in accordance with the Financial Investment Services and Capital Markets Act (FSCMA). In practice, if the company delivers the notice of the convocation of a general meeting of shareholders to the trustee, the trustee immediately notifies the asset management company, and the asset management company exercises its voting rights directly or through management instructions given to the trustee.

A general meeting of shareholders must be held in a physical location, and resolutions are required to be adopted by shareholders (or agents) in person. In principle, adopting a written resolution without actually holding a general meeting of shareholders is not allowed.

However, as an exception, a company with total paid-in capital of less than KRW1 billion may adopt a written resolution in lieu of the resolution of the general meeting of shareholders, and such company will be deemed to have adopted a written resolution if all of its shareholders have consented to the agenda of the resolution in writing.

Unless otherwise provided in the KCC, a company may issue authorised but unissued shares at such times and upon such terms as the board of directors of the company may determine. In such issuance, all shareholders who are listed on the shareholders’ register as of the record date (“allotment to shareholders”) have pre-emptive rights and are entitled to subscribe for any newly issued shares in proportion to their existing shareholdings, and the company must offer them the new shares on uniform terms.

The company must notify the shareholders who are entitled to subscribe for newly issued shares of the deadline for subscription at least two weeks prior to the deadline. If a shareholder fails to subscribe on or before such deadline, such shareholder’s pre-emptive rights will lapse.

Under the FSCMA, if a listed company intends to issue new shares by way of allotment to shareholders, it must issue a certificate of pre-emptive right to the newly issued shares so that the shareholders may have an opportunity to sell the certificate of pre-emptive right.

If certain shareholders forfeit their right to subscribe to newly issued shares, non-listed companies may allot the forfeited shares to a third party through a board resolution; pursuant to the FSCMA, listed companies must, in principle, withdraw the forfeited shares but may allot the forfeited shares to a third party under limited conditions (including conditions regarding share price).

Notwithstanding the forgoing, a company may issue new shares to persons other than existing shareholders in accordance with the provisions set forth in the company's AOI (“allotment to a third party”), so long as such allotment is limited to cases where it is necessary to achieve the company's managerial objectives, such as the introduction of new technology or the improvement of the company's financial structure.

Under the KCC, a company must notify its stockholders or make public notice of the conditions and other details of new shares issued by way of allotment to a third party, no less than two weeks prior to the relevant subscription payment date. However, a listed company may (pursuant to the FSCMA) substitute such notification or public notice by disclosing the material fact in a report publicly filed with the listing authorities.

In principle, shares are freely transferable. The KCC provides for a free transfer of shares so that shareholders may recoup their share capital.

Under the KCC, shares can be transferred by way of transfer of the relevant share certificates; generally, no transfer of shares is valid or in effect until such share certificates have been transferred. Nonetheless, shareholders may validly transfer shares without share certificates in limited cases if the company has failed to issue share certificates within six months from the date of incorporation or the payment due date for the subscription price for such shares.

The AOI may provide that board approval is required with respect to a share transfer. In this case, in absence of the requisite board approval, no transfer of shares should be effective against the company. If the board of directors does not approve a share transfer, the transferring shareholder may request the company to either purchase the shares or designate a transferee acceptable to the company, and the company must accede to such request.

Shareholders are entitled to grant security interests over their shares. Security interests on shares may be granted by way of creating a pledge on such shares, pursuant to the provisions of the KCC, or by creating a security transfer (yangdo-dambo in Korean, which means a transfer of the ownership of shares to a creditor as collateral).

A statutory pledge on shares may be created as a summary pledge or a registered pledge. A summary pledge is effected by mutual agreement of the parties and the transfer of a share certificate. In addition to this, a registered pledge requires the company to reflect the name and address of the pledgee on the register of shareholders and the pledgee’s name on the share certificate, at the request of the pledgee.

Under the Act on Electronic Registration of Stocks and Bonds, listed shares are registered in the electronic register without the issuance of share certificates. Therefore, in order to establish a pledge on listed shares, the pledgee should apply to the Korea Securities Depository through a securities company for electronic registration of a pledge.

