[Q&A] Kim Byunghwan: "Commercial Law is a General Law... Legal Aspects and Impact Must Be Discussed Carefully"

Financial Services Commission Chairman Holds Briefing at Government Seoul Office on 2nd
Direct Explanation "Will Seek Market Understanding"
Achieving Effective Shareholder Protection through Capital Market Act Amendment

Financial Services Commission Chairman Kim Byung-hwan is speaking at the briefing on "Directions for Amending the Capital Markets Act to Strengthen Protection of Common Shareholders' Interests," held at 10 a.m. on the 2nd at the Government Seoul Office. Photo by Financial Services Commission

On the 2nd, Kim Byung-hwan, Chairman of the Financial Services Commission, emphasized, "The Commercial Act is a general law applicable to all companies, so amendments to the general law must be discussed deeply and carefully from both legal and impact perspectives."

Chairman Kim held a briefing at 10 a.m. at the Government Complex Seoul on the direction of amendments to the Capital Market Act to strengthen the protection of general shareholders' interests, explaining the background of shifting from amending the Commercial Act to amending the Capital Market Act.

Kim explained, "Even if laws are amended with good intentions and goodwill, we have often witnessed cases where unintended side effects significantly undermine the meaning of the system reform," adding, "Considering this, we have prepared an amendment to the Capital Market Act to protect general shareholders."

The main content establishes a special provision for shareholder protection principles, applying to about 2,500 companies listed on the domestic KOSPI and KOSDAQ. The applicable acts include ▲mergers ▲transfer of significant business or assets ▲comprehensive stock exchanges or transfers ▲splits and split mergers, which are four types of capital transactions stipulated in Article 165-4 of the Capital Market Act. Additionally, when a listed company undergoes a merger, the board of directors must prepare and disclose an opinion statement regarding the purpose, expected effects, and appropriateness of the valuation of the merger.

The Financial Services Commission will consult with the ruling party on this amendment to the Capital Market Act and propose it as a member's bill. The government plan is scheduled to be submitted to the National Assembly this week.

The following is a Q&A with Chairman Kim Byung-hwan, Senior Deputy Governor Lee Se-hoon of the Financial Supervisory Service, and Legal Affairs Director Koo Sung-yeop of the Ministry of Justice.

- Are you planning to continue with the policy of pinpoint regulations on problematic parts rather than a comprehensive amendment of the principles?

▲The Commercial Act is fundamentally a general law. Rather than amending the Commercial Act amid controversy, it may seem limited, but most cases of insufficient protection of general shareholders in the capital market so far have been related to financial transactions. Including financial transactions in this amendment is very meaningful. By including a provision that the board of directors must strengthen efforts to protect shareholders, I believe the intent of the duty of loyalty of directors under the Commercial Act currently under discussion can be substantially reflected.

- What happens if these duties or responsibilities are not fulfilled?

▲There are procedural regulations for mergers, etc. When these are violated, supervisory measures apply. Since external evaluations must be conducted and disclosed, supervisory measures will be applied, ensuring effectiveness. The scope of supervisory measures will likely be further discussed in the National Assembly.

- Do you think the market will be satisfied?

▲The current discussion has mainly focused on amending the Commercial Act, so alternative discussions were insufficient. I hope today's explanation will help alleviate many market concerns through amendments to the Capital Market Act and gain understanding. Amending the Commercial Act also raises concerns about the sustainable development of the capital market, which we will explain to investors.

- You mentioned submitting the bill this week. How much behind-the-scenes discussion has taken place with the opposition and the National Assembly? Are you considering the possibility of passage?

▲This is something that needs to be discussed in the National Assembly. The Commercial Act is currently under discussion in the Legislation and Judiciary Committee, and the Capital Market Act will be discussed in the Political Affairs Committee once submitted. I don't know what the framework will be, but there will be a process of joint discussion. Currently, there are no behind-the-scenes discussions. We will present this alternative and have a discussion in the National Assembly.

