[Who Is the 3% Rule For?] Experts Say "Supplementation Is Meaningless... Abolition Is Preferable"

Property Rights Infringement and Market Economy Violation
Differential Voting Rights Essential if Enforced
Issue with Applying Only to Private Companies

[Asia Economy reporters Changhwan Lee and Jihwan Park] Controversy continues over the '3% rule,' a key element of the Commercial Act amendment proposed by the government and the ruling party. The government and ruling party are determined to pass the amendment during this regular session of the National Assembly, while the business community clearly opposes the 3% rule and several other provisions. Experts from academia and the business sector, in interviews with Asia Economy, unanimously agreed that several provisions including the 3% rule violate constitutional property rights and disregard the fundamental principles of the stock market, making them market economy-contravening policies that should be abolished.

Choi Jun-seon, Honorary Professor at Sungkyunkwan University School of Law, said on the 16th, "The 3% rule completely denies the basic principles of capitalism. Shareholders' voting rights are property rights held by shareholders, and restricting them for unclear reasons is a logic that cannot stand on its own," adding, "This constitutes a violation of constitutional property rights." He further argued, "Since the 3% rule exists only in Korea worldwide, institutional improvement has little meaning, and abolition is desirable."

The government and ruling party plan to amend the Commercial Act to require companies to elect audit committee members at shareholders' meetings. Currently, audit committee members are selected from directors appointed by major shareholders, but under the current system, it is difficult to expect the independence of audit committee members, so the law will be changed to secure independence. The problematic part of the amendment is the provision limiting the voting rights of major shareholders to 3% when electing audit committee members at shareholders' meetings.

Kwon Tae-shin, Vice Chairman of the Federation of Korean Industries, pointed out, "As seen in past attacks on SK by Sovereign and on Samsung by Elliott, speculative capital represented by foreign hedge funds tends to diversify the subjects exercising ownership and voting rights of stocks in multinational forms," adding, "Through so-called share splitting, they can nullify the 3% rule and misuse the newly introduced separate election system for audit committee members to dominate the board and interfere with corporate management, posing a high risk of seeking short-term capital gains."

Vice Chairman Kwon emphasized, "Companies threatened with management rights naturally accumulate assets to avoid risks and postpone investments and new business ventures," adding, "As a result, companies shrink, jobs decrease, and the national economy is negatively affected," and stressed, "The 3% rule must be abolished."

Lee Kyung-sang, Head of the Economic Research Department at the Korea Chamber of Commerce and Industry, also stated, "Limiting voting rights for the appointment of audit committee members, who are board members, infringes on the essential content of shareholder rights and undermines the foundation of the stock company system," adding, "It is difficult to see serious problems with board independence currently, so careful discussion is needed before introducing the system."

Experts agree that if the government and ruling party ignore the business community's opinions and introduce separate election of audit committee members and the 3% rule, companies should at least be provided with minimum safeguards to defend their management rights. Key safeguards mentioned include 'dual-class voting rights' and 'temporary relaxation of the 3% rule,' which are management defense measures allowed in major countries worldwide.

In the United States, the principle of 'one share, one vote' is basic, but the company’s articles of incorporation allow the introduction of dual-class voting rights. For example, Facebook’s Class A and Class B shares have one and ten votes respectively. This is why founder Mark Zuckerberg can manage the company without absolute ownership. Stock options grant existing shareholders the right to purchase shares at prices lower than market value when new shares are issued, if foreign speculative capital attempts hostile mergers and acquisitions (M&A) to threaten management rights.

Professor Jeon Sam-hyun of Soongsil University’s Department of Law emphasized, "The reason Mark Zuckerberg can exercise 60% of voting rights with about 15% ownership is because abroad there is a deep recognition that companies cannot grow without management stability," adding, "Dual-class voting rights should be introduced to prevent management subjects from becoming unclear due to attacks by foreign hedge funds." Lee also said, "If the separate election system for audit committee members must be introduced, at least the 3% voting rights limit for major shareholders should be lifted when speculative funds attempt to enter the board through shareholder proposals," adding, "Even with additional regulations, minimum defensive rights must be guaranteed."

Applying the 3% rule only to private companies is also cited as a problem. Since limiting major shareholders' voting rights in audit appointments is mainly intended to ensure proper auditing of company management, the same logic should apply to public corporations that are not subject to the 3% rule.

Shin Se-don, Honorary Professor of Economics at Sookmyung Women’s University, criticized, "If the government insists on the 3% rule, it should include public interest corporations and entities with significant government shares like the Industrial Bank of Korea," adding, "The audit role is highly specialized, but unqualified people occupy audit positions in public enterprises, preventing proper management and oversight of these companies."

Currently, within the ruling party, measures such as regulating major shareholders through mandatory holding periods or raising the voting rights limit from 3% to around 6% during separate election of audit committee members are reportedly being discussed. Other alternatives include methods like Japan’s audit committee system, where auditors do not have director qualifications or board voting rights and are limited solely to audit duties.