"Only Commercial Act Amendments Rushed"... Business Community Demands Breach of Trust Reform

Eight Major Economic Organizations Submit Letter of Concern on Third Commercial Act Amendment
"Management Uncertainty Will Increase... Corporate Burden to Grow"

The business community has expressed concerns that if the third round of amendments to the Commercial Act-centered on the mandatory cancellation of treasury shares-is completed, management uncertainty for companies will further increase. They have called on the National Assembly to make a rational decision. The core demand is that discussions on amending the breach of trust crime, as promised by politicians during the first round of Commercial Act amendments, must be prioritized to alleviate the management burden on companies caused by successive amendments to laws such as the Commercial Act and the Trade Union Act.

The eight major economic organizations-including the Korea Chamber of Commerce and Industry, the Federation of Korean Industries, the Korea International Trade Association, the Korea Federation of SMEs, the Korea Employers Federation, the Korea Federation of Mid-sized Enterprises, the Korea Listed Companies Association, and the Kosdaq Association-announced on January 20 that they had submitted their opinion to the government and the National Assembly, stating that rational institutional improvements are necessary in the third round of Commercial Act amendments to minimize management uncertainty for companies. It is understood that this opinion letter has been delivered to the Democratic Party of Korea and the Ministry of Justice, among others.

Increased Corporate Burden... Business Community Calls for Rational Improvements

First, the business community pointed out that the legislative intent of the third amendment is to "prevent the arbitrary use of treasury shares acquired with company assets to benefit certain shareholders." While treasury shares voluntarily acquired within distributable profits under Article 341 of the Commercial Act are subject to this, they argue that shares involuntarily acquired during processes such as mergers under Article 341-2 do not align with the legislative intent and should therefore be exempt from the cancellation requirement.

Involuntary acquisition of treasury shares often occurs unavoidably during the process of converting to a holding company, which the government has encouraged. The business community expressed particular concern regarding industries in need of structural reorganization, such as petrochemicals. They argue that if treasury shares acquired during mergers and acquisitions (M&A) must be canceled, not only will the pace of business restructuring slow, but there is also a significant risk that the competitiveness of Korean companies will decline during periods of industrial upheaval.

The business community proposed to the government and the National Assembly that if there are concerns about the misuse of "treasury shares acquired for specific purposes" during disposition, shareholder approval at a general meeting could be required at the time of disposition. They also requested that if companies must cancel treasury shares involuntarily acquired under Article 341-2 of the Commercial Act, the capital reduction process should be waived. In the case of treasury shares acquired for specific purposes, including mergers, cancellation requires creditor protection procedures and a special resolution at the general meeting. If companies are unable to meet large-scale repayment demands from creditors, this could result in legal violations.

A representative of one economic organization stated, "If companies holding treasury shares acquired for specific purposes fail to obtain general shareholder approval for holding or disposing of treasury shares, and then fail again to obtain a special resolution for cancellation, they will face management uncertainty by being in a state of legal violation every year. Waiving the capital reduction process and allowing cancellation by board resolution alone would achieve the legislative purpose while reducing the burden on companies."

Additionally, the business community expressed concern that if companies retain or dispose of treasury shares without canceling them, and must obtain annual shareholder approval for their retention or disposition plan, the predictability of mid- to long-term management strategies will be undermined depending on whether approval is granted. They suggested that if regular or extraordinary general meetings are repeated every year for this purpose, management decision-making could be delayed, and therefore proposed extending the approval period to every three years if there are no changes.

What Happened to the National Assembly's Promise to Discuss 'Breach of Trust Reform'?

In addition to these demands, the eight major economic organizations pointed out that discussions on "reform of the breach of trust crime system," which the National Assembly promised during the first round of Commercial Act amendments last year, have not progressed. They argue that while excessive criminal liability concerns over management decisions and the management burden caused by successive legal amendments remain unaddressed, only the Commercial Act amendments are being pushed forward at a rapid pace. The second round of Commercial Act amendments, which include provisions such as allowing subcontractor unions to negotiate with principal employers, mandatory cumulative voting, and expanded separate election of audit committee members, will take effect in March and September, respectively.

The business community has consistently raised the issue that the requirements for constituting the breach of trust crime are abstract, exposing even the results of reasonable management decisions to the risk of ex post criminal punishment. Through this latest proposal, they again voiced concerns that "with the first round of Commercial Act amendments, the likelihood of shareholders filing criminal complaints for breach of trust has increased, raising concerns that large-scale investments and M&A, as well as companies' strategic decision-making, could be stifled."

An industry representative stated, "As reform of the breach of trust crime is delayed, companies are left with no other choice but to postpone or avoid management decisions. To enable companies to actively pursue investment and innovation, the principles of business judgment should be clearly defined and the breach of trust crime reformed as soon as possible, prior to the third round of Commercial Act amendments."