[Activist Funds Gain Strength ③ Companies Can Avoid Attacks by Following Proper Procedures]

'Even Stronger' Commercial Act Followed by Capital Markets Act Amendments Under Discussion
Need to Reduce Shareholder Conflicts in Mergers and Spin-offs
Celltrion Group's Merger Cancellation Last Year as a 'Model Case'
Further Legislation Needed, Including Easing Criminal Breach of Trust Provisions

Amid the recent trend of strengthening shareholder return policies, activist funds?which have steadily expanded their influence?are expected to gain even more leeway following the passage of the amended Commercial Act and ongoing moves to revise the Capital Markets Act. Companies are already expressing concerns about increasing conflicts with shareholders and potential restrictions on long-term management strategies.

However, many believe that there will be no major issues as long as companies improve their governance in accordance with the law, strengthen communication with shareholders, and ensure procedural legitimacy in cases such as mergers and spin-offs, where conflicts of interest among shareholders frequently arise. There is also growing support for calls to ease the criminal breach of trust provisions in the Criminal Act, given that long-term management decisions could otherwise be interpreted as breaches of duty.

Stronger Activist Movements Expected with Amendments to the Commercial Act and Capital Markets Act

The amended Commercial Act, which passed the National Assembly plenary session on July 3, 2025, expands the fiduciary duty of corporate directors from the company alone to both the company and its shareholders, thereby requiring directors to actively protect the interests of general shareholders as well. In addition, when electing audit committee members, not only for internal directors but also for outside directors, the voting rights of the largest shareholder and related parties are now limited to a combined 3%. The amendments also require the conversion of outside directors into “independent directors” and mandate the introduction of electronic general meetings of shareholders for large listed companies.

These amendments to the Commercial Act are expected to further expand the influence of activist funds. By explicitly stating the fiduciary duty of directors toward shareholders, activist funds and minority shareholders will now be able to directly hold directors accountable through lawsuits in cases of conflicts of interest between controlling and general shareholders. Furthermore, the combination of the “3% aggregate rule” and electronic shareholder meetings will reduce the influence of controlling shareholders in appointing audit committee members, while making it easier for general shareholders to consolidate their voting rights.

In addition, even “stronger” amendments to the Commercial Act and revisions to the Capital Markets Act are on the horizon. The ruling Democratic Party of Korea has expressed strong legislative intent to address issues left out of the current Commercial Act amendment, such as the mandatory cumulative voting system and the expansion of separate elections for audit committee members, within the current extraordinary session of the National Assembly. The cumulative voting system, in particular, allows shareholders to concentrate their votes on specific candidates when electing directors, thereby increasing the chances for candidates supported by activist funds or minority shareholders to join the board.

The Capital Markets Act amendment currently before the National Assembly focuses on regulating spin-offs and mergers that favor controlling shareholders. In many cases, the double listing of subsidiaries through physical spin-offs has resulted in losses for existing parent company shareholders. The amendment is expected to introduce regulations requiring that, when a parent company lists a subsidiary created through a physical spin-off, a portion of the public offering shares be allocated preferentially to existing parent company shareholders. Additionally, to prevent the valuation of corporate value in mergers or spin-offs from being skewed in favor of controlling shareholders, the amendment specifies that “fair value”?which takes into account not only stock price but also asset and income value?must be used as the valuation standard. This approach appears to be based on major precedents from the Delaware courts in the United States.

Communicating with Shareholders and Strictly Following Procedures Are Essential

The amendments to the Commercial Act and Capital Markets Act are placing a burden on companies. According to a survey released in March 2025 by the Korea Chamber of Commerce and Industry of 300 listed companies, many respondents expressed concerns that the amendments would increase conflicts between directors and shareholders (41%) and disrupt large-scale investments and research and development (R&D) (25%).

However, some point out that if companies make efforts to strengthen communication with shareholders?such as by holding regular and transparent investor relations (IR) sessions?improve governance by revitalizing board committees, and establish consistent shareholder return (dividend and share buyback) plans from a long-term perspective, there will be fewer clashes with activist funds.

There are also expectations that the “fiduciary duty to shareholders” in the amended Commercial Act?which is the aspect companies are most concerned about?will not lead to frequent lawsuits, since it only applies in cases of conflicts of interest between controlling and general shareholders. Lee Yongwoo, Director of the Economic Plus Research Institute and the original drafter of the Commercial Act amendment as a member of the 21st National Assembly, explained, “The business judgment rule applies when directors have made their best efforts based on the information available to them?in other words, when they have fulfilled the ‘duty of care of a good manager’ under the Civil Act. This is unrelated to the fiduciary duty to shareholders, and our Supreme Court has issued numerous precedents stating that directors are not held liable for business judgment.”

The Delaware courts in the United States, which apply a business-friendly version of corporate law, do not apply the business judgment rule to matters involving conflicts of interest among shareholders as a general principle. Instead, the rule is only applied when there is a decision by an independent committee and a majority of shareholders?excluding those with conflicts of interest?approve the matter. There is a domestic precedent of a company applying established Delaware court precedents in practice. The Celltrion Group completed the merger of Celltrion and Celltrion Healthcare (Phase 1) at the end of 2023 and pursued the merger of Celltrion and Celltrion Pharm (Phase 2) last year. At that time, a special committee composed solely of outside directors conducted a merger valuation by an external accounting firm, synergy analysis by a global consulting firm, and a shareholder survey. In the shareholder survey, in which about half of all issued shares participated, less than 10% were in favor. Ultimately, the special committee concluded not to proceed with the merger, citing “protection of company and shareholder interests,” and the board of directors officially resolved to accept this decision. Lee Kyungyeon, an analyst at Daishin Securities, assessed, “The procedures implemented by Celltrion enhanced the transparency and fairness of corporate governance and increased trust among shareholders and stakeholders.”

Meanwhile, there are increasing calls for the need to ease the criminal breach of trust provisions in the Criminal Act?a topic already raised as necessary for discussion in the National Assembly. Director Lee Yongwoo also pointed out, “The scope of criminal punishment for breach of trust should be clearly limited to serious and intentional violations, with a priority on civil resolution.” In this regard, Kim Hyunjung, floor spokesperson for the Democratic Party of Korea, stated on July 8, 2025, “Regarding concerns in the business community about breach of trust and other issues, we will quickly meet with business leaders and continue additional discussions through meetings.”

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