Any person who, alone or together with specially related persons, holds 5% or more of the total issued and outstanding shares of a listed company must report their shareholding information to the Financial Services Commission and the relevant securities exchange, until their holding falls below 5%. Initially, the report must be made within five business days from the date when such person first becomes a 5% holder. Thereafter, each time the number of shares held by them changes by 1% or more of the total issued and outstanding shares of the company or the purpose of the shareholding changes, the person must report the change to the Financial Services Commission and the relevant securities exchange within five business days from the date of such change.

In addition, directors and officers (whether registered or not) and major shareholders of a listed company (ie, a holder of, directly or indirectly, 10% or more of the total voting interests or a person who exercises de facto influence over material business decisions of the company) must report to the Securities and Futures Commission and the relevant securities exchange the number of shares beneficially owned by them within five business days after they become a director, officer or major shareholder. They must also report any change in the number of shares held by them to the Securities and Futures Commission and the relevant exchange within five business days from the date of such change.

A company may cancel its shares by way of capital reduction or the acquisition of its own shares within the scope of distributable profits and subsequent cancellation.

• Capital reduction: the KCC requires a special resolution of shareholders at a general shareholders' meeting approving such acquisition to be obtained. The special resolution must be adopted by the affirmative votes of no less than two thirds of the shareholders present at the meeting, which should represent no less than one third of the total number of the issued and outstanding shares of the company. The KCC also requires a company intending to reduce its stated capital to undertake certain procedures to protect its creditors. Notwithstanding the forgoing, in case of capital reduction to cover deficits (ie, capital reduction without consideration), the KCC requires that general resolution of shareholders at a general shareholders' meeting approving such acquisition to be obtained, and procedures to protect creditors are not required.
• Cancellation of treasury shares: a company may, by resolution of the board of directors, cancel its own shares acquired within the scope of distributable profits (see 4.2 Buybacks for detail). In this case, procedures to protect creditors are not required, and there is no change in the company’s capital despite the cancellation of shares.

Under Korean law, a company may acquire its own shares through the following two methods.

• Acquisition of own shares within the scope of distributable profits: a company may acquire its own shares within the scope of distributable profits calculated under the KCC by a resolution of the general meeting of shareholders or the board of directors (if the company is a listed company or if the AOI stipulates that dividends may be distributed by a resolution of the board of directors). In such case, the company’s own shares shall be acquired (i) at the market price on the Korea Exchange, (ii) under equal terms and conditions in proportion to the number of shares held by the shareholders by giving notice or public notice to all shareholders, or (iii) through a tender offer. In the case of a listed company, it is also possible to enter into a trust agreement with a trust company to acquire the company’s own shares and then effect the acquisition by having such shares transferred as treasury shares upon the termination or expiry of the trust agreement.
• Acquisition of own shares for a specific purpose: a company may acquire its own shares for a specific purpose or for a specific reason set forth in the KCC, and such acquisition of treasury stock may be made regardless of whether or not distributable profits exist. Specific purposes or reasons include, for example, cases where a shareholder exercises appraisal rights, where a company acquires treasury shares as a result of a merger with (or transfer of the entire business of) another company, or where it is necessary to dispose of fractional shares.

The company may pay dividends if it has distributable income and dividend payment is approved at the general meeting of shareholders, or by the board if the board approves the financial statements of the company.

Distributable income means the amount available from the net assets in the balance sheet of the company as at the end of the immediately preceding financial year, after deducting the paid-in capital, the statutory capital reserve, surplus earnings to be cumulated as the statutory capital reserve as at the end of the current financial year, and unrealised profit. Under the KCC, dividend payments are permitted strictly within the scope of the distributable income as shareholders have a junior claim to the claims of creditors.

Once dividend payment is approved by a resolution of the shareholders or the board, dividends must be paid within one month after the date of such resolution, unless the date of payment is determined otherwise in such resolution.

The approval of a general meeting of shareholders is required in order to appoint (by an ordinary resolution) or remove (by a special resolution) a director to/from the board of a company. Although generally the board calls a general meeting of shareholders to appoint or remove a director, holders of at least a certain percentage of shares have the right to call a general meeting and propose to elect or remove a director at such meeting.

