Discussions on revising the Commercial Act to be more favorable to shareholders are expected to intensify at the upcoming year-end regular session of the National Assembly, as the main opposition Democratic Party of Korea (DPK) pushes to pass the amendment before the end of the year.

The DPK is pushing to revise the Commercial Act to expand corporate directors' duty of loyalty to include shareholders, a move aimed at shielding minority shareholders from what it describes as unfair practices by companies run by large, family-owned business conglomerates whose stocks are publicly traded.

However, the business community, the ruling People Power Party (PPP) and the government are wary that the revision could leave Korean companies vulnerable to attempts to wrest control of their management. Nevertheless, the DPK's determination to pass the amendment, even if it means using its parliamentary majority, is poised to ignite political conflict.

The DPK argues that the revision will help boost the value of local businesses by addressing the harm inflicted on minority shareholders during corporate spin-offs and mergers, which are often used to solidify the shareholding of the owner family. The party views this as a major factor behind the so-called "Korea discount."

However, businesses are expressing concerns that expanding directors' duty of loyalty may not stimulate the stock market but could instead hinder corporate management by decentralizing the command structure, potentially doing more harm than good.

Both the government and the ruling party are cautious about revising the Commercial Act and are instead focusing more on amending the Capital Market Act as a way to better protect minority shareholders. The ruling party claims that amending the Capital Market Act is more effective in protecting minority shareholders because it directly targets publicly listed companies, implementing stricter regulations and stronger enforcement mechanisms under the Financial Services Commission's oversight.

DPK ups pressure

DPK Chairman Rep. Lee Jae-myung emphasized the need for fundamental measures to revitalize the domestic stock market, voicing strong support for a revision to the Commercial Act.

“We must block unfair internal transactions where profits are transferred to (chaebol) family members by creating subsidiaries and engaging in improper transactions,” Lee said during the party's Supreme Council meeting, Nov. 6. “It doesn't make sense to allow unfair practices that strip the core assets through the physical division of key businesses.”

He then announced plans to pass the amendment by the end of the year.

Rep. Lee Jae-myung, left, chairman of the main opposition Democratic Party of Korea, meets with Sohn Kyung-shik, chairman of the Korea Enterprises Federation (KEF), at the KEF building in Seoul, Monday. Yonhap

The main opposition party's stronger push for the revision is seen as an attempt to appease the backlash from civic groups and liberal supporters following its recent decision to align with the ruling party and the government in abolishing a proposed tax on income gained through financial investments.

The DPK claims that expanding corporate directors' duty of loyalty to include shareholders by revising the law will prevent boards from making decisions that could harm minority shareholders, such as spinning off and listing core businesses.

A prime example of this was a series of listings by Kakao. After the debut of Kakao Games in 2020, the company listed Kakao Bank in August 2021 and Kakao Pay in November of that year. During this period, Kakao's stock price fell by more than 20 percent within just five months. Kakao Pay, in particular, faced backlash when eight executives sold around 440,000 shares acquired through stock options just a month after the company went public, reaping a profit of 87.8 billion won ($62 million).

In 2021, SK Chemicals also faced significant shareholder criticism over its corporate restructuring. The company spun off its vaccine business into SK Bioscience, which was later listed, and in December of the same year, it separated its industrial energy supply business to form SK Multi Utility.

More recently, controversy arose over the calculation of swap ratios in the planned merger between Doosan Group subsidiaries — Doosan Bobcat and Doosan Robotics.

In order to push ahead with the law amendment, the DPK established an eight-member task force.

DPK floor leader Rep. Park Chan-dae did not rule out the possibility of unilaterally passing the amendment if the government and the PPP oppose it.

“We are determined to see it through and will demonstrate it through clear actions,” Park said.

Controversy and opposition

Experts point out that requiring directors, who are entrusted with authority through a contract with the company, to act in the interests of shareholders does not align with the existing legal framework.

“Adding the concept of shareholders' interests to directors' duties, which already have well-established precedents and practical standards, could create significant confusion in corporate management,” said Kim Kyung-chun, an attorney at Lee & Ko.

Professor Chun Kyung-hoon of Seoul National University School of Law echoed a similar view.

“Shareholders are not in a contractual relationship with directors, so they cannot be the object of duty of loyalty,” he said.

On behalf of the business community, which strongly opposes the DPK's proposal, Sohn Kyung-shik, chairman of the Korea Enterprises Federation, a prominent business lobby group, said during a meeting with the DPK chairman on Monday, “Expanding directors' duty of loyalty to include shareholders could potentially stifle normal business operations.”

The Federation of Korean Industries, another business lobby group, surveyed professors specializing in commercial law at law schools and law departments nationwide last September and found that 62.6 percent of the 99 respondents opposed the amendment, with 65.7 percent of them believing the proposed revision would negatively impact corporate management.

Rep. Kim Sang-hoon, center, the policy chief of the ruling People Power Party, speaks during a press conference at the National Assembly in Seoul, Sunday. Yonhap

The governing party appears to align with the business community. Rep. Kim Sang-hoon, the party's policy chief, emphasized that shareholders encompass a range of entities, including institutional investors, foreign private equity funds (PEFs) and minority shareholders.

“The DPK's bill has a potential issue of infringing on management rights, and in such cases, there are concerns as to whether the interests of minority shareholders can be fully protected,” he said during a press conference on Sunday.

Earlier, he also argued that defining the duty of loyalty to serve the interests of shareholders is inherently contradictory and poses a significant risk of corporate management rights being infringed upon by aggressive hedge funds, such as PEFs.

The government, for its part, is adopting a cautious stance but acknowledges the need to enhance the transparency of governance and decision-making processes within companies to protect minority shareholders and increase corporate value.

Both Finance Minister Choi Sang-mok and Financial Services Commission (FSC) Chairman Kim Byoung-hwan vowed to present a relevant proposal within this year, but did not elaborate on details.

During a press briefing for foreign correspondents in Seoul on Monday, FSC Vice Chairman Kim So-young echoed this sentiment, saying, “There is agreement on the need to improve corporate governance in relation to the advancement of the capital market. However, discussions are still ongoing about the best approach to achieve this, whether the amendment to the Commercial Act is necessary, or if there are other potential solutions.”

The government and the ruling party appear to be focusing more on amending the Capital Market Act rather than the Commercial Act, believing that the controversy over the unfair treatment of minority shareholders during major corporations' business restructuring can be addressed by making a more targeted revision in that area.

“If there is an opportunity to communicate with the opposition party, we could discuss ways to protect shareholder interests in corporate M&As through the Capital Market Act,” the PPP's Kim said.