Three reasons why arguments opposing Commercial Act amendment are fundamentally incorrect
- Among 44 recent Samsung Electronics’ board agenda items, only one requires director’s duty of loyalty to avoid conflicts of interest (as opposed to duty of care)
- Listed Korean companies are already suffering from zero growth
as controlling families are distracted and not interested in creating value.
Chaebol’s claim that Commercial Act amendment will hurt economic activities is misleading
- Chaebol club's protectionist view of foreign investors is an embarrassing
The highly anticipated Commercial Act amendment, which was scheduled for approval by the National Assembly main session on February 27th and closely watched by 15 million local retail investors, has been blocked, unfortunately. The bill was withheld, with the justification that 'due to substantial disagreements between negotiating parties, further deliberation is required, according to Woo Won-shik, Speaker of the National Assembly. Despite a unified endorsement of Commercial Act reform by government leaders including the president in 2024, the current administration and the ruling party have reversed their position in recent months, a decision that appears to be influenced by strong lobbying efforts from major corporates and their industry organizations. This reversal is extremely disappointing.
The central aim of the proposed Commercial Act amendment is to safeguard shareholders, the rightful owners of corporations. In response to the provision broadening director’s fiduciary duties from solely 'the company' to 'the company and its shareholders,' the business sector has labeled it a 'destructive overhaul that jeopardizes Korea’s industrial foundation,' expressing fears of operational paralysis due to excessive litigation. They also warn of increased meddling by foreign activist investors and a worsening of the 'Korea Discount'.
These claims are demonstrably false. We have concrete evidence to refute the three main objections to the Commercial Act amendment raised by the chaebol and their lobbying organizations.
Corporate sector argument 1: there are concerns about of a surge in litigation
This fear of excessive litigation is, in our view, groundless. In fact, it’s more likely to be a deliberate exaggeration to obscure the facts. Top legal experts who represent these businesses, are well aware that directors’ fiduciary duties do not encompass routine business operations covered by the duty of care, as evidenced by both legal principles and extensive U.S. court cases. This was definitively clarified in numerous public discussions with our Forum's legal experts last year. Nevertheless, the business community, disregarding this, continues to persistently foster this 'lawsuit nightmare' story in the local media. Specifically, even taking just one step into exploring “why and in what circumstances” such litigation can occur, no logical explanation is offered by them. The response that 'shareholders may hold differing views' is incorrect, as shareholder fiduciary duties do not apply in such instances. Even if shareholders disagree, if a decision results in equal benefits or losses for all, it falls outside the scope of these duties. Similarly, the claim that 'a shareholder could sue a director for damages under civil law, not commercial law, for an illegal act' is also inaccurate. No court would validate such a claim. If such a remote concern exists, it can be easily addressed by explicitly excluding it in the Commercial Act. However, even such a suggestion is rejected as ‘not fitting the Commercial Act framework,’ and the business community continuously reiterates 'theoretical concerns of excessive litigation.
In terms of practical board agenda items, if we examine the disclosed agendas of Samsung Electronics and Hyundai Motors, two of Korea's largest corporates over the recent 18 months, a combined 28 board meetings were convened. From the 91 agenda items across both companies, it's estimated that only 4, or 4% of the total, would be subject to director’s duty of loyalty (as opposed to duty of care). The majority of Samsung Electronics' board agenda items for the first half of 2024, such as “approval of financial statements and business reports, approval of the '24-'26 shareholder return policy, appointment of Samsung Compliance Committee members, approval of directors compensation limits, approval of social contribution matching fund operation plans, establishment of plans regarding safety and health, Q1 reports and quarterly dividends, donation contribution to the Hope 2024 Sharing Campaign,” etc., are important but do not involve conflicts of interest. Therefore, fulfilling the director's duty to care is sufficient.
Meanwhile, the 4 items mentioned above, such as “approval of transactions with related parties, approval of business transactions with affiliates, and approval of transactions between directors, etc., and the company,” have the potential for conflicts of interest. It is estimated that most listed companies practicing ethical management, less than approximately 5% of board agenda items will be subject to director’s duty of loyalty. Even in these matters, the prevailing board practice in Korea has been that the question of ‘harm to minority shareholders’ interests’ is not even discussed. The intention of this Commercial Act revision is to now require, in such cases, that boards examine not just the transaction terms, but also ‘whether the transaction is fair and beneficial to all shareholders.