On the other hand, if the dismissal of a director is rejected at the general meeting of shareholders despite the director's misconduct or serious violation of laws and regulations or the company’s AOI, the holders of at least 3% or more of the total issued and outstanding shares of a listed company (or, in the case of a listed company, at least 0.5% of the total issued and outstanding shares for at least six months, or 0.25% if the company’s total capital is KRW100 million) may request the court to dismiss the director within one month from the date of the general meeting of shareholders.

Any shareholder has the right to bring an action in court for revocation or nullification of a board resolution, so long as such person holds at least one share. The court will then decide whether to revoke or nullify the resolution, based on the applicable law.

Holders of at least 1% of the total issued and outstanding shares have the right to demand, on behalf of the company, that a director does not take certain actions or ceases to take certain actions that are in violation of laws and regulations or the AOI of the company, if such actions would result in irreparable harm to the company. In the case of a listed company, shareholders meeting the following thresholds also have the same right:

• 0.05% of the total shares continuously held for at least six consecutive months; or
• 0.025% of the total shares continuously held for at least six consecutive months if the paid-in capital of the immediately preceding financial year is at least KRW100 billion.

Shareholders do not have the power to require a director to actively take certain actions. However, if a director commits an unlawful act resulting in damage to the company, shareholders may either sue (or demand the company sue) the director or adopt a resolution to remove the director (following which resolution the removal takes effect immediately).

In principle, the provisions of the KCC applicable to directors apply mutatis mutandis to auditors. Therefore, shareholders have the right to propose to the board the appointment or removal of an auditor and to adopt a special resolution to remove an auditor, subject to the same shareholding thresholds as applied to the shareholder rights with respect to directors.

In principle, a company's director is not obliged to report any corporate governance arrangements or other corporate information to any individual shareholder. This is because directors bear fiduciary duties under the KCC to the company and not to the shareholders, and particularly as a listed company's reporting of undisclosed internal information to certain shareholders may raise issues such as the principle of shareholder equality, violation of the fair disclosure obligation or the use of undisclosed material information.

KOSPI-listed companies with total assets of KRW1 trillion or more based on the consolidated financial statements as of the previous fiscal year end must disclose their corporate governance reports by 31 May each year, and financial companies must disclose their annual governance reports on their websites, etc, 20 days prior to the date of the ordinary general meeting of shareholders.

The corporate governance reports of KOSPI-listed companies and the annual governance reports of financial companies generally include the following:

• the company’s principles and policies on corporate governance, along with the status of corporate governance;
• matters concerning the roles, responsibilities, operation, etc, of the board of directors and committees within the board of directors;
• information on the activities of outside directors;
• the status of the general meeting of shareholders;
• matters regarding dividends; and
• other key issues regarding corporate governance.

In principle, a controlling company does not have any duties or liabilities to the shareholders of a company it controls. However, under specific circumstances, a controlling company may be held jointly and severally liable with directors of the controlled company for damages to the shareholders of the controlled company if such controlling company participates in illegal actions of the controlled company through actions such as using its influence to instruct directors of the controlled company to perform specific acts.

If there are concerns that the company may be insolvent (ie, unable to pay its debts without significant difficulty), holders of at least 10% of the company’s total issued and outstanding shares have the right to petition the court for rehabilitation of the company, pursuant to the Debtor Rehabilitation and Bankruptcy Act.

Appraisal Right

A shareholder holding at least one share has the right to request the company to purchase their shares if such holder dissents from any of the following resolutions:

• a transfer of all or a material portion of the business of the company;
• entering into, altering or rescinding a contract for leasing the whole business, for giving authority to manage such business, or for sharing with another person all profits and losses of the company, or other similar contracts;
• assuming all or a material portion of the business of another company, which significantly affects the company’s business;
• a comprehensive share swap or transfer;
• a merger; or
• a corporate split or a split merger.

Court Actions/Demand Right

A shareholder holding at least one share has the right to bring an action in court and/or to demand the company to take or not take certain actions, including the right to:

• petition the court for revocation or nullification of a resolution passed at a general meeting of shareholders;
• petition the court to nullify the issuance of new shares;
• demand the company suspends the issuance of new shares;
• petition the court to nullify the incorporation of the company;
• petition the court to nullify a merger or consolidation;
• petition the court to nullify a corporate split or split merger;
• petition the court to nullify any reduction in paid-in capital;
• demand the company suspends any unfair issuance of convertible bonds or bonds with warrants; and
• petition the court for retrial of the confirmed final decision, in the event that a derivative suit is brought and the plaintiff and defendant colluded to have a decision rendered for the purpose of injuring the company’s rights.

