[Viewpoint] The Absurd Bill Proposed by a Lawmaker Known as an Economic Expert

Choi Jun-seon, Honorary Professor at Sungkyunkwan University School of Law

On the 6th, Lee Yong-woo, a prominent 'economic expert' recognized within the Democratic Party of Korea, proposed the "Special Act on Listed Companies (Listed Company Act)." Among the provisions of this bill is a rather absurd regulation. It states that the largest shareholder of a listed company and their special related parties cannot exercise voting rights on the shares they hold in the listed company when the company’s shareholders' meeting resolves on mergers, spin-off mergers, business transfers, etc., involving the largest shareholder, their special related parties, affiliated companies, and others as prescribed by Presidential Decree (except in cases of 100% ownership).

This regulation will infringe on shareholders' property rights by restricting their voting rights and simultaneously kill the Korean M&A market by regulating mergers and acquisitions (M&A) themselves. Shareholders' voting rights are rights derived from the property rights of shareholders as stock owners. Restricting these rights is a direct infringement on property rights. Recently, Korea’s rule makers have been confiscating citizens' property rights without hesitation. There are countless examples such as the three real estate laws, the forced conversion of Korean Air’s land into parks, the push for legislation on profit-sharing systems, excessive taxation, and the National Pension Service’s interference in corporate management. Reckless infringement on property rights halts citizens' economic activities. The passage of the three real estate laws in the National Assembly immediately stopped real estate transactions.

Infringement on property rights violates citizens' economic freedom and obstructs their economic independence. Citizens without economic independence inevitably succumb to the regime. Venezuela is an example. Infringement on property rights destroys citizens' economic freedom, political freedom, and ultimately annihilates individual dignity. The restriction of the largest shareholder’s voting rights in mergers has theoretical problems first. Under the current Commercial Act, restrictions on voting rights are considered infringements on property rights and are only allowed in very exceptional cases. Under the current Commercial Act, cases where voting rights are restricted can be broadly divided into two categories. First, treasury shares and mutually held shares have no voting rights at all. Also, in resolutions such as appointing auditors or amending articles of incorporation to exclude cumulative voting, no matter how many shares one holds, voting rights can only be exercised within 3% of the total issued shares.

Second, if a shareholder has a special interest in the agenda item at the shareholders' meeting, their voting rights are restricted. The issue is whether the largest shareholder and their special related parties can be considered special interested parties in cases of company mergers, etc. For example, in the merger of Samsung C&T and Cheil Industries, where the merger ratio was set favorably for the controlling family and caused controversy, there is room to consider the controlling family as special interested parties in intra-group mergers. However, a merger is a contract between the two companies intending to merge, and shareholders, whether major or minor, are not direct parties to the contract. Therefore, there is no basis to consider the largest shareholder and their special related parties as special interested parties in the merger contract.

In fact, the current Commercial Act’s provision restricting voting rights of shareholders with special interests is itself absurd and not found in other countries. It is unclear what it means to consider shareholders, who are not directors, as special interested parties, and the grounds for restricting voting rights are unclear. It is rare in other legislation to preemptively deprive shareholders of voting rights simply because they are presumed to have an interest in the resolution. How can shareholders exercising their property rights be considered special interested parties? This is fundamentally inconsistent with the basic principles of the Capital Market Act.

Countries that are bastions of liberalism such as the UK and the US, as well as Germany and Japan, do not recognize preemptive exclusion of voting rights except in a few exceptions. This is because infringement on property rights is extremely dangerous. Instead, they adopt a post-control method that invalidates resolutions only when the participation of special interested parties results in manifestly unfair outcomes. For example, Japan’s Company Act recognizes a post-remedy called "lawsuit to cancel shareholders' meeting resolutions" when special interested parties’ participation leads to manifestly unfair resolutions. Lee’s Listed Company Act proposal goes even further by unconditionally blocking the largest shareholder’s voting rights in mergers in advance. This will become another Galapagos-like regulation that will be laughed at worldwide, like the voting rights restriction during auditor appointments. Is this really the same person who was CEO of KakaoBank?