[Invest&Law] Second Amendment to the Commercial Act... Activist Funds and National Pension Service Hold the 'Casting Vote'

Mandatory Cumulative Voting for Large Listed Companies
Minority Shareholder Influence Expected to Grow with "Stronger Commercial Act"

The so-called "Stronger Commercial Act," which includes the mandatory implementation of cumulative voting and the expansion of separate elections for audit committee members, was passed by the National Assembly on August 25. This comes just two months after the passage of a previous amendment to the Commercial Act in early July, which included the duty of loyalty of directors to shareholders. As the influence of major shareholders diminishes and communication among shareholders becomes increasingly important, it is expected that activist funds and pension funds will play a more decisive role as casting votes in future corporate decision-making processes.

Under the newly passed amendment, cumulative voting has become mandatory for large listed companies with assets of 2 trillion won or more, and the minimum number of audit committee members who must be separately elected has increased from one to two. Combined with the "3% rule," which limits the voting rights of related parties to a combined 3% when appointing audit committee members, this is expected to accelerate the entry of minority shareholder-nominated directors into boards of directors.

On August 26, Jung Dasom, a researcher at Korea Investment & Securities, stated, "Considering that the average shareholding ratio of controlling shareholders and related parties in the top-tier companies of the ten largest Korean conglomerates is 36%, 33% of their voting rights cannot be exercised when appointing audit committee members." She added, "Especially if two out of the typically three audit committee members are separately elected, they will constitute the majority, thereby strengthening the oversight and monitoring functions over controlling shareholders and management."

However, since the existing provision that "a shareholder holding 1% or more of shares must request the appointment of directors through cumulative voting" remains in place, the roles of activist funds and pension funds such as the National Pension Service, which hold a certain percentage of shares, are expected to become even more important. According to Leaders Index, a corporate analysis research institute, among 130 affiliates with owner stakes within the top 50 conglomerates, 74 listed companies, or 56.9%, have the National Pension Service holding a stake of 5% or more.

Lee Kyungyeon, a researcher at Daishin Securities, explained, "Since cumulative support from shareholders is required, there must be shareholder solidarity or a certain level of support for it to become feasible," and emphasized, "Mandatory adoption of cumulative voting does not mean it must be implemented every year. It can only function in practice if there is a request from shareholders holding a certain amount of shares."

In addition, the ruling party plans to begin full-scale legislative discussions on the mandatory cancellation of treasury shares starting next month. The currently proposed bills require that treasury shares be canceled immediately upon acquisition or within a period ranging from six months to one year. Proposals vary, from the most stringent, which mandates cancellation within six months for already held treasury shares, to more lenient ones allowing up to five years. Listed companies that have long used treasury shares as a means of defending management control or raising funds are closely monitoring the possibility of a third amendment.

Moon Sung, an attorney at Yulchon LLC, stated, "There will be an increase in demands for cumulative voting from those who believe it is necessary to appoint directors who represent the interests of minority shareholders on the board, such as minority shareholder alliances, activist funds, and parties to management disputes with lower shareholding ratios." He added, "There will be a significant increase in general meetings of shareholders where the National Pension Service, which is undergoing stewardship code enhancement and institutional reform, will hold the casting vote."