Furthermore, holders of at least 1% of the total issued and outstanding shares have the following rights:

• to demand, on behalf of the company, that a director not take certain actions or ceases to take certain actions that are in violation of the law or the AOI of the company, if such actions would result in irreparable harm to the company; and
• to bring an action in court and/or to demand that the company bring an action in court against:
1. promoters;
2. directors;
3. statutory auditors;
4. those who have colluded with the company to subscribe to shares at a considerably unfair price;
5. shareholders who have received profits from the company; or
6. liquidators.

Shareholders of a listed company may also exercise the right to demand that a director not take certain actions or ceases to take certain actions that are in violation of the law or the AOI of the company if they satisfy the following shareholding thresholds:

• 0.05% of the total issued and outstanding shares continuously held for at least six consecutive months; or
• 0.025% if the paid-in capital of the immediately preceding financial year is KRW100 billion or more.

Shareholders of a listed company may also exercise the right to bring an action in court and/or to demand that the company bring an action in court against the entities listed above if such shareholders hold 0.01% of the total issued and outstanding shares for at least six consecutive months.

Holders of at least 1% of the total issued and outstanding shares have the right to demand, on behalf of the company, that a director does not take certain actions or ceases to take certain actions that are in violation of the law or the AOI of the company, if such actions would result in irreparable harm to the company. Shareholders of a listed company may exercise the same right if they hold at least 0.05% of the total issued and outstanding shares for at least six consecutive months, or 0.025% if the paid-in capital of the company in the immediately preceding financial year is KRW100 billion or more. Such demand right may be exercised by way of communications to the director or bringing an action in court.

A shareholder may file a claim against a director or the company for any damages incurred by such shareholder as a result of such director’s neglect of his or her duties to the company if such neglect results from “wilful misconduct or gross negligence”, even where such negligence does not constitute a tort against the shareholder under the Civil Code. This liability is joint and several for all directors involved; in the event of any action taken pursuant to a resolution of the board of directors, the directors who voted for such resolution will be jointly and severally liable.

However, if a director misappropriates corporate assets, as a result of which the assets of the company decrease and consequently the shareholders’ economic interests are adversely affected, the Supreme Court has held that such damages are indirect damages for which the shareholder cannot claim damages based on the foregoing statutory right.

If a director has intentionally or negligently acted in violation of laws and regulations or the AOI, or has neglected their duties, all directors shall be held liable, jointly and severally, for damages incurred by the company as a result of their actions.

Holders of at least 1% of the total issued and outstanding shares have the right to bring an action in court on behalf of the company against directors (ie, a derivative suit). Shareholders of a listed company have the same right if they hold at least 0.01% of the total issued and outstanding shares continuously for at least six consecutive months. Prior to exercising the right to institute such derivative suit, the relevant shareholders must first deliver to the company a written notice demanding the filing of an action against directors. If the company does not file an action against directors within 30 days of receiving such notice, the shareholders may bring an action on behalf of the company.

However, if the company may suffer irreparable harm due to the lapse of the 30-day period, the relevant shareholders may file the lawsuit immediately. So long as the shareholders have satisfied the requisite shareholding threshold at the time of filing the lawsuit, they may cease to maintain the shareholding threshold after filing the lawsuit. The company may join the derivative suit filed by the shareholders.

The purpose of the representative suit is to hold directors liable for damages incurred by the company as a result of the actions of directors. The derivative suit shall not be available for the purpose of seeking damages incurred by third parties or shareholders as a result of the actions of the directors.

Legal Framework for Shareholder Activism in Korea

Shareholder activism is generally subject to the provisions of the KCC, the FSCMA and the Korea Exchange (KRX) regulations. The government has been reinforcing laws and regulations to improve transparency in large business groups’ investments structures as well as their corporate management, and to strengthen shareholders’ rights in individual companies.

