The Korean Commercial Code (KCC) recognises the following five types of companies:
The most popular type is the joint stock company, accounting for about 90% of the companies established and existing in Korea as of July 2024.
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:
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:
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:
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:
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.
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:
Agenda items requiring approval by a special resolution at the general meeting of the shareholders include:
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:
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.
Influence
The company’s shareholders may seek to influence the company through non-legal and legal measures against the company or its directors, etc.
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.
Under the amended FSCMA, effective as of 24 July 2024, an officer or a major shareholder (ie, an insider) of a listed company who intends to engage in a large-scale transaction (ie, trading of at least 1% of the total number of issued and outstanding shares, or in an amount of at least KRW5 billion on a combined basis for the past six months) of certain securities (eg, common shares, non-voting preferred shares, convertible bonds, bonds with warrants and exchangeable bonds) issued by the listed company has a prior disclosure obligation. The insider must report their transaction plan to the Securities and Futures Commission and the relevant securities exchange, specifying the purpose, amount and period of the transaction at least 30 days prior to the expected trading date. However, financial investors (including foreign investors), small-scale transactions (trading of less than 1% of the total number of issued and outstanding shares and less than KRW5 billion), transactions that are not likely to involve the use of material, non-public information, and transactions arising from external factors (eg, inheritance, stock dividends, M&A transactions involving a change in the largest shareholder, and mergers/spin-offs) are not subject to this prior disclosure requirement.
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.
Under Korean law, a company may acquire its own shares through the following two methods.
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:
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.
A shareholder who holds more than 3% of the total number of issued and outstanding voting shares at the time of appointment of an auditor is not entitled to cast votes in excess of that 3%. This limitation is intended to secure the independence of the auditor by curbing the influence of major shareholders with more than 3% of the voting shares, and by reflecting the opinions of minority shareholders.
The largest shareholder of a listed company is subject to tighter restrictions on voting rights – ie, a 3% limit – which is aggregated with shares held by a certain group of its specially related parties.
Listed companies with total assets of KRW2 trillion or more as of the end of the most recent fiscal year must adopt an audit committee system instead of an auditor. In such cases, the following special rules apply to the appointment and removal of audit committee members:
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 KRW 500 billion 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:
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:
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:
Furthermore, holders of at least 1% of the total issued and outstanding shares have the following rights:
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:
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). In the case of a listed company, continuous holders of at least 0.01% of the total issued and outstanding shares for at least six consecutive months have the same right in addition to the holders of at least 1% of the shares. 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.
Furthermore, shareholders of the parent company have the right to bring a derivative suit against the directors of a direct subsidiary (ie, a company of which more than 50% of the shares are held by the parent company) or indirect subsidiary (ie, a company of which more than 50% of the shares are held by the parent company and a direct subsidiary in aggregate), so long as such shareholders hold at least 1% of the total issued and outstanding shares of the parent company (if the parent company is listed, holders of at least 0.5% of the total issued and outstanding shares for at least six consecutive months also have this right).
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;
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.
A shareholder who holds shares without the “intent to influence corporate management” will be subject to more relaxed regulations regarding the content and timing of the report. The following activities are excluded from the scope of shareholding with the “intent to influence corporate management”:
Recent Changes to the KCC
The following amendments to the KCC adopted in December 2020 would lend support to shareholder activism:
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:
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. Furthermore, with the Korean government officially launching the “Corporate Value-up Program” in 2024 to address the so-called “Korea discount” on shares issued by Korean companies, it is expected that shareholder activism, demanding enhancement of corporate value through increased dividends and corporate governance reforms, will gain momentum. 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:
Key examples of shareholder activism in Korea in recent years include the following.
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.
