Meeting with Lee Bok-hyun in the Business Community... Key Issues: Easing Director Liability and Tax Reform

Corporate-Centered Value-Up Policy Seminar to Be Held on the 26th
Agenda Set from Business Community Perspective... Likely Three Topics
Amendments to Commercial Act: Director's Duty of Loyalty, Inheritance Tax, Defense Measures, etc.

A seminar on value-up (corporate value enhancement) policies centered on companies is scheduled for the 26th, with the easing of director responsibilities following amendments to the Commercial Act expected to be a major agenda item. Additionally, tax reforms such as the rationalization of inheritance tax, which currently has a top rate of around 50%, and concerns over the lack of management rights defense measures will also be addressed.

According to the government and the financial investment industry on the 18th, a seminar will be held on the 26th, hosted by the Korea Listed Companies Association, the KOSDAQ Association, and the Korea Economic Association. The main panelists have not yet been decided, and the event will be attended by Lee Bok-hyun, Governor of the Financial Supervisory Service. This seminar was arranged as a counterbalance to the 'Corporate Governance for Capital Market Advancement' policy seminar jointly hosted by the Korea Capital Market Institute and the Korean Securities Association on the 12th.

A key agenda item is the easing of director responsibilities following the introduction of directors' duty of loyalty under the Commercial Act. At the beginning of the year, President Yoon Suk-yeol’s remarks on 'amending the Commercial Act' sparked calls for strengthening shareholder rights. The current Article 382-3 of the Commercial Act specifies the 'duty of loyalty' only to the 'company,' and there was growing support for adding 'shareholders' to this provision. However, the Ministry of Justice, the main department responsible for the Commercial Act, drew a line by stating that it is an "abstract and declarative provision," putting the matter to rest for the time being. Nevertheless, following the Presidential Office’s criticism that the corporate value-up policy has had minimal effect, the Ministry of Economy and Finance and others have begun reconsidering the policy. Governor Lee Bok-hyun of the Financial Supervisory Service has been a proponent of the necessity of amending the Commercial Act from the start. Deputy Prime Minister and Minister of Economy and Finance Choi Sang-mok also officially announced at a press briefing on the 27th of last month that they are considering amending the Commercial Act.

The business community has expressed concerns that the introduction of the duty of loyalty could increase directors' liabilities. According to a recent survey by the Korea Chamber of Commerce and Industry targeting domestic listed companies, 61.3% of respondents said that expanding directors' duty of loyalty under the Commercial Act would lead to an increase in shareholder derivative lawsuits and criminal charges for breach of trust. Kim Chun, head of the Korea Listed Companies Association, argued at the Capital Market Institute and Securities Association seminar on the 12th that "introducing directors' duty of loyalty to shareholders is ambiguous in meaning and difficult to operate as a standard for directors' actions in specific situations, so it should be carefully reviewed." The financial authorities also partially sympathize with these concerns from the business community. Governor Lee stated at a briefing on the 14th regarding the Commercial Act amendment issue that there is a need to abolish the crime of breach of trust. Given the current ambiguity of the standards for breach of trust under the Criminal Act, he said that discussions should be held "as a package with the amendment of the Commercial Act" to alleviate concerns arising from strengthening directors' responsibilities. This is a more progressive stance than his explanation on the 12th that "the business judgment rule should be explicitly institutionalized." However, Governor Lee added a caveat that "this is not a matter agreed upon within the government," indicating the need for coordination of differing opinions within the government.

Another major agenda is expected to be tax reform, including inheritance tax. The business community has long argued that to enhance value-up, the burden of inheritance tax, which is among the highest in the world, must be reduced first. The argument is that major shareholders tend to suppress stock price increases to pay less tax during inheritance and gifting, which causes the Korea discount (undervaluation of the Korean stock market). Currently, South Korea’s top inheritance tax rate is 50%, and with the major shareholder surcharge system applied, it reaches 60%, which is high even by global standards. The Presidential Office has also stated that it will pursue tax reform by lowering the inheritance tax rate to the level of the Organisation for Economic Co-operation and Development (OECD). Sung Tae-yoon, Policy Chief of the Presidential Office, appeared on KBS's 'Sunday Diagnosis' on the 16th and publicly expressed this intention, saying, "Tax-related reform work is absolutely necessary." The current OECD average rate is about 26%. Before preparing the tax law amendment bill in July, the Ministry of Economy and Finance and others plan to sufficiently gather opinions.

The lack of management rights defense measures is also one of the difficulties companies have been voicing. Typically, the financial investment industry understands corporate governance improvement as a process of raising corporate value through communication between shareholders and companies. In this process, activist funds actively voice their opinions to companies through shareholder actions. Recently, in Korea, there have been more direct expressions of willingness to participate in management through the appointment of outside directors and non-executive directors. However, there have been complaints that Korea has limited and ineffective management rights defense measures to counter external attacks, such as dual-class voting rights and poison pill mechanisms.