Rights Under the KCC

Activist shareholders generally rely on the specific rights afforded to minority shareholders under the KCC, including the right to:

• call a general meeting of shareholders;
• propose the agenda of such meeting;
• request a cumulative voting with regard to the appointment of directors;
• request an injunction (suspension) against a director’s misconduct;
• institute a derivative suit; and
• inspect books and records.

The KCC has a number of “special provisions” applicable to listed companies that relax the shareholding ratio requirement for minority shareholders to exercise their rights. To prevent abuse of these provisions, the KCC generally requires a minimum holding period as well (eg, six months).

FSCMA Disclosure Requirements

On the other hand, shareholding disclosure requirements under the FSCMA may serve to check shareholder activism. Under the FSCMA, a shareholder who comes to own at least 5% of a listed company must report its shareholding status and the purpose of ownership to the Financial Services Commission and the KRX within a specified period. Thereafter, such shareholder must also file a detailed account of any changes in its shareholding ratio by at least 1% of the total issued and outstanding shares, any changes in its purpose of shareholding, or any other material matters.

Recent Changes to the FSCMA

In February 2020, an amendment to the enforcement decree of the FSCMA (the “FSCMA Enforcement Decree”) was adopted to relax the 5% reporting obligation, for the purpose of enhancing and supporting institutional investors’ shareholder activism. The key amendments to the new FSCMA Enforcement Decree are intended to:

• clarify and reduce the scope of shareholding with the “intent to influence corporate management”, which is subject to 5% reporting requirements;
• further segment the reporting obligations, depending on the purpose of the shareholding; and
• ease the 5% reporting requirement applicable to institutional investors.

Regarding the first amendment item, the new FSCMA Enforcement Decree has excluded the following activities from the scope of shareholding with the “intent to influence corporate management”:

• the exercise of minority shareholders’ rights available under the KCC;
• initiatives by professional investors to amend the AOI of the company to improve corporate governance;
• shareholder activities related to the declaration of dividends; and
• the simple or public expression of opinion.

Recent Changes to the KCC

The following amendments to the KCC adopted in December 2020 would lend support to shareholder activism:

• the election of any director who will serve as a member of the audit committee must be held separately from the election of other directors, in order to ensure the independence of the audit committee members of a listed company;
• shareholders of the parent company have the right to bring a derivative suit against the directors of a direct or indirect subsidiary (ie, a company of which more than 50% of the shares are held by the parent company), so long as such shareholders hold at least 1% of the total issued and outstanding shares of the parent company or, in the case of a listed parent company, at least 0.5% of the total issued and outstanding shares for at least six months; and
• minority shareholders of listed companies may exercise their rights selectively at their discretion, pursuant to either the special provisions or the general provisions applicable to listed companies – ie, minority shareholders may comply with either the higher shareholding threshold not subject to any holding period, or the lower shareholding threshold subject to a holding period, whichever is easier to meet.

The key aims of activist shareholders are to enhance the corporate value and thereby the shareholder value. To that end, activist shareholders tend to propose the following matters to the management, or to actively oppose the agenda proposed by the management:

• recommending director and officer candidates and campaigning for the appointment of directors (especially an outside director who is elected as an audit committee member separately from other directors) who would represent the interests of minority shareholders;
• challenging excessive compensation for directors or their management misconduct and requesting improvement thereof;
• matters relating to shareholder return policies, including reasonable determination of the size of dividends, the acquisition of treasury shares, and the optimisation of capital structure; and/or
• disposal of idle assets serving non-core/non-business purposes, or corporate restructuring through mergers and acquisitions.

Strategies used by activist shareholders in Korea are similar to those used in other countries and depend on their objectives or the circumstances of the relevant companies. Activist shareholders may communicate their request informally in a letter to the board or ask for a conversation with the management; official/legal procedures, on the other hand, include exercising shareholder rights to propose a shareholder meeting agenda and/or to call for a shareholder meeting, and soliciting the votes of other shareholders by proxies.

The right to propose a shareholder meeting agenda is most frequently exercised. If the company rejects the inclusion of the agenda proposed by the activist shareholder, the shareholder often files a preliminary injunction in court to include such proposed agenda.

In order to put pressure on the largest shareholder, certain activist funds may take a step beyond soliciting proxy votes and enter into voting trusts or other alliances with significant shareholders.