Minority Shareholder Associations
Recently, a new form of shareholder activism is on the rise, where minority shareholders use certification-based shareholder activism platforms such as “Act” to form “minority shareholder associations” to exercise their shareholder rights, particularly in small-sized listed companies. In an attempt to directly influence corporate governance, minority shareholder associations might send the company an official letter to request the acquisition and cancellation of treasury shares or the expansion of dividends; they might also make a shareholder proposal for agenda items such as the appointment of an auditor or audit committee member, or the appointment or removal of a director at a general meeting. Minority shareholder associations had made shareholder proposals in the general meetings of 18 companies as of the end of 2023, with three proposals being adopted in the year, demonstrating the substantial impact of shareholder activism by minority shareholder associations.
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 special provisions in law applicable to listed companies with total assets of at least KRW2 trillion at the previous fiscal year end. See 6.3 Rights to Appoint and Remove Auditors for further details.
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 was 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 took 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.
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lawkim@kimchang.com www.kimchang.comAnalysis of the 2024 Annual General Meetings in South Korea
Most listed companies in South Korea, which close their books in December, typically hold their Annual General Meetings (AGMs) in February and March. For the 2024 fiscal year, it is reported that around 80% of these companies held their AGMs in March. An analysis of the 2024 AGMs reveals a trend towards shareholder proposals focused on the acquisition and retirement of treasury stock, rather than dividend increases.
Additionally, there have been instances of director appointments using the cumulative voting system, a rise in the diversity of shareholder proposals, and increased collaboration among minority shareholders through shareholder activism platforms.
Increase in shareholder proposals on treasury stock acquisition and retirement
In both 2023 and 2024, shareholder proposals related to shareholder returns, such as dividends and treasury stock retirements, drew significant attention. However, a notable shift occurred: while proposals for increasing dividends decreased, there was a noticeable rise in proposals concerning the acquisition and retirement of treasury stocks. According to the DART electronic disclosure system and a report by the AJU Business Management Research Institute, the number of shareholder proposals for dividend increases dropped from 27 in 2023 to 12 in 2024. In contrast, proposals for the acquisition and retirement of treasury stocks rose from 11 in 2023 to 16 in 2024.
The acquisition and retirement of treasury stock, while similar to dividends in terms of enhancing shareholder returns, offer additional advantages. They can increase shareholders’ equity stakes, reduce the number of outstanding shares, and boost stock prices, all without triggering taxes such as dividend tax. This shift in shareholder proposals may be partly attributed to a legal development in 2023, when the Daejeon District Court granted a provisional injunction for the inclusion of a treasury stock acquisition proposal, alleviating some legal uncertainties surrounding such proposals.
Although the approval rate for shareholder proposals on the acquisition and retirement of treasury stocks remains low, these proposals are effectively influencing management’s shareholder return policies. For example, at the 2024 AGM of Kumho Petrochemical, Tcha Partners Asset Management proposed amendments to the articles of incorporation for treasury stock retirement, a resolution for treasury stock retirement, and the appointment of an outside director to the audit committee. Although these proposals were not approved, the process led the company to commit to retiring 50% of its treasury shares over the next three years. This demonstrates that, while shareholder proposals may not always succeed, they can still exert a significant influence on corporate decision-making. These proposals can help align management strategies more closely with shareholder interests.
Cumulative voting gains traction in director elections
The cumulative voting system is a method that grants shareholders multiple voting rights proportional to the number of directors being elected. For instance, if two directors are being elected, each share entitles the holder to two votes; if three directors are being elected, each share provides three votes, and shareholders can concentrate their voting rights on a specific candidate. This system allows shareholders to concentrate their votes on a preferred candidate, making it easier for candidates supported by minority shareholders to secure a position on the board.
During the 2024 AGM season, cumulative voting was utilised at the AGMs of JB Financial Group and KT&G, leading to the appointment of outside directors proposed by minority shareholders.
