Korea Ratings: Commercial Act Amendment May Negatively Impact Credit Ratings Through Financial Strategy Changes

On July 28, Korea Ratings Corporation (Korea Ratings) stated that if companies pursue financial strategies focusing on shareholder returns?such as expanding dividends or retiring treasury shares?following the amendment of the Commercial Act, there is a possibility that this could negatively affect their future credit ratings. While the amendment itself is not inherently a negative factor for corporate creditworthiness, the agency cautioned that there is a need to be vigilant about the possibility that corporate decision-making may become more oriented toward shareholder interests rather than those of creditors.

Kim Kyungmoo, head of the Evaluation Standards Office at Korea Ratings, made these remarks in a report released on the same day, titled "Amendment of the Commercial Act and Credit Ratings ? The Need to Guard Against Impairment of Creditor Interests Due to Changes in Corporate Financial Strategies."

Kim assessed, "The amendment of the Commercial Act, which focuses on protecting the interests of minority shareholders, could lead to corporate decisions that prioritize shareholder interests over those of creditors. This is a disadvantageous factor from the creditor's perspective." He added, "From a credit rating standpoint, if it is determined that corporate decisions infringe upon creditor interests, this is expected to act as a factor lowering creditworthiness."

The revised Commercial Act, which centers on strengthening directors' duty of loyalty, was promulgated on July 22. Among its provisions, the clause strengthening the duty of loyalty took effect immediately upon promulgation, while the remaining amendments will take effect one year after promulgation (provisions related to electronic general meetings will take effect on January 1, 2027). In addition, a second round of amendments to the Commercial Act?including the mandatory retirement of treasury shares?is also being promoted in the National Assembly.

This report highlighted that changes in corporate financial strategies following the amendment could have a negative impact on credit ratings from a financial risk perspective. Specifically, examples such as expanded dividends, a contraction in paid-in capital increases, and the retirement of treasury shares were cited.

First, Kim stated, "As corporate dividend payout ratios increase due to management policies favoring shareholders and tax reforms promoting dividends, financial risks could be heightened due to the deterioration of leverage indicators such as the debt ratio and dependence on borrowings." He also pointed out, "Paid-in capital increases are likely to decrease due to opposition from minority shareholders concerned about share dilution," and noted the possibility of a decline in financial stability and a qualitative deterioration of capital due to increased reliance on alternative capital instruments such as hybrid securities.

Finally, if the retirement of treasury shares becomes mandatory, it is assessed that financial strategy flexibility will be reduced, including the ability to secure liquidity through the sale of treasury shares or to raise funds through the issuance of exchangeable bonds. Currently, several amendments to the Commercial Act that include mandatory retirement of treasury shares have been proposed in the National Assembly.

Kim commented, "It is difficult to view the amendment of the Commercial Act itself as a negative factor for corporate credit ratings, but since the direction of the amendment is focused on protecting minority shareholders, there is a need to be cautious about the possibility that corporate management decisions may be made in a way that prioritizes shareholder interests over those of creditors."

However, he also evaluated positively that "shareholder-friendly management through the amendment of the Commercial Act is expected to enhance corporate value and improve conditions for raising capital through the stock market."

He added, "Whether shareholder-friendly management is pursued while maintaining financial soundness commensurate with the credit rating will be a key variable determining the direction of creditworthiness," and emphasized, "It will also be important to establish exemplary practices and standards for appropriately balancing the interests of shareholders and creditors through cases of conflicts of interest that arise after the revised Commercial Act is implemented."