From the left, Koo Sang-yeop, Legal Affairs Director of the Ministry of Justice, Kim Byung-hwan, Chairman, and Lee Se-hoon, Senior Deputy Governor of the Financial Supervisory Service

- The Financial Services Commission has proposed the Capital Market Act alternative, but I understand there are many discussions under the Commercial Act. How far will the Ministry of Justice keep the discussion table open?

▲After several working-level meetings between the Ministry of Justice and economic departments, the key point was the need for effective shareholder protection. The bill on general provisions in the Commercial Act approaches from the perspective of benefits and harms. However, whether it is beneficial or harmful is a substantive issue that courts, up to the Supreme Court, must decide. While directors are aware of legal risks, it is questionable whether this can serve as a practical remedy for shareholders.

However, the government proposal specifies this not as a simple substantive provision but as a procedural provision requiring efforts to protect shareholders, addressing the issue of government asymmetry. No matter how many remedies are prepared, shareholders must fulfill the burden of proof and assertion to realize legal responsibility. As long as government asymmetry exists, it is difficult to realize this regardless of provisions in the Commercial Act, punitive damages, or class actions.

According to the government proposal, detailed procedural provisions allow shareholders to hold legal responsibility. Conversely, if companies or directors leave sufficient grounds, predictability regarding exemption increases. This enhances enforceability and predictability for both shareholders and companies.

Regarding other Commercial Act issues, as mentioned several times, we are promoting basic measures such as electronic general meetings and expanding stock purchase rights. However, duties of loyalty under the Commercial Act represent a significant change in our legal system, so sufficient social discussion and consensus formation are desirable.

- How do you plan to address damages to general shareholders caused by third-party allotments or disposal of treasury stocks?

▲There are concerns about small shareholders being harmed by third-party allotments or sudden large capital increases. We need to consider whether these issues should be resolved legally or institutionally. However, we will examine whether there are institutional improvements to prevent unfair practices in these areas.

- Since there were few sanctions for harming general shareholders as long as procedures were followed, the amendment to the Commercial Act was proposed. If procedural regulations are imposed, cases may still arise where general shareholders' interests are harmed while following codes of conduct. What is your view on this?

▲Chairman Kim mentioned a major change in replacing the mechanical tool for calculating fair value in mergers and splits. Secondly, procedural provisions addressing government asymmetry are included. The economic departments and Ministry of Justice are studying detailed guidelines. If behavioral guidelines are issued, it will be a significant change, effectively working for shareholders and companies.

We need to consider why such issues occur in Korea but not abroad. I believe corporate culture is important. To change corporate culture, strict but balanced law enforcement can serve as a catalyst. However, since judicial decisions are ultimately required, this is a matter for law enforcement agencies, judiciary, companies, shareholders, and consumers to consider together.

▲Recently, a company faced controversy over insufficient shareholder protection in a merger case. In mergers between affiliates, fair value can be mechanically determined by a standard price. No other country uses a standard stock price method like ours to set merger ratios. It is crucial for companies to evaluate fair value genuinely and persuade and explain to shareholders. Primarily, this will establish a culture, practice, and system where companies disclose how the selected fair value was determined and explain it to shareholders.

- Some in academia mention including directors' duties of loyalty in the Capital Market Act if amending the Commercial Act is difficult. What is your opinion?

▲During the Securities Exchange Act era, governance provisions for listed companies were mainly in the Securities Exchange Act. However, with the Capital Market Act, governance content was unified under the Commercial Act. Including this in the Capital Market Act would disrupt this system. However, the current Capital Market Act has special provisions related to capital transactions. Since there have been institutional problems in protecting minority shareholders, including such provisions as in the government proposal can achieve significant effects.

- Please explain in detail the reason and background for Financial Supervisory Service Governor Lee Bok-hyun's change of opinion from discussing the Commercial Act until last week's back briefing.

▲No one would deny the broad framework that the interests of general shareholders should be protected when coordinating various stakeholders around companies. In this sense, the Financial Supervisory Service Governor also proposed amending the Commercial Act or abolishing breach of trust as one alternative. After gathering opinions from various sectors, it was judged that the amendment to the Capital Market Act is the best way to minimize unexpected side effects and achieve the intended regulatory effect.