In the US, for transactions involving conflicts of interest with specific shareholders, legitimacy is ensured only when independent directors (excluding those related to the interested shareholder) and the majority of other shareholders (excluding that interested shareholder) approve it. This is a perfectly feasible practice for Korean companies. In cases where specific shareholders pursue their own gains at the expense of minority shareholder interests like the Samsung C&T merger, Doosan Group restructuring, LG Energy Solution split-off and IPO, and the attempted Hyundai Mobis/Glovis merger, this kind of scrutiny was critically necessary. Yet, under the current Commercial Act and established practices, the minority shareholder rights were completely overlooked. Is the business community truly suggesting they want to continue with this fundamentally flawed system?
Corporate sector argument 2: it will severely restrict corporate activities
This claim is also untrue, or perhaps it reflects a misconception on the part of controlling shareholders and management. Domestic listed companies have already reached a growth plateau and their economic contribution has significantly diminished. According to MSCI, the KOSPI's total shareholder return (TSR) has been a mere 4% annually over the past five years and 5% pa over the past decade. If we exclude the 2% dividend yield, the annual growth is only 2-3%, effectively zero when adjusted for inflation. How can they argue that corporate activities will be severely restricted when growth has already stagnated? This echoes the Bank of Korea Governor's assertion that '1% growth reflects our present fundamentals.' Just as Korea weathered the 1998 financial crisis through rigorous reforms and restructuring, today's chaebols must implement similar governance enhancements, debt reduction, and a focused approach to their business portfolios.
Korean chaebols continue to prioritize 'empire building' for the benefit of their controlling shareholders over generating corporate value through efficient capital deployment. The contrasting ownership structures of 'strong' Coupang, with its streamlined single-listed parent model, versus 'weak' Kakao, burdened by countless subsidiaries and sub-subsidiaries, illustrates this point. TSMC, which has significantly outpaced Samsung Electronics, also maintains a single-listed parent company, a stark difference from Samsung's complex ownership network.
Coupang Shareholding Structure
Kakao Group Shareholding Structure
Samsung Group Shareholding Structure
TSMC Shareholding Structure
Corporate sector argument 3: increased vulnerability from foreign speculative investors
In 2020, during the debate on the previous Commercial Act amendment, which included the introduction of the 3% rule in September 2020, Jung Man-ki, Chairman of the Korea Automobile Manufacturers Association, stated, 'If the proposed Commercial Act amendment is adopted by the National Assembly as it stands, it would be akin to allowing the enemy to infiltrate our military strategy sessions (referring to corporate board meetings) and steal classified intelligence. There has been no instance in the last four and a half years of a foreign fund attempting to forcibly place an external director onto an audit committee. In that same month, the local press (allegedly under pressure from the chaebol clubs), referencing Samsung Electronics, speculated that four major foreign shareholders, BlackRock, Vanguard, Norges, and Capital Group might collude to push for an audit committee appointment.
The business community and industry organizations, which repeatedly claim that the Commercial Act amendment without basis will trigger attacks from foreign activist investors, resemble proponents of the closed-door policies of the Josun Dynasty, which refused trade relations and caused international isolation. Even the National Pension Service and the Korea Investment Corporation (KIC) allocate substantial assets to alternative managers including hedge funds.
The assertion by chaebols that amendments to the Commercial Act will lead to a decline in corporate value is unfounded. Enhanced investor protection through the expansion of directors' duty of loyalty will likely attract increased long-term foreign investment into Korea. The fact that Warren Buffett is increasing his investments in Japan, where governance improvements are substantial, while holding no Korean names, speaks volumes. This Commercial Act revision can be a pivotal moment for restoring 'confidence' in Korean corporates. It will be a catalyst for normalizing Korea's representation within the MSCI EM index, which has dropped below 10% due to severely depressed market valuation (8.5x PER, 0.96x PBR). Korea’s weighting is also less than half of Taiwan's.