Shareholder activism in Korea mostly appeared in major conglomerates until the mid-2010s but has been expanding in recent years, with a number of shareholder activism cases targeting middle-standing companies as well as small and medium enterprises. In particular, the NPS announced the introduction of the Korean Stewardship Code in July 2018, followed by the Teachers' Pension (TP) and the Government Employees Pension Service (GEPS) each adopting the Korean Stewardship Code in December 2019 and February 2020 respectively, signalling the potential start of more active exercise of shareholder rights. In addition, the amendment to the KCC in 2020 expressly stipulates that shareholders of listed companies may selectively exercise minority shareholders' rights under the special provisions for listed companies as well as under general provisions, and strengthens minority shareholder rights through providing for a separate election system for audit committee members as well as multi-tier derivative action. The scope of companies subject to shareholder activism has gradually expanded in Korea in line with various social and political trends, and this is likely to continue in the future.

Shareholder activism in Korea targets businesses in various industries and is not concentrated in any specific industry. The following six types of companies are generally vulnerable to – and mostly targeted by – activist shareholders:

• companies with no largest shareholder or a largest shareholder with weak control;
• companies with a high foreign shareholding ratio that actively participate in the general meeting of shareholders;
• companies with low shareholder returns (eg, low share prices or low dividends);
• companies with uncertainty of distributable cash or free cash flow according to their balance sheets;
• companies with a pending controversial agenda, such as a restructuring; and
• companies under public criticism due to events such as ongoing criminal or administrative investigations.

Key examples of shareholder activism in Korea in recent years include the following.

• A key activist shareholder objective witnessed recently has been higher dividends (or the acquisition of treasury stocks) by using idle cash and achieving greater efficiency in capital structure. For instance, in 2019 Elliott Management proposed that Hyundai Motor Company pay out a cash dividend of KRW21,967 per ordinary share, which was approximately seven times higher than the per share dividend payment planned by Hyundai Motor Company (ie, KRW3,000). The per share dividend payment planned by Hyundai Motor Company was approved by the ordinary general meeting of shareholders. Align Partners Capital Management recently sent an open shareholders' letter to a number of financial holding companies to request an increase in the shareholder return rate compared to the previous year by increasing dividends and acquiring and cancelling the company’s shares; most of the financial holding companies accepted the offer and increased the shareholder return rate by 1~7% points compared to the previous year. However, JB Financial Group proposed a lower shareholder return rate than as requested by Align Partners (annual dividend payout ratio: 27%); Align Partners submitted a dividend proposal of 33% annual dividend payout ratio as a shareholder proposal, but JB Financial Group's dividend proposal was approved at the general meeting of shareholders.
• Another notable objective relating to companies with a related parties transaction issue – which may damage corporate value – is to oppose such transactions or to require the appointment of new directors, etc. In 2022, Align Partners argued in an open shareholders’ letter that SM Entertainment entered into an unfair agreement with another company controlled by SM Entertainment's largest shareholder (an individual), causing a “tunnelling” effect transferring SM Entertainment’s profits to the largest shareholder, and that such agreement should be terminated. SM Entertainment accepted such request and terminated the agreement.
• Truston Asset Management opposed Taekwang Industrial Co., Ltd.'s plan to participate in the capital increase by third-party allotment of Heungkuk Life (a company with a controlling “owner family”), arguing that such participation would be detrimental to minority shareholders of Taekwang Industrial Co., Ltd.; as a result, Taekwang Industrial Co., Ltd. withdrew its plans to participate in Heungkuk Life’s capital increase.
• KCGI argued that DB HiTek Co., Ltd engaged in related party transactions for the private interest of the “owner family” and proceeded with a spin-off in order to avoid conversion into a holding company, which would have adversely affected the owner family’s control over the group. KCGI sent a shareholder's letter to DB HiTek Co., Ltd's management requesting improvement and filed an application for a preliminary injunction to inspect and copy the accounting books and the minutes of the board of directors' meeting; the case is currently pending.
• There have also been campaigns against business and governance restructuring plans proposed by the board in the form of split-offs and mergers, alleging adverse impact on shareholder value. As a case in point, activist funds such as the Blash Fund pointed out the unfairness in the merger ratio between Dongwon Industries and Dongwon Enterprise, which was alleged to only favour the owner family. With strong opposition from the minority shareholders, Dongwon group consequently yielded to shareholders and adjusted the merger ratio in May 2022 in a way that was favourable to the minor shareholders.
• Activist shareholders also seek to appoint their preferred candidates to serve on the board. For instance, in 2019 Elliott Management proposed an agenda in an attempt to put its outside directors on the board of Hyundai Motor Company. KCGI proposed an agenda to place its preferred outside director on Hanjin KAL’s board in 2019 and also proposed an agenda to appoint inside, outside and other non-executive directors in 2020, together with friendly shareholders with whom it entered into a joint equity agreement, but the proposal was rejected at the 2020 annual general meeting of shareholders.

