Contemporary Issues in Business Laws of South Korea

(Updated Outline — Reflecting 2025–2026 Commercial Act & Capital Markets Act Reforms) I. Rights of minority shareholders of listed companies Under the Korean Commercial Act (as amended), minority shareholders of listed companies enjoy statutory rights at lowered percentage thresholds, generally subject to a continuous six-month holding requirement. Shareholders may elect either the listed-company thresholds (with the six-month holding period) or the general thresholds (without a holding-period requirement). Key thresholds under Article 542-6 and related provisions are as follows: Required Shareholding % Shareholders’ Rights 1 share Right to inspect shareholders’ registry, minutes of board and shareholders’ meetings, financial statements and auditor’s reports; right to bring an action seeking nullification of a shareholders’ resolution under certain circumstances 0.01% held for 6 months (listed) Right to bring a derivative suit against a director (Art. 403 / 542-6(6)). Multiple (double) derivative suits against directors of a subsidiary are also available under Art. 406-2 (parent-shareholder thresholds: 1% general / 0.5% listed with 6-month holding). 0.05% (or 0.025% for large companies*) held for 6 months Right to seek an injunction against a director (Art. 402) 0.1% (or 0.05% for large companies*) held for 6 months Right to inspect books and records (Art. 466) 0.5% (or 0.25% for large companies*) held for 6 months Right to bring a suit to remove a director (where a proposal to remove for cause is disapproved at a shareholders’ meeting); suit must be brought within 1 month of the meeting (Art. 385) 1% (or 0.5% for large companies**) of voting shares held for 6 months Right to make a shareholder proposal, including AOI amendments and director nominations (Art. 363-2). Impermissible proposals include items rejected in the past 3 years, removal of a director whose term is not expiring, and items the board deems “unfruitful or inappropriate.” 1% of voting shares (large listed companies with assets ≥ KRW 2 trillion); otherwise 3% / lower listed thresholds Right to demand cumulative voting. From 10 September 2026, large listed companies (assets ≥ KRW 2 trillion) may no longer exclude cumulative voting in their AOI (Art. 542-7(3)). 1.5% held for 6 months Right to call a special meeting of shareholders and to petition the court to appoint an inspector (Art. 366 / 467) * “Large companies” for these purposes generally means listed companies with paid-in capital of KRW 100 billion or more (or as otherwise prescribed by Presidential Decree). ** Lower 0.5% threshold applies to listed companies prescribed by Presidential Decree in light of asset scale. Key 2025–2026 reforms affecting minority rights • Directors’ duty of loyalty now extends to the company and its shareholders; directors must protect the interests of all shareholders and treat them fairly (Art. 382-3, effective 22 July 2025). • Aggregated 3% voting cap: when electing or removing any audit committee member (or statutory auditor), the largest shareholder and its related parties may collectively exercise voting rights only up to 3% (Art. 542-12(4), (7), effective 23 July 2026). • Large listed companies (assets ≥ KRW 2 trillion) must elect at least two audit committee members separately from other directors (effective 10 September 2026). • Mandatory cumulative voting for large listed companies (no AOI opt-out) from 10 September 2026. II. Selected regulatory issues A. 5% large-shareholding reporting requirement • Any person who, together with its specially-related persons (SRPs), (i) acquires 5% or more of a listed company’s equity securities (on a fully-diluted basis) or (ii) increases or decreases holdings by 1% or more, or changes the purpose of holding, must report to the Financial Services Commission (FSC) and the Korea Exchange within five business days. • The report must declare the purpose of the holding (simple/portfolio investment vs. management participation / influence on management). • SRPs include persons acting in concert (joint holders) under agreements to jointly acquire/dispose of shares or exercise voting rights. Broad concert-party rules continue to apply. • Failure to file timely may result in forfeiture of voting rights for the portion in excess of the 5% threshold and possible FSC disposal orders. • As of October 2026, legislative proposals are under discussion that would ease certain aspects of the 5% rule for institutional investors (e.g., excluding simple joint voting consultation from aggregation or narrowing “management participation” for limited director nominations). These proposals have not yet been enacted. B. Regulatory approvals and restrictions 1. Antitrust (Fair Trade Commission) Acquisition of 15% or more (or other control thresholds under the Monopoly Regulation and Fair Trade Act) of a listed company generally requires prior FTC review/approval. Review timelines and filing thresholds are governed by the current MRFTA and Enforcement Decree; the classic 30-day (+ possible extension) framework continues to apply in substance, subject to updated detailed thresholds. 2. Securities companies and other financial institutions Prior FSC approval remains required before becoming the largest shareholder or a major (e.g., 10%) shareholder of a securities company. Banks and financial holding companies remain subject to per-shareholder (including SRPs) holding limits and approval hurdles (historically 4% for chaebols; staged approval thresholds for others, including foreign funds). C. Tender offer rules • Traditional rule: A person who, together with SRPs, proposes to acquire Equity Securities of a listed company from 10 or more persons off-exchange during a six-month period, resulting in (or while already holding) 5% or more, must make a public tender offer under the Capital Markets Act. Failure can result in criminal sanctions, loss of voting rights on the improperly acquired shares, and FSC disposal orders. • Pending reform (as of October 2026): A mandatory tender-offer regime for changes of control has passed the National Assembly’s Political Affairs Committee and is advancing toward enactment. Under the committee bill, an acquirer who obtains 25% or more and becomes the largest shareholder (or an existing ≥25% largest shareholder who acquires additional shares) must conduct a tender offer so that, together with existing holdings, the offer covers at least “50% + 1 share” of voting shares. The purchase price is to be set by Presidential Decree by reference to recent market/transaction prices. A grace period after promulgation is expected. Final text and effective date remain subject to plenary passage and promulgation. III. Some tactics and defenses A. Voting; pitfalls