March 10, 2025
Korean Corporate Governance Forum,
Chairman, Namuh Rhee
Vice Chairman, Joonbum Cheon
PDF Download : [KCGF Opinion] Three reasons why arguments opposing Commercial Act amendment are fundamentally incorrect
Three reasons why arguments opposing Commercial Act amendment are fundamentally incorrect
- Among 44 recent Samsung Electronics’ board agenda items, only one requires director’s duty of loyalty to avoid conflicts of interest (as opposed to duty of care)
- Listed Korean companies are already suffering from zero growth
as controlling families are distracted and not interested in creating value.
Chaebol’s claim that Commercial Act amendment will hurt economic activities is misleading
- Chaebol club's protectionist view of foreign investors is an embarrassing
The highly anticipated Commercial Act amendment, which was scheduled for approval by the National Assembly main session on February 27th and closely watched by 15 million local retail investors, has been blocked, unfortunately. The bill was withheld, with the justification that 'due to substantial disagreements between negotiating parties, further deliberation is required, according to Woo Won-shik, Speaker of the National Assembly. Despite a unified endorsement of Commercial Act reform by government leaders including the president in 2024, the current administration and the ruling party have reversed their position in recent months, a decision that appears to be influenced by strong lobbying efforts from major corporates and their industry organizations. This reversal is extremely disappointing.
The central aim of the proposed Commercial Act amendment is to safeguard shareholders, the rightful owners of corporations. In response to the provision broadening director’s fiduciary duties from solely 'the company' to 'the company and its shareholders,' the business sector has labeled it a 'destructive overhaul that jeopardizes Korea’s industrial foundation,' expressing fears of operational paralysis due to excessive litigation. They also warn of increased meddling by foreign activist investors and a worsening of the 'Korea Discount'.
These claims are demonstrably false. We have concrete evidence to refute the three main objections to the Commercial Act amendment raised by the chaebol and their lobbying organizations.
Corporate sector argument 1: there are concerns about of a surge in litigation
This fear of excessive litigation is, in our view, groundless. In fact, it’s more likely to be a deliberate exaggeration to obscure the facts. Top legal experts who represent these businesses, are well aware that directors’ fiduciary duties do not encompass routine business operations covered by the duty of care, as evidenced by both legal principles and extensive U.S. court cases. This was definitively clarified in numerous public discussions with our Forum's legal experts last year. Nevertheless, the business community, disregarding this, continues to persistently foster this 'lawsuit nightmare' story in the local media. Specifically, even taking just one step into exploring “why and in what circumstances” such litigation can occur, no logical explanation is offered by them. The response that 'shareholders may hold differing views' is incorrect, as shareholder fiduciary duties do not apply in such instances. Even if shareholders disagree, if a decision results in equal benefits or losses for all, it falls outside the scope of these duties. Similarly, the claim that 'a shareholder could sue a director for damages under civil law, not commercial law, for an illegal act' is also inaccurate. No court would validate such a claim. If such a remote concern exists, it can be easily addressed by explicitly excluding it in the Commercial Act. However, even such a suggestion is rejected as ‘not fitting the Commercial Act framework,’ and the business community continuously reiterates 'theoretical concerns of excessive litigation.
In terms of practical board agenda items, if we examine the disclosed agendas of Samsung Electronics and Hyundai Motors, two of Korea's largest corporates over the recent 18 months, a combined 28 board meetings were convened. From the 91 agenda items across both companies, it's estimated that only 4, or 4% of the total, would be subject to director’s duty of loyalty (as opposed to duty of care). The majority of Samsung Electronics' board agenda items for the first half of 2024, such as “approval of financial statements and business reports, approval of the '24-'26 shareholder return policy, appointment of Samsung Compliance Committee members, approval of directors compensation limits, approval of social contribution matching fund operation plans, establishment of plans regarding safety and health, Q1 reports and quarterly dividends, donation contribution to the Hope 2024 Sharing Campaign,” etc., are important but do not involve conflicts of interest. Therefore, fulfilling the director's duty to care is sufficient.
Meanwhile, the 4 items mentioned above, such as “approval of transactions with related parties, approval of business transactions with affiliates, and approval of transactions between directors, etc., and the company,” have the potential for conflicts of interest. It is estimated that most listed companies practicing ethical management, less than approximately 5% of board agenda items will be subject to director’s duty of loyalty. Even in these matters, the prevailing board practice in Korea has been that the question of ‘harm to minority shareholders’ interests’ is not even discussed. The intention of this Commercial Act revision is to now require, in such cases, that boards examine not just the transaction terms, but also ‘whether the transaction is fair and beneficial to all shareholders.
