Writing Reports and Responding to Revised Commercial Act... Companies Preparing for General Meetings Face Deep Concerns

[Asia Economy Reporter Hwang Yoon-joo] As the general shareholders' meetings (GSM) approach at the end of March this year, concerns among listed companies are growing. This is because, amid ongoing COVID-19 quarantine obligations and risks of insufficient quorum, new obligations such as the 'prior provision of business and audit reports' and the 'separate election of audit committee members' are being implemented from this year.

According to a survey conducted by the Korea Chamber of Commerce and Industry targeting 308 listed companies holding their GSMs at the end of March, the main issues and difficulties were ▲ burden of prior provision obligation for business and audit reports (59.1%) ▲ burden of COVID-19 quarantine obligations (36.4%) ▲ risk of insufficient quorum (17.5%) ▲ disputes related to the appointment of directors and auditors (12%).

From this year, companies must provide finalized business and audit reports to shareholders as well as the Financial Services Commission and stock exchanges in advance. Until last year, companies provided reports on-site and submitted them to supervisory authorities by the end of March after reflecting any amendments. However, from this year, reports must be provided to shareholders at least one week in advance. For a GSM held on March 23, the reports must be finalized and disclosed by March 16, effectively moving the deadline 15 days earlier.

As a result, three out of four listed companies (76%) reported difficulties (no difficulties: 23.4%, no response: 0.6%). The main difficulty was the scheduling burden due to early finalization of external audit reports at 67.2% (no related difficulties: 31.2%, no response: 1.6%). Additionally, 50.6% of companies anticipated a wave of correction disclosures later, as many contents cannot be finalized in time.

Another burden for this year's GSM is the newly established obligation for the separate election of audit committee members. The Commercial Act was amended so that when electing directors who serve as audit committee members, the voting rights of major shareholders are recognized only up to a maximum of 3%. In fact, in this survey, one in three listed companies (36%) responded that the separate election of audit committee members has a negative impact (serious impact: 6.5%, some impact: 29.5%). Conversely, only 4.2% responded that it has a positive impact (positive impact: 4.2%, no impact: 57.5%, no response: 2.3%).

Regarding this, 33.1% of respondent listed companies expected shareholder rights exercise to strengthen compared to last year (not strengthened: 66.9%). The main actors exercising these rights were minority shareholders (79.4%), institutional investors (14.7%), and hostile forces such as activist funds (5.9%) in that order.

Especially among companies whose audit committee members’ terms expire and need to be newly appointed at this GSM, more than half (54.5%) anticipated difficulties, indicating a significant burden from the amended Commercial Act. (No difficulties: 36.4%, no response: 9.1%). The difficulties cited included ‘possibility that desired candidates may not be elected due to voting rights restrictions’ (31.8%) and ‘difficulty securing a talent pool as the rule is implemented immediately without a grace period’ (27.3%).

The amendment to the Commercial Act is also expected to increase the number of companies adopting electronic voting systems. By adopting electronic voting, companies can be exempted from the general GSM resolution requirement of ‘approval by at least one-quarter of total shares,’ thus avoiding quorum shortage issues. In fact, 46.1% of companies have already adopted electronic voting, and among them, 29.9% said they will introduce or consider introducing electronic voting at this year’s GSM.

Meanwhile, difficulties related to designated auditors were also significant. The designated external auditor system, which has been in effect since last year, requires that if a listed company freely appoints an auditor for six consecutive years, the Securities and Futures Commission will designate the auditor for the next three years. Among respondent companies, 45.5% were designated this year, and of those, 54.3% reported experiencing difficulties due to the auditor designation. Difficulties included ‘strict audits even on matters not previously questioned by former audit firms’ (37.1%) and ‘insufficient understanding of the company by the new audit firm’ (32.9%).