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Stronger Commercial Act raises alarm over corporate governance

Published: 26 Aug. 2025, 00:00

Jeong Cheong-rae, leader of the ruling Democratic Party (left), floor leader Kim Byung-ki and other members of the party’s Supreme Council leave the voting booth after casting ballots to end a filibuster on revisions to the Commercial Act during a plenary session at the National Assembly in Seoul on Aug. 25. The amendment later passed the legislature. [YONHAP]

The so-called “stronger Commercial Act,” the second round of amendments to Korea’s corporate law, passed the National Assembly on Aug. 25 under the leadership of the Democratic Party. The party ended a filibuster initiated by the People Power Party in just one day with a vote, then pushed the bill through a plenary session. The PPP boycotted the vote, denouncing the measure as an “economic rebellion act.”

The revision makes it mandatory for listed companies with assets above 2 trillion won ($1.4 billion) to adopt cumulative voting for board elections and expands the requirement for the separate election of audit committee members from one to two or more. Cumulative voting allows minority shareholders to concentrate their votes on one candidate, making it easier for them to place their own representatives on the board. Critics argue this could divide boards into factions and undermine long-term strategy. Most U.S. states once mandated cumulative voting, only to abolish it for these reasons.

The expanded separate election of audit committee members has also raised concerns. By limiting the influence of controlling shareholders, the change increases the likelihood that candidates backed by activist funds or foreign investors could win seats. Business leaders warn this could lead to the leakage of core technology and sensitive information from large companies competing in global markets. Combined with the so-called 3 percent rule — introduced in July as part of the first amendment — its impact could be significant. Per that rule, when electing outside directors to serve as audit committee members, the voting rights of controlling shareholders and affiliates are capped at 3 percent.

Taken together, the two amendments have fueled fears that corporate management rights will be severely weakened. According to a simulation by Choi Joon-sun, a professor emeritus at Sungkyunkwan University Law School, if a company has seven board members, the largest shareholder and affiliates would be able to secure only two to three seats. That could leave boards free to act against the will of controlling shareholders. Meanwhile, the Democratic Party is already discussing a third amendment that would mandate the cancellation of treasury shares, eliminating another tool for defending management rights.

Business groups urged lawmakers to pursue “balanced legislation that minimizes side effects.” They also called for internationally recognized tools to protect corporate governance, including dual-class shares that give controlling shareholders greater voting rights and poison pills that allow existing shareholders to buy shares at a discount when management control is threatened. They argue that codifying the business judgment rule and reforming strict breach-of-trust provisions is necessary to encourage bold decision-making. President Lee Jae Myung has said that “the center of economic growth is business,” but the administration and ruling party’s willingness to push forward despite corporate concerns has left many in disbelief.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.