Directors' Duty of Loyalty Expanded to 'Shareholders'
Ruling Party: "Management Will Be Difficult"
Opposition: "Part of Yoon Administration's Value-Up"
Business Community: "Serious Side Effects Feared"
People Power Party: "Request Immediate Veto"
The amendment to the Commercial Act, which expands the scope of the 'duty of loyalty of directors' to include all shareholders, passed the National Assembly plenary session on the 13th. The People Power Party opposed the amendment, arguing that it infringes on corporate autonomy and could significantly hinder management activities such as investment, but the bill was passed under the leadership of the opposition parties.
On the afternoon of the same day, the National Assembly announced that the partial amendment to the Commercial Act was approved with 184 votes in favor, 91 against, and 4 abstentions out of 279 members present. The core of the passed amendment is to expand the duty of loyalty of directors (Article 382-3 of the Commercial Act) from the existing 'company' to 'company and shareholders.' Under the current law, directors only owe a duty of loyalty to the company, but the amendment aims to extend this duty to shareholders as well, thereby protecting minority shareholders.
The amendment had been scheduled for a plenary session vote on the 27th of last month, but the Speaker of the National Assembly, Woo Won-sik, postponed the vote to allow further negotiations between the ruling and opposition parties. The Democratic Party set a firm stance to pass the amendment during this session. Jin Seong-jun, the Democratic Party's Policy Committee Chair, stated at the party's policy coordination meeting, "By expanding the duty of loyalty of directors, we will improve the corporate governance structure that has been concentrated on major shareholders and enhance the rights and interests of minority shareholders. This amendment will be the starting point to resolve the Korea discount, a chronic problem in our securities market."
The amendment passed on this day includes only part of the bills promoted as party policy by the Democratic Party. Initially, the Democratic Party's amendment included not only the expansion of the duty of loyalty to shareholders but also provisions for expanding the separate election of audit committee members in large listed companies and mandating cumulative voting systems in large listed companies. However, these were excluded from the plenary session due to opposition from the government, ruling party, and business circles.
The provision to expand the separate election of audit committee members requires that instead of major shareholders selecting audit committee members from among directors they appoint, independent audit committee members be elected separately. The Democratic Party believes this will strengthen the independence of audits by restraining major shareholders.
Additionally, mandating the cumulative voting system grants voting rights equal to the number of directors to be appointed per share when electing two or more directors. For example, if three directors are to be elected, a shareholder holding one share can cast three votes and concentrate them on a single candidate. This increases the likelihood of electing directors recommended by minority shareholders. However, there are concerns that hedge funds might exploit this system for short-term profits, contrary to the amendment's intent. The business community is reportedly more attentive to provisions like the mandatory cumulative voting system than to the expansion of the scope of directors passed by the National Assembly on this day.
Plenary Session Debate... Ruling Party: "Management Will Be Difficult" vs Opposition: "Includes Yoon Administration's Value-Up"
Before the plenary vote, the ruling and opposition parties showed differing opinions during the debate. Choi Eun-seok, a People Power Party lawmaker, criticized, "This amendment is another typical populist bill that ruins the future of the Republic of Korea, like the so-called Yellow Envelope Law, the 250,000 won cash handout law, the Semiconductor Special Act excluding the 52-hour exception, and the Grain Management Act." He added, "Corporate innovation that treats all shareholders fairly and satisfies all shareholders is impossible from the start. So why force companies to do that?"
In response, Lee So-young of the Democratic Party said, "There are claims that shareholders will file excessive lawsuits if the amendment passes, but this is exaggerated. Concerns about excessive litigation arise whenever shareholder rights protection systems are introduced, but due to established business judgment rules and the difficulty of proof in precedents, actual lawsuits are limited." She also countered, "It is said that attacks by speculative capital and activist funds will intensify, but if the amendment passes, long-term investors will come in. Once the Korea discount is resolved, the likelihood of funds seeking short-term profits entering will be much lower."
Yoo Sang-beom of the People Power Party opposed the amendment again, stating, "In corporate management, where the majority rule principle is fundamental, it is an unrealistic ideal to believe that the interests of major shareholders, minority shareholders, and hedge funds, all with different interests, can be fully protected."
Oh Ki-hyung of the Democratic Party emphasized that the amendment is part of the value-up initiative promoted by President Yoon Seok-yeol. Oh said, "Early last year, the government announced measures for capital market value-up centered on the Financial Services Commission. The amendment to the Commercial Act to protect minority shareholders was set as a national task." He added, "President Yoon also mentioned it, and Deputy Prime Minister Choi Sang-mok said he would follow suit with the amendment. So if the Democratic Party proposes the same thing, is it 'not allowed'? Is this opposition for the sake of opposition?"
Speaker Woo Won-shik is presiding over the plenary session held at the National Assembly on the 13th. 2025.3.13 Photo by Kim Hyun-min
Business Community: "Serious Side Effects Feared"
The Korea Economic Federation and three other major economic organizations issued a statement expressing concern immediately after the passage of the amendment in the National Assembly plenary session. The Korea Economic Federation said, "If the duty of loyalty of directors is expanded to shareholders, the frequent lawsuits by shareholders claiming disadvantages in management decisions will disrupt mergers and acquisitions and large-scale investments, inevitably hindering the long-term development of companies," and added, "We hope that the right to request reconsideration (veto power) will be exercised regarding the amendment to the Commercial Act, which causes serious side effects to the economy and companies and even has constitutional issues."
The Korea Employers Federation stated, "Although the amendment claims to improve governance and protect minority shareholders' rights, effective alternatives should be prepared through the Capital Markets Act. It is difficult to find legislative examples in major foreign countries that directly regulate the duty of loyalty of directors to shareholders, so this bill does not conform to global standards," expressing concern.
The Korea International Trade Association pointed out, "It may weaken the competitiveness of export industries," and emphasized, "To overcome the current complex crisis, a stable management environment must be created where companies can take management risks and make bold innovation and investment decisions."
The Korea Chamber of Commerce and Industry also noted, "For our companies, mainly in manufacturing, normal decision-making for mid- to long-term facility investments is likely to become subject to lawsuits," and questioned, "It is doubtful whether global companies will choose Korea as an investment destination given such a harsh institutional environment that is unprecedented worldwide."
Hosted by the Korea Economic Association, the "Urgent Statement by CEOs of Major Companies for the Rejump of the Korean Economy" was announced on the 21st at the Lotte Hotel in Seoul. After Kim Chang-beom, Executive Vice Chairman, read the statement, the attending company CEOs posed for a photo. Photo by Heo Young-han
People Power Party: "Request Immediate Veto"
The People Power Party plans to immediately request the government to exercise veto power against the amendment passed on this day.
Kwon Young-se, the emergency committee chairman of the People Power Party, said at an open emergency committee meeting at the National Assembly, "If the Democratic Party unilaterally passes the amendment to the Commercial Act again today, the People Power Party will immediately recommend the exercise of the right to request reconsideration (veto power) to protect our companies."
Meanwhile, nine bills under the Ministry of Education's jurisdiction, including the 'Act on Senior Citizens' Jobs and Social Activities Support' to support the elderly's livelihood and the 'Elementary and Secondary Education Act' to support students with disabilities, were passed without opposition between the ruling and opposition parties during the plenary session.
Other contentious bills, such as the Semiconductor Special Act, the Banking Act, and the Franchise Business Act amendments, were postponed from being designated as fast-track bills.
Kwon Young-se, Emergency Response Committee Chairman of the People Power Party, is attending a members' meeting held at the National Assembly on the 13th. 2025.3.13 Photo by Kim Hyun-min
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