In the US, for transactions involving conflicts of interest with specific shareholders, legitimacy is ensured only when independent directors (excluding those related to the interested shareholder) and the majority of other shareholders (excluding that interested shareholder) approve it. This is a perfectly feasible practice for Korean companies. In cases where specific shareholders pursue their own gains at the expense of minority shareholder interests like the Samsung C&T merger, Doosan Group restructuring, LG Energy Solution split-off and IPO, and the attempted Hyundai Mobis/Glovis merger, this kind of scrutiny was critically necessary. Yet, under the current Commercial Act and established practices, the minority shareholder rights were completely overlooked. Is the business community truly suggesting they want to continue with this fundamentally flawed system?
Corporate sector argument 2: it will severely restrict corporate activities
This claim is also untrue, or perhaps it reflects a misconception on the part of controlling shareholders and management. Domestic listed companies have already reached a growth plateau and their economic contribution has significantly diminished. According to MSCI, the KOSPI's total shareholder return (TSR) has been a mere 4% annually over the past five years and 5% pa over the past decade. If we exclude the 2% dividend yield, the annual growth is only 2-3%, effectively zero when adjusted for inflation. How can they argue that corporate activities will be severely restricted when growth has already stagnated? This echoes the Bank of Korea Governor's assertion that '1% growth reflects our present fundamentals.' Just as Korea weathered the 1998 financial crisis through rigorous reforms and restructuring, today's chaebols must implement similar governance enhancements, debt reduction, and a focused approach to their business portfolios.
Korean chaebols continue to prioritize 'empire building' for the benefit of their controlling shareholders over generating corporate value through efficient capital deployment. The contrasting ownership structures of 'strong' Coupang, with its streamlined single-listed parent model, versus 'weak' Kakao, burdened by countless subsidiaries and sub-subsidiaries, illustrates this point. TSMC, which has significantly outpaced Samsung Electronics, also maintains a single-listed parent company, a stark difference from Samsung's complex ownership network.
Coupang Shareholding Structure
Kakao Group Shareholding Structure
Samsung Group Shareholding Structure
TSMC Shareholding Structure
Corporate sector argument 3: increased vulnerability from foreign speculative investors
In 2020, during the debate on the previous Commercial Act amendment, which included the introduction of the 3% rule in September 2020, Jung Man-ki, Chairman of the Korea Automobile Manufacturers Association, stated, 'If the proposed Commercial Act amendment is adopted by the National Assembly as it stands, it would be akin to allowing the enemy to infiltrate our military strategy sessions (referring to corporate board meetings) and steal classified intelligence. There has been no instance in the last four and a half years of a foreign fund attempting to forcibly place an external director onto an audit committee. In that same month, the local press (allegedly under pressure from the chaebol clubs), referencing Samsung Electronics, speculated that four major foreign shareholders, BlackRock, Vanguard, Norges, and Capital Group might collude to push for an audit committee appointment.
The business community and industry organizations, which repeatedly claim that the Commercial Act amendment without basis will trigger attacks from foreign activist investors, resemble proponents of the closed-door policies of the Josun Dynasty, which refused trade relations and caused international isolation. Even the National Pension Service and the Korea Investment Corporation (KIC) allocate substantial assets to alternative managers including hedge funds.
The assertion by chaebols that amendments to the Commercial Act will lead to a decline in corporate value is unfounded. Enhanced investor protection through the expansion of directors' duty of loyalty will likely attract increased long-term foreign investment into Korea. The fact that Warren Buffett is increasing his investments in Japan, where governance improvements are substantial, while holding no Korean names, speaks volumes. This Commercial Act revision can be a pivotal moment for restoring 'confidence' in Korean corporates. It will be a catalyst for normalizing Korea's representation within the MSCI EM index, which has dropped below 10% due to severely depressed market valuation (8.5x PER, 0.96x PBR). Korea’s weighting is also less than half of Taiwan's.
March 10, 2025
Korean Corporate Governance Forum,
Chairman, Namuh Rhee
Vice Chairman, Joonbum Cheon
PDF Download : [KCGF Opinion] Three reasons why arguments opposing Commercial Act amendment are fundamentally incorrect