[Stronger Amended Commercial Act] ② Electronic General Meetings, Independent Directors, and Enhanced 3% Rule: "Increased Uncertainty Requires Proactive Corporate Response" [Choi Seokjin's Law & Biz]

It Will Become Harder to Predict Electronic General Meeting Outcomes
The 3% Rule May Weaken Management's Ability to Defend Control
More Sophisticated Response Strategies Are Needed
Cumulative Voting and Expansion of Separately Elected Audit Committee Members to Be Revised Soon

Editor's NoteOn July 4, the day after the amendment to the Commercial Act passed the National Assembly, law firm Sejong became the first domestic law firm to hold a related seminar. Based on the presentations at the seminar, this series will examine the main points of the amended Commercial Act and how companies should respond, in two parts.

The recently amended Commercial Act includes not only the directors' duty of loyalty to shareholders, but also several measures to protect the rights of minority shareholders that may burden corporate management, such as electronic general meetings of shareholders, independent directors, and audit committee members.

The ruling party has stated that it will soon propose and swiftly process additional amendments to include provisions that were deferred in this round, such as the mandatory cumulative voting system and the expansion of separately elected audit committee members.

While the business community is calling for supplementary measures to protect management rights, experts advise that companies need to take proactive steps to address the increased uncertainty.

Introduction and Mandatory Adoption of Electronic General Meetings of Shareholders

The amended Commercial Act allows listed companies to hold electronic general meetings of shareholders through a resolution of the board of directors. In addition, listed companies with assets above a certain threshold (to be specified by Presidential Decree) are required to hold electronic general meetings of shareholders.

Unlike the "observer-type electronic general meetings" that some companies adopted after the COVID-19 pandemic, the newly introduced electronic general meetings consider shareholders who participate online to be present at the meeting, and allow them to participate in proceedings and voting in real time.

The new provisions on electronic general meetings will take effect on January 1, 2027. The companies required to hold such meetings will be specified by Presidential Decree, but during the legislative process, companies with total assets of 2 trillion won or more were discussed, and it is expected that roughly 200 or more companies will be subject to the amended law.

System Setup and On-Site Rehearsals Are Essential

From the perspective of companies, by next year they must have systems in place to transmit and receive video and audio of the meeting venue in real time, as well as electronic voting systems. Technical measures to protect personal information are also necessary.

Companies must also prepare procedures to respond in cases where someone exercises voting rights by impersonating another person, or where communication failures cause some shareholders' votes to be omitted. However, the law allows the operation of electronic general meetings to be outsourced as specified by Presidential Decree, with the Korea Securities Depository (KSD) being a leading candidate.

Sukmi Lee, a lawyer at law firm Sejong, stated, "From the company's perspective, in order to avoid procedural defects, it is essential to conduct simulations of vote counting and proceedings, as well as on-site rehearsals, after building the necessary IT infrastructure."

It Will Become More Difficult to Predict General Meeting Results

With the introduction of electronic general meetings, it will inevitably become more difficult to predict the outcomes of these meetings. In particular, if the cumulative voting system is also made mandatory through additional amendments to the Commercial Act, the unpredictability could increase significantly.

Lee explained, "Until now, it was possible to predict voting outcomes in advance by distinguishing between friendly and unfriendly shareholders through the proxy review process. However, with electronic general meetings, it is difficult to determine in advance how shareholders participating remotely will exercise their voting rights, so the predictability of meeting results will inevitably decrease. Companies will need to shift from a proxy analysis strategy to a real-time attendance response strategy."

Strengthening of the 3% Rule for Appointment and Dismissal of Audit Committee Members

Under the Commercial Act, when appointing or dismissing audit committee members, shareholders who own more than 3% of the total issued shares (excluding non-voting shares) cannot exercise voting rights for the excess shares. This is to prevent excessive influence by major shareholders.

Until now, the largest shareholder was required to aggregate shares held by related parties only when appointing or dismissing an "audit committee member who is not an independent director." However, under the amended Commercial Act, the largest shareholder must always aggregate shares held by related parties when calculating their shareholdings for the appointment or dismissal of audit committee members, regardless of whether the member is an independent director. This will take effect one year after promulgation.

