YOON&YANG

On July 3, 2025, the National Assembly of Korea passed a set of significant amendments to the Korean Commercial Code aimed at enhancing corporate governance and shareholder equality. Based on subsequent debates following the previous presidential veto of April 2025, the new amendment embodies significant changes to corporate governance featured by (i) expansion of fiduciary duty of directors vis à vis the shareholders as well as the company, (ii) a narrow increase of the required number of independent directors which forewarns further potential amendments to secure substantive independency of the board, (iii) application of the aggregated 3% rule to appointment of all members of the audit committee which would create ripples in the board composition and operation, and (iv) introduction of electronic shareholder meetings which is mandatory to large scale public companies. This package of amendments is expected to have significant impact upon how companies operate, take steps in making decisions, fulfill compliance requirements, and engage with shareholders.

1.Directors’ Duty of Loyalty Expanded vis à vis Shareholders

2.One-third Requirement of Independent Directors in Public Companies

3.Application of the Aggregated 3% Restriction for All Audit Committee Members

4.Mandatory Electronic Shareholder Meetings for the Large-scale Public Companies

1. Directors’ Duty of Loyalty Expanded vis à vis Shareholders

Under the amended Article 382-3, directors’ duty of loyalty, previously owed only to the company under the code, is expanded to expressly include shareholders. Additionally, directors are now explicitly required to protect the interests of the shareholders in general and treat all shareholders fairly and equally in performing their duties. This amendment is expected to take effect immediately upon promulgation, which is expected to occur before within July or August 2025.

Key Implications

•Directors must now carefully balance the interests of the company and shareholders, particularly under the situations involving corporate restructuring, mergers and acquisitions, capital transactions, takeover bids and management disputes.

•Directors face higher litigation risk, for the minority shareholders may bring claims directly against directors on the basis of alleged breaches of the expanded duty vis à vis all shareholders, particularly in the circumstances where the interests of the company and shareholders deviate from each other (e.g., a director’s act appears to be neutral to the company and yet causing unfair prejudice to certain shareholders).

•Directors must be cautious of exposure to a heightened risk of criminal liability, for the breach of the expanded duty may lead to criminal prosecution if it results in self-benefit or benefiting third parties (e.g., frequently major shareholders or the managements) at the cost of unfair loss of other shareholders.

Suggested Actions

In light of the upcoming changes, the companies are well advised to:

•conduct proactive compliance assessments of procedural and substantive fairness, and proactively engage external counsel when undertaking significant business decisions to mitigate exposure to potential disputes which might otherwise be escalated to civil and/or criminal actions;

•implement clear internal policies and enhanced director training programs to clarify the scope of directors’ fiduciary duties owed to shareholders as well as the company itself and reinforce the level of shareholders’ trust in the business operations and the management’s business decisions;

•consider establishing independent special committees on an ad-hoc basis consisting of disinterested directors to review and oversee transactions at hand and the matters relating to fair market value involving potential conflicts of interest among shareholders and/or the management; and

•enhance shareholder communications and IR program, and adopt shareholder friendly policies to procure support from shareholders and investors with regard to business operations and managerial decisions.

2. One-third Requirement of Independent Directors in Public Companies

Under the amended Article 542-8, “outside directors” are now renamed as “independent directors.” The independent directors are expected to perform their functions independently from inside directors, executive officers, and any person who directs business operations. For public companies, the minimum number of independent directors is raised from a quarter to one-third of the board. This amendment is expected to take effect one year after promulgation which is speculated to be around July or August 2026.

Key Implications

•The amendment aims to reinforce the board’s oversight function by requiring public companies to appoint directors who are substantively independent from the possible influence of the management and controlling shareholders.

•The large-scale public companies in Korea with total assets of KRW 2 trillion or more (approximately USD 1.47 billion) have been already required to have 3 or more “outside” directors which should be majority of the board.

•One might call it a narrow increase in number with mere change of name to “independent” directors, for there is no additional change in qualification of the “independent” directors at this time. However, this amendment sets an alert to possible further legislation which would potentially diversify models for qualification and procedural requirements of appointing independent directors by benchmarking the best practices in other jurisdictions (e.g., minority shareholder involvements in appointment of independent directors including the minority veto, minority proposal or affirmative minority resolution).

Suggested Actions

To prepare for these changes, the Korean companies will need to:

•reassess corporate governance structure to align with the requirements in board composition and to ensure their substantive independency from the management and controlling shareholders; and

•establish procedures and protocol for appointment of genuinely independent directors to better achieve shareholder equality and fairness by applying standards that would ensure substantive independency of the board.

3. Application of the Aggregated 3% Restriction for All Audit Committee Members

Under the amended Article 542-12, the large-scale public companies (with total assets of at least KRW 2 trillion) will now be required to apply the so-called “aggregated 3% rule” (which limits the voting rights of the largest shareholder in aggregation with its specially related persons to 3%, in contrast to all other shareholders whose voting rights are individually subject to 3% limit on a non-aggregation basis) when electing each and every member of the audit committee. The amended provision will take effect one year after promulgation which is speculated to be around July or August 2026.