The case of JB Financial Group was particularly groundbreaking, as it marked the first instance in which directors were appointed through a shareholder proposal in a financial holding company. At JB Financial Group’s 2024 AGM, the shareholder activist fund Align Partners Capital Management (Align Partners) successfully secured the election of two outside director candidates they had nominated, with cumulative voting playing a crucial role. Despite garnering 41% of the votes in 2023, Align Partners’ candidate failed to secure the majority needed to be elected as an outside director. However, at the 2024 AGM, the use of cumulative voting enabled the election of two candidates supported by Align Partners to JB Financial Group’s board.
Similarly, at KT&G’s AGM, the cumulative voting facilitated the appointment of an outside director candidate proposed by the Industrial Bank of Korea.
Many listed companies in South Korea have provisions in their articles of incorporation that exclude cumulative voting. However, with the successful election of outside directors using this system in the 2024 AGMs, it is anticipated that efforts to amend articles of incorporation to adopt cumulative voting, as well as attempts to elect directors through this method, will increase in the future.
Increasing diversity in shareholder proposals, including advisory shareholder proposals
Recent shareholder meetings in South Korea have seen a growing variety of shareholder proposals, extending beyond traditional agenda items such as the appointment of directors and amendments to the articles of incorporation. Shareholders have increasingly proposed matters typically reserved for the board of directors, such as the acquisition and retirement of treasury stocks and corporate split-offs. Additionally, there has been a rise in advisory shareholder proposals, reflecting the expanding scope of issues being brought forward by shareholders.
According to a report by KCGS (Korea Institute of Corporate Governance and Sustainability), which analysed the agenda items for the first quarter of 2024, a total of 34 shareholder proposals were submitted across 11 companies. Of these, five proposals focused on treasury stock retirement and amendments to the articles of incorporation to allow treasury stock retirements by shareholder resolution.
In the case of corporate split-offs, the Commercial Act requires a company to draft a split-off plan, obtain board approval, and finally secure approval through a special resolution at the shareholders’ meeting. Recently, however, minority shareholders have begun proposing corporate split-offs directly at shareholders’ meetings, bypassing board resolutions, with the aim of enhancing corporate value. Despite these efforts, lower courts have ruled that shareholder proposals for corporate split-offs are not permissible as agenda items for shareholders’ meetings because they either violate the law or pertain to matters that cannot be implemented by the company.
Another emerging trend is advisory shareholder proposals. Advisory shareholder proposals allow shareholders to introduce and vote on issues that fall outside the scope of the Commercial Act or the company’s articles of incorporation. These proposals, while non-binding, serve as an important signal to management regarding shareholder priorities. For instance, at the 2024 AGM of Daol Investment & Securities, the company’s second-largest shareholder, Ki-Soo Kim, CEO of Presto Asset Pte, proposed an amendment to the articles of incorporation to introduce advisory shareholder proposals. This amendment aimed to establish a framework for proposing issues related to corporate governance reforms and shareholder return policies as formal agenda items at shareholders’ meetings. However, all of Mr. Kim’s proposals, including the one to introduce advisory shareholder proposals, were ultimately rejected.
This increase in the diversity of shareholder proposals, despite mixed outcomes, indicates a growing willingness among shareholders to engage more actively in corporate governance and influence decision-making processes in South Korean companies.
Increasing cohesion and influence of minority shareholders through technological advancements
The 2024 AGM season saw a noticeable increase in the active participation of minority shareholders. Activist funds and minority shareholder alliances exercised various minority shareholder rights, such as the right to propose shareholder resolutions, and there was a significant increase in proxy solicitations.
The increase in the exercise of shareholder rights by minority shareholders can be partly attributed to the emergence of shareholder activism platforms. In the past, general shareholders engaged in scattered discussions through open chats, but the introduction of application-based platforms requiring shareholder verification has made it easier for minority shareholders to unite and exercise their rights. Since the emergence of these platforms, there has been a notable increase in the mobilisation of minority shareholders across multiple listed companies in South Korea. According to a report by the shareholder activism platform ACT, during 2024 AGMs, 13 shareholder proposals and proxy solicitations for 15 companies, including Samsung Electronics and Naver, were carried out through ACT.