of a potential “major shareholder” designation 1. Cumulative voting Cumulative voting is now mandatory for listed companies with total assets of KRW 2 trillion or more (effective 10 September 2026); AOI opt-outs are ineffective for those companies. Holders of 1% or more of voting shares may request cumulative voting. For other companies, cumulative voting remains available unless the AOI specifically disallows it; minority shareholders meeting the applicable thresholds can propose AOI amendments to restore it. 2. Disenfranchisement or restriction of voting rights • Treasury shares carry no voting rights while held by the issuer. Under the 2025–2026 Commercial Act amendments, companies that acquire treasury shares must generally cancel them within one year, subject to limited exceptions under a shareholder-approved retention-and-disposal plan for specified purposes (e.g., employee compensation). Disclosure of treasury-share holdings and plans has been expanded to all listed companies holding any treasury shares. • In votes to amend the AOI regarding cumulative voting, holders of more than 3% may generally cast votes only up to 3%. • Aggregated 3% rule for audit committee (and statutory auditor) elections/removals: the largest shareholder and its related parties may collectively vote only up to 3%, regardless of whether the audit committee member is an outside/independent director (effective 23 July 2026). Other shareholders remain subject to an individual 3% cap. 3. Short-swing profit rule If an officer, employee or major shareholder realizes a profit from purchase and sale (or sale and purchase) of the company’s shares within six months, the company may demand disgorgement of the profit; criminal sanctions may also apply. A “major shareholder” includes a beneficial owner of 10% or more and a shareholder with material influence over major managerial decisions (e.g., appointment/dismissal of management). B. Potential defenses • Shareholder rights plans (“poison pills”) — whether flip-in or flip-over — remain unavailable under Korean law. There is ongoing policy discussion about possible introduction of a Korean-style defensive mechanism, but none has been enacted as of October 2026. • Issuance of new equity securities to third parties: AOIs of many Korean companies still permit the board to issue new shares to third parties without triggering preemptive rights in cases of joint ventures, strategic alliances, technology transfer or other operational objectives, subject to pricing floors (generally not less than 90% of market price under capital-markets rules). Such issuances are now subject to heightened scrutiny under the expanded directors’ duty to shareholders (Art. 382-3). Courts may invalidate issuances whose primary purpose is entrenchment rather than a bona fide business purpose. • Golden parachutes: A limited number of companies retain AOI provisions providing significant severance for inside directors/senior executives upon termination following a “hostile M&A.” Enforceability and fiduciary-duty implications should be reviewed in light of the 2025 duty-to-shareholders amendment. • Classified boards remain rare among Korean listed companies. • Other practical responses: friendly stake-building, white-knight transactions, and engagement with institutional investors and proxy advisers. Treasury-share strategies are now more constrained by mandatory-cancellation rules. IV. Activist Shareholders in Korea A. Persistent governance concerns and reform momentum Many Korean companies have historically been viewed as having governance shortcomings, including concentrated/opaque ownership, government and stakeholder influence, limited formal dividend policies, preemptive-rights loopholes, disclosure quality issues, unclear nomination processes, and weak alignment of incentives with long-term shareholder value. The 2025–2026 Commercial Act amendments (directors’ duty to shareholders, mandatory cumulative voting for large listed companies, strengthened audit-committee election rules, and treasury-share reforms) represent the most significant legislative push in years to address the “Korea discount” and strengthen minority protections. B. Certain activist / engaged shareholders (historical and continuing context) 1. PSPD and civic activism People’s Solidarity for Participatory Democracy (PSPD) was among the earliest organized voices for corporate-governance reform in Korea from the late 1990s onward, targeting practices at major chaebol affiliates and initiating litigation. 2. Foreign and domestic activist investors Notable earlier campaigns included Sovereign Asset Management’s stake in SK Corporation and the Icahn/Lichtenstein Alliance’s campaign at KT&G (higher dividends, asset monetization, board representation). Subsequent years have seen continued activity by domestic activist funds, foreign hedge funds, and increasingly assertive Korean asset managers and the National Pension Service under stewardship-code principles. 3. Institutional investors and stewardship Korean asset-management companies, once largely passive, have become more active. Stewardship-code participants face enhanced disclosure expectations regarding voting policies and rationales. Restrictions on voting in certain self-interested control transactions continue to apply, subject to limited statutory exceptions where a loss to the portfolio company is clearly foreseeable. 4. Practical implications of recent reforms for activists • Lower effective barriers to board representation at large listed companies via mandatory cumulative voting and separate election of audit-committee members. • Stronger statutory basis to challenge transactions that harm minority shareholders even when the company as a whole is not clearly harmed (duty-to-shareholders standard). • Continued importance of the 5% reporting regime and concert-party rules; proposed legislative easing for institutions remains under debate. • Heightened cost and complexity of control transactions if/when the mandatory tender-offer regime (25% / 50%+1) is fully enacted. Notes 1. Thresholds and holding periods are subject to the text of the Commercial Act (especially Arts. 382-2, 382-3, 403, 406-2, 542-6, 542-7, 542-12) and the Capital Markets Act / Enforcement Decree as in force. Presidential Decree may prescribe lower thresholds for certain large listed companies. 2. The mandatory tender-offer reform described above had cleared the Political Affairs Committee as of September 2026 and was awaiting further legislative steps; readers should confirm final enacted text and effective date. 3. This outline is for informational purposes and does not constitute legal advice. Specific transactions require advice under the then-current statutes, regulations, and judicial interpretations.