The audit committee has been mandatorily required for large-scale public companies, and optional for other companies. The audit committee consists of 3 or more directors, of which 2 or more should be outside directors (which will now be called an independent director). Before the amendment, the aggregated 3% rule applied only to the election of audit committee members who were not outside directors. This provision served as the ground upon which the largest shareholder could effectively avoid the aggregated 3% rule by filling all members of the audit committee with outside directors, which will no longer be the case under the new amendment. 

When applied together with another provision which requires that at least one director who will serve as the audit committee member shall be separately elected at the time he or she is elected as the director (as opposed to an election for audit committee members among the elected directors)(i.e., a “separate election” requirement), the new amendment has practical importance in that it significantly increases the possibility of at least one director serving as the audit committee member being elected against the vote of the largest shareholder who is subject to the aggregated 3% rule. Indeed, a critical debate continued as to the possible increase of this separate election requirement to two or more directors and audit committee members, which is yet open for further discussion for future amendments.

Key Implications

•The application of the aggregated 3% rule to all audit committee members would significantly increases the potential influence of the second or third largest shareholders, minority shareholders, institutional investors, and activist funds in the election of at least one director serving as the audit committee member.

•If nominees backed by minority shareholders or activist funds secure seats on the board and the audit committee, the committee is likely to exert a more independent and active oversight, potentially resulting in heightened scrutiny of management.

•Yet, increased oversight by audit committees may lead to potential conflicts or disputes within the management and the board, delay in decision-making, and a higher risk of corporate governance-related disputes and hostile takeover attempts.

•Attention is called to directors who are now subject to the enhanced duty of loyalty vis à vis shareholders, for they will be required to weigh the interests of the company, the shareholder in general, and the shareholder equality and fairness in every aspect of the acts of the board and the audit committee, particularly where there are advocates of the conflicting interests which could possibly deviate from the best interest of the company.

Suggested Actions

•The large-scale public companies, particularly those with substantial ownership concentration among controlling shareholders, should proactively develop strategies to address the increased influence of the runner ups, minority shareholders, institutional investors, and activist funds in election of the directors and the audit committee.

•Companies should review and update internal governance regulations to align with the enhanced independency and authority of audit committees, closely monitor ongoing legislative and policy developments aimed at improving minority shareholder representation, and take necessary steps to renovate governance frameworks and enhance management accountability.

4. Mandatory Electronic Shareholder Meetings for the Large-scale Public Companies

Under the amended Articles 542-14 and 542-15, large-scale public companies must convene shareholders’ meetings in a hybrid electronic format, which requires that the shareholders shall be able to choose between (i) attending in-person at the meeting venue or (ii) if physical attendance is not feasible, participating and voting remotely by electronic method on a real-time basis. This amendment is expected to take effect on January 1, 2027.

Summary of Key Amendments

•Public companies other than the large-scale public companies may, at their discretion and unless prohibited by their articles of incorporation, conduct shareholders’ meetings allowing a part of the shareholders to participate and vote remotely by electronic method.

•Large-scale public companies must hold hybrid electronic shareholders’ meetings;

•Participation through electronic shareholders’ meetings has the same legal effect as physical attendance at the meeting venue.

•Electronic shareholders’ meetings must enable shareholders to participate in deliberations and vote on a real-time basis.

•Companies may retain a professional management entity for the operation of electronic meetings to ensure efficient and fair management.

•Companies must retain electronic meeting records for five years from the date of the meeting, and provide shareholders with access to electronic meeting records at the company’s headquarters for no less than three months following the meeting.

Key Implications

•The new amendment introduces the “participatory hybrid electronic shareholder meeting,” in which virtual participants in parallel with the physical attendants are legally recognized as attending the meeting, with full rights to vote electronically on a real-time basis.

•Companies will likely encounter a range of legal and technical challenges, including personal date protection and privacy concerns related to shareholder identity verification and data retention, preventive measures to manage the risk of duplicate voting or improper proxy voting and other potential disputes over the validity of resolutions due to network disruptions or technical failures.

Suggested Actions

Companies subject to hybrid shareholder meeting requirements should:

•take steps to secure technical infrastructure incorporating authentication methods (such as encryption and multi-factor authentication), appropriate network security measures, stress-testing, penetration testing, and real-time incident monitoring system to ensure compliance readiness;

•develop and adopt detailed internal governance rules and procedural manuals for electronic shareholders’ meetings, clearly outlining contingency measures for technical failures and delineating the chairperson’s authority regarding meeting adjournments, suspensions, or postponements; and

•proactively consider engagement with external service providers to ensure effective risk management and compliance, especially if the companies lack internal technical resources and capabilities.

Conclusion

The new amendment represents a substantial shift in Korea’s corporate governance framework. All companies should be aware of the scope of the changes, assess their internal governance and compliance frameworks, and implement timely measures to minimize potential risks and effectively navigate through the evolving compliance landscape. A special attention and alert are called for the large-scale public companies which are subject to the aggregated 3% rule for the audit committee and the electronic shareholders’ meeting requirements. Potential minority representation at the board and the audit committee should now be regarded as a constant, not a variable.

Given the explicit addition of fiduciary obligations vis à vis shareholders, the director should always cast questions of whether any of the board decision would affect the interest of any shareholder, whether there is any conflict of interests affected by the decision, and whether any such conflicts could be resolved or mitigated with any measure incidental to the decision.