The 2024 AGM of Hanmi Science, in particular, highlighted the increased mobilisation and influence of minority shareholders through shareholder activism platforms. At this AGM, there was a conflict between the faction led by Song Young-sook (chairwoman of Hanmi Group) and her daughter Lim Joo-hyun, who advocated for a merger between Hanmi Group and OCI, and the opposing faction led by Song’s sons, Lim Jong-yoon and Lim Jong-hoon. With the friendly shareholding difference reportedly at only about 2 percentage points, securing the votes of minority shareholders, who held 16.77% of the shares, was crucial. It is assessed that Lim Jong-yoon and Lim Jong-hoon’s victory in the AGM was influenced by the voting rights secured through the shareholder activism platform utilised by the minority shareholder alliance.
Changes and Discussions on Relevant Regulations
In response to the increasing number of shareholder proposals, the Financial Supervisory Service (FSS) has decided to revise disclosure forms to ensure that the status and outcomes of shareholder proposals are thoroughly disclosed. This decision was made following criticism that, despite the rise in the exercise of shareholder proposal rights by minority shareholders, relevant information was not being adequately provided.
The current disclosure system has several issues, as follows.
To address these issues, the FSS has implemented the following improvements.
Prospects for Amending the Commercial Act to Strengthen Minority Shareholder Protections
At the end of 2023, Federated Hermes Limited published a newsletter titled “South Korea – Enough is Enough”, in which it pointed out that the “Korea Discount” – the phenomenon whereby South Korean stocks trade at lower valuations compared to those in other countries – stems from poor corporate governance in Korea, where minority shareholders have been chronically sacrificed for the benefit of a small number of chaebol (powerful conglomerate) families. The longstanding issues of weak corporate governance in Korean companies, insufficient shareholder return policies, and the exploitation of minority shareholders for the benefit of major shareholders have been criticised by both domestic and international investors. Recently, the South Korean government’s movement to amend the Commercial Act to better protect minority shareholders has attracted significant attention from investors.
On 2 January 2024, President Suk-yeol Yoon announced that he would “positively consider amending the Commercial Act to enhance the interests of minority shareholders”. In this context, there has been a proposal to amend the Commercial Act to expand the fiduciary duty of directors from being solely to the company to also include shareholders. This has become a key point of interest, as the government is now being closely watched to see if it will implement such changes.
Under the current Commercial Act, directors’ fiduciary duties are limited to the company’s interests, making it difficult to hold directors accountable even in cases where general shareholders suffer significant losses in capital transactions. For instance, when a company spins off a profitable division into a separate entity and lists it on the stock exchange, leading to a significant drop in the parent company’s stock price, minority shareholders have limited avenues for recourse. A recent example is LG Chem’s spin-off of LG Energy Solution, which resulted in a 24.1% decline in LG Chem’s stock price over three months.
Activist funds and minority shareholders have consistently raised concerns about these issues. They argue for the necessity of amending the Commercial Act, citing the fact that U.S. Model Business Corporation Act Section 8.31 and Delaware General Corporation Law Section 102(b)(7) both stipulate that directors owe a fiduciary duty to shareholders as well.
As calls for amending the Commercial Act to expand directors’ fiduciary duties grow louder, the business community has opposed such changes, arguing that they could lead to a flood of lawsuits filed by general shareholders. As of July 2024, the government has taken a cautious stance, stating that “public discussion is ongoing regarding the amendment to strengthen directors’ fiduciary duties under the Commercial Act”. In contrast, the Democratic Party of Korea, which holds a majority in the National Assembly, announced in August 2024 that it would push to expand the fiduciary duty of directors to include all shareholders, and establish a legal basis to ensure that the board of directors faithfully represents the interests of general shareholders, drawing considerable attention to the outcome of this legislative effort from both Korean and international investors.
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