Professor Choi Joon-sun, Director of the Korea Business Law Institute presented the topic of 'Analysis of Global Business Environments, Korean Business Law Amendment and Stewardship Code’ in the ‘Korea Business Policy Forum from the Perspective of Global Standards’ at the Korea Press Center Foreign Correspondents' Club on the 27th, Wednesday.

Professor Choi explained that the government and ruling party are working to pass several revision bills of commercial laws in the National Assembly under the name of ‘laws for economic democratization’. For companies, these revision bills of commercial laws are bizarre ones to which we cannot find similar cases in the world. To save companies, these laws must be abolished. 

In addition, he said that Korea introduced stewardship code in 2016 which allows institutional investors to actively exercise their voting rights, causing a tremendous change in the business environment. Let's take a brief look at their details.

There are 5 kinds of outlines.

1. Mandatory Cumulative Voting System

Professor Choi portrayed that cumulative voting system ostensibly seems to be a very nice institution because if it gives each share as many voting rights as the number of directors to be elected, which can be concentrated on one specific candidate running for director. With this system, minority shareholders can place at least one of their representatives on the board of directors. 

However, he explained that if the board of directors is composed of representatives of each interest group, it will be impossible for the company to achieve its goals and each group tends to put their interest before anything else. 

Then, general meeting of shareholders gathered for the election of directors becomes a political arena and the board of directors will not be able to function properly with a combination of groups of people representing different ideas of the groups to which they belong. A company is not a democratic organization, he said.

Professor Choi illustrated that rather, it is an orchestra that needs to move in shipshape manner according to the CEO's conduction. Currently, Russia, Saudi Arabia and China mandate cumulative voting system. In the United States, 19 states adopted this system in their Company Acts in 1980 but, as of 2016, only 5 states - Arizona, Nebraska, North Dakota, South Dakota and West Virginia – keep the system mandatory, and California and Hawaii hold it mandatory only for unlisted companies. 

Japan has made the system mandatory in the past but abolished the mandatory requirement in 1974. As current regulations in Korea are sufficient enough, it is not necessary to impose the system as mandatory, he added.

2. Double Derivative Suit System

Professor Choi explained that double derivative suit system is a kind of lawsuit system which allows shareholders of the parent company (company which hold more than 50% of stocks of a subsidiary) to claim damages of subsidiaries against managers of the subsidiary. 

This goes directly against ‘Principle of Independence of Corporate Personality." This system should be recognized only between a parent company and its fully-owned subsidiary as in Japan. Precedents of the United States also recognize the system only if the legal personality of subsidiary company is formulated as almost non- existent, he added. 

3. Separate Election of Members of Audit Committee

Professor Choi asserted that at present, as members of the audit committee (auditors) are also directors, it is good enough to designate members of the audit committee among the directors after all the directors have been elected. 

If the major shareholders’ voting rights are restricted (voting right which exceed 3% cannot be exercised) and minority shareholders cast their cumulative votes when the members of audit committee are designated separately from the election of directors, more than one member of the audit committee is bound to be appointed to the Board of Directors, he said.

He described that the auditor can oversee all directors including CEO and has access to all the data of the company. Hedge funds and hostile forces can also put their representatives in the company as auditors (as members of the audit committee) and acquire all the classified information of the company. For the company, this is a worst nightmare.

4. Mandatory Electronic Voting System

he said that electronic voting is a matter of voting method, so the state has no reason to intervene in such details.

5. Introduction of Stewardship Code

Professor Choi explained that companies are getting nervous about the introduction of stewardship code. Hanjin KAL and Korean Air already experienced many difficulties. National Pension is either the largest shareholder or controlling shareholder of 270 to 300 listed companies in Korea. 

With stewardship code and revised commercial law in force, National Pension can even change governance structure of companies if it is willing to do so because stewardship code provides institutional investors including the National Pension with sufficient justification for management intervention, he said. 

He pointed out that especially, Financial Services Commission announced that it will revise Capital Market Law this year to reform private equity system. If the law is revised, domestic private hedge funds are able to acquire unlimited number of stocks and unlimited voting rights just like foreign hedge funds. 

So far, companies have had to defend only against foreign hedge funds but now companies are completely exposed without defense to full attacks from native hedge funds like wolf packs. In the future, we will frequently witness attacks like the one on Korean Air and Hanjin Kal launched by a Korean hedge fund named KCGI, he added.

<Professor June-sun Choi>

- College of Law, Sungkyunkwan University

- LLM, Graduate School of Sungkyunkwan University

- Dr. iur. Philipps Universit ä t zu Marburg (Germany)

- Professor, School of Law, Sungkyunkwan University

- Professor (emer.), School of Law, Sungkyunkwan University

- President of Board of Directors, The Korea Business Law Institute

Lee Kyung ah [WikiLeaks Korea]

andrea.lee@wikileaks-kr.org

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