Shareholder Activist Funds

The recent increase in the number of asset managers and assets managed by asset managers has led to a balloon effect, resulting in a rise in the market for shareholder activist funds. With the emergence of new asset managers, funds advocating shareholder activism have emerged, such as those employing strategies of investing in the shares of undervalued listed companies in order to obtain investment returns through eliminating the factors leading to undervaluation of the relevant company, by improving the governance structure and increasing dividends through actively exercising minority shareholders’ rights.

National Pension Service

In 2018, Korea’s state-run National Pension Service (NPS), which is the world’s third-largest pension fund, adopted a stewardship code; public opinion in Korea is increasingly supportive of the idea that shareholders should actively exercise their shareholder rights, due to certain recent highly publicised cases of misbehaviour by members of “owner” families.

In connection with this, the NPS enacted its internal shareholder activism guidelines, which became effective on 27 December 2019 and establish detailed standards and processes for shareholder activism based on the stewardship code. With these guidelines 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, to exercise its shareholder rights to the fullest extent permitted under applicable laws and regulations.

While it is difficult to ascertain the exact proportion of public activist demands that have been met, a number of activist demands have led to significant changes in corporate governance in recent years.

For instance, a group of activists successfully carried out a public campaign opposing a large listed company’s corporate restructuring in a shareholder ballot. In certain other instances, the listed companies voluntarily accepted the activist shareholders’ proposal to diversify the composition of the board to include foreign and/or female outside directors, or to expand the shareholder return policies.

Furthermore, activist shareholders have a better chance of successfully appointing their director designee to the audit committee, due to the following changes in law applicable to listed companies with total assets of at least KRW2 trillion at the previous fiscal year end:

• the election of any director who becomes a member of the audit committee must be conducted separately from elections for other directors, to ensure the independence of members of audit committees of listed companies; and
• the amended KCC limits all shareholders from casting votes in respect of their shares in excess of 3% 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% (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.

Korean companies have limited options in responding to an activist shareholder. Each share must generally carry one vote under Korean law, and poison pills and multiple voting shares are not available to Korean companies, with limited exceptions, as discussed below. Companies may consider increasing the shareholding stake of a friendly third party by way of issuing new shares or disposing of treasury shares to such third party. However, the court may invalidate the new issuance of shares to a third party if such issuance does not serve any reasonable business purpose but rather purports solely to defend against shareholder activism.

As an exception to the principle of one voting right per share under the KCC, multiple voting shares will be introduced to Korea on a limited basis, pursuant to the proposed amendment to the Act on Special Measures for the Promotion of Venture Businesses (the “Special Measures Act”), which was passed on 27 April 2023 and will take effect on 17 November 2023. The Special Measures Act permits the issuance of multiple voting shares with up to ten voting rights per share, limited to the shares held by the founders of unlisted venture businesses, in order to enable founders to stably manage their business.

Fundamentally, companies should keep track of changes in shareholding to identify early warning signs. Activist shareholders will try to set shareholders against the board and management, so it is important that the company maintains active and open communications with major institutional investors, asset managers and other shareholders.

In Korea, the NPS and other major institutional investors, labour unions and other social groups have led governance activism, which has developed to put pressure on companies to adopt independent directors, ESG policies and other best practices for good corporate governance and corporate social responsibilities. Companies may adopt such best practices to address the concerns of the shareholders driving governance activism. Even if they cannot accept all such requests from shareholders, the companies should actively engage with shareholders to explain the reasons for their actions and build rapport with shareholders.