[Who Is the 3% Rule For?] Auditor Appointment Chaos at Every General Meeting of Shareholders

[Asia Economy Reporter Song Hwajeong] "This year again, we failed to appoint auditors due to the 3% rule. Every year during the shareholders' meeting season, we are in an emergency to secure the quorum."

Every year, listed companies suffer from a crisis in appointing auditors during the shareholders' meeting season. This is because of the 3% rule. Despite difficult economic conditions and challenging business management situations, companies have to fight against outdated 'regulations' to appoint auditors.

According to the Korea Listed Companies Association and the KOSDAQ Association on the 15th, among 2,029 listed companies with December fiscal year-end, 340 companies had their agenda rejected at the last regular shareholders' meeting due to failure to meet the quorum. This accounts for 16.8% of the total. Compared to 3.7% in 2018 and 9.4% last year, this is a significant increase. In particular, 315 listed companies failed to appoint auditors and audit committee members due to insufficient quorum, accounting for 92.6% of all rejected agendas. The number of rejected auditor and audit committee appointments increased from 56 cases in 2018 to 149 cases last year, and 315 cases this year, showing a steep annual increase.

This auditor appointment crisis is due to the 3% rule. Under the Commercial Act, major shareholders are prevented from reappointing auditors, and to reflect the opinions of minority shareholders in auditor appointments, the voting rights of major shareholders and their related parties are limited to 3% during auditor appointments. The resolution requirements for shareholders' meetings are approval by at least one-quarter of the total issued shares and a majority of the shares present. In other words, to pass an agenda, shareholders holding 25% of voting shares must attend. It is not easy to gather 22% of votes excluding the major shareholder's 3%, which causes the annual auditor appointment crisis to recur. Especially, with the abolition of 'shadow voting' (proxy voting) that used to exercise voting rights in proportion to the approval ratio at the shareholders' meeting to make up for the insufficient quorum, appointing auditors at shareholders' meetings has become even more difficult.

A KOSDAQ company official said, "Small and medium-sized listed companies struggle to focus on management such as technology development and securing sales channels, and it is common for all employees to travel nationwide to find shareholders scattered across the country to delegate voting rights during shareholders' meetings," adding, "Regulations like the 3% rule should be significantly relaxed so that companies can concentrate on business activities."

Another official emphasized, "Even when using companies that handle proxy voting during the shareholders' meeting season, there are cases where sufficient voting rights cannot be secured," and stressed, "It is necessary to consider an exceptional application of the 3% rule at least for small and medium-sized enterprises."