On the 4th, at the seminar room on the 23rd floor of D Tower in Jung-gu, Seoul, lawyer Sukmi Lee is presenting at the law firm Sejong's seminar on the "Amendment of the Commercial Act." Law firm Sejong

Increased Possibility for Minority Shareholders to Join the Board

As the scope of restrictions on the voting rights of major shareholders expands, it will become more difficult for companies to appoint their preferred audit committee members, while the likelihood of candidates recommended by minority shareholders being appointed as audit committee members will increase significantly.

The business community is concerned that as minority shareholders gain greater access to the board, there is a higher risk that important company information, such as agenda items disclosed at board meetings or information prior to public disclosure, may be leaked externally.

There are also concerns that it will become more difficult to defend management rights, as minority shareholders will be able to exercise their rights, such as the right to propose shareholder resolutions, the right to inspect and copy accounting books, and the right to file shareholder derivative suits, in a more sophisticated and thorough manner. As the 3% rule is strengthened, cases where audit committee members cannot be appointed due to a lack of quorum are expected to increase compared to the past.

Lee advised, "It is necessary to strengthen the qualification requirements for audit committee members through amendments to the articles of incorporation, or to secure a pool of independent director candidates who can gain shareholder support in advance. In the event of a proxy fight, companies should secure white knights and strengthen solicitation activities for proxy voting."

Lee also added, "To prevent important company information from being indiscriminately disclosed to third parties, it is necessary to require individual directors to submit confidentiality agreements and remind them of their duty to maintain the confidentiality of company information. Companies may also consider establishing an executive officer system or separate committees within the board to control sensitive information."

Increase in the Ratio of Independent Directors to One-Third

The amended Commercial Act changes the term "outside director" to "independent director," and defines it as "a director who performs functions independently from inside directors, executive officers, and those who give instructions on business execution."

At the same time, the mandatory appointment ratio of independent directors in listed companies has been raised from one-fourth to one-third of the total number of directors. For large listed companies, as before the amendment, a majority of directors must be independent directors.

This will take effect one year after promulgation, and existing outside directors will be regarded as independent directors under the amended law, so outside directors appointed after July 2026 will be registered as independent directors. Amendments to the articles of incorporation regarding outside directors and their ratio will be necessary.

Lee stated, "If the one-third requirement is not met, the company may be designated as an 'issue for inadequate governance structure,' so this should be carefully noted. There is also a possibility that the disqualification requirements will be strengthened, but the details will be specified in the enforcement decree, so it is necessary to check for further regulatory amendments."

Introduction of Cumulative Voting and Expansion of Separately Elected Audit Committee Members

In this amendment, the mandatory cumulative voting system and the expansion of separately elected audit committee members, which were discussed to protect minority shareholder rights, were excluded for now, but are highly likely to be included in the next amendment to the Commercial Act.

The cumulative voting system allows shareholders, when appointing two or more directors, to concentrate all their votes (equal to the number of shares they hold multiplied by the number of directors to be appointed) on a single candidate.

If the cumulative voting system is applied, directors are appointed in order of those receiving the most votes, even if they do not receive a majority of the votes of shareholders present, making it advantageous for minority shareholders to pool votes and elect their preferred directors.

The current Commercial Act allows listed companies to exclude the cumulative voting system through their articles of incorporation, but the next amendment is likely to include a provision prohibiting such exclusion by articles of incorporation.

Separately elected audit committee members are those appointed directly as audit committee members, rather than being selected from among the elected directors. Compared to the collective appointment method, this has a greater effect in limiting the voting rights of major shareholders under the 3% rule. There has been discussion about increasing the minimum number of separately elected audit committee members from one to two, as well as appointing all audit committee members separately.

Lee predicted, "From the company's perspective, they are likely to consider measures such as appointing the maximum number of directors allowed under the articles of incorporation through proactive convening of extraordinary general meetings, or operating a staggered board system."

*Electronic General Meeting of Shareholders

A type of general meeting of shareholders in which some shareholders do not attend the meeting venue in person but participate in resolutions remotely through electronic means.