Commercial Code amendments ignite governance reform hopes in Korea

One month after Lee Jae-Myung’s inauguration as president, Korea’s long-anticipated amendments to the Commercial Code were passed by the National Assembly on 3 July, igniting cautious optimism among investors. Viewed as a step forward in improving board accountability and reinforcing shareholder rights, these governance reforms target the persistent "Korea discount"—the undervaluation of stocks rooted in perceptions of systemic weak governance. The measures signal a pivotal shift which, if effectively implemented, have the potential to elevate market confidence and align Korea with global standards.    

 The amended Code introduces several notable revisions, including an explicit extension of directors’ duty of loyalty to shareholders; a change in terminology from “outside directors” to “independent directors” extension of the aggregate 3% voting cap rule to both the appointment and removal of independent audit committee members; an increase in the minimum ratio of independent directors from one-quarter to one-third on boards of companies with assets below KRW 2 trillion (approximately US$ 1.4 billion); and a mandate for hybrid AGMs allowing both physical and online shareholder participation.  

The most consequential change may be the long-debated revision to Article 382-3 of the Commercial Code, clarifying that directors owe a duty of loyalty not only to the company but also to its shareholders—a change ACGA and its members have long supported and advocated for. This amendment was passed once before in March 2025 but it was vetoed by then Acting President Han Duck-soo. It has now been reintroduced and enacted during the current legislative session.  

As noted in previous ACGA commentary, the clarification is particularly relevant in situations where the interests of controlling and minority shareholders diverge—often in capital transactions such as mergers, acquisitions, and the issuance of treasury shares or convertible securities. Minority shareholders have historically lacked adequate protection in these contexts. That said, the precise scope and interpretation of the new provision remain unsettled and will likely be clarified through future court decisions.  

While the amendment is particularly relevant in these contexts, its significance lies in its broader implications. It reinforces the principle that independent directors must consider the interests of all shareholders, rather than simply endorsing the decisions of management or controlling owners. Over time, if correctly implemented, this could contribute to a gradual shift in boardroom dynamics and corporate culture.  

Enforcement, however, remains a challenge. Although the amendment enhances civil accountability by allowing shareholders to file lawsuits against directors who violate this duty, plaintiffs still bear the burden of proof. In the absence of a discovery system, collecting sufficient evidence may remain difficult unless the case has already been subject to investigation by government agencies or prosecutors.  

Beyond the duty of loyalty, the bill includes additional reforms aimed at improving board independence and modernising shareholder participation.  

One key reform is the expanded application of the aggregate 3% rule in audit committee elections. Under the revised rule, the voting rights of controlling shareholders and their affiliates are now collectively capped at 3% for all audit committee appointments, including independent directors. Previously, this collective cap was applied only to non-outside audit committee directors and auditors. The new approach is aimed at strengthening audit committee independence. 

The amendment also replaces the term “outside director” with “independent director,” while increasing the required ratio of independent directors on boards of small and mid-sized listed companies from one-quarter to one-third. Although the formal eligibility criteria remain unchanged, the change in terminology may help reinforce expectations around the role of these directors and their independence from management.  

Finally, from January 2027, large listed companies will be required to hold electronic shareholder meetings alongside physical ones. The Commercial Code had previously been silent on the legality of electronic AGMs, causing legal ambiguity. The new provision clarifies this and formalises the requirement for a hybrid format. This is a positive development which ACGA advocated for in an earlier report highlighting the issues international investors face in participating in Korean AGMs which will support broader participation and shareholder engagement.  

What was left out?  

Two proposals that were excluded from the latest amendments to Korea’s Commercial Code are the mandatory cumulative voting for large listed companies with assets over KRW 2 trillion and increasing the number of separate elections for audit committee directors from one to at least two seats.  

Under the current rules, shareholders can nominate and elect one audit committee director through a separate election process. This system separates the vote for audit committee directors from other board members and applies the 3% voting cap on all shareholders from the start of the director appointment process. Expanding this mechanism to include more than one seat would reduce the risk of that independence being marginalised or outweighed by the rest of the committee.  

Cumulative voting, whilst already permitted under the present Code, remains optional—and most companies have opted out through their articles of incorporation. In the cases where it is allowed, foreign investors continue to face practical challenges in executing their votes. These include technical limitations in proxy advisory systems, inconsistent implementation by service providers, and uncertainty over whether votes are accurately counted—issues that have surfaced during recent AGMs. These procedural hurdles, detailed in our previous report, combined with limited adoption, significantly reduce the mechanism’s effectiveness in enabling minority shareholders to influence board composition.  

In Korea’s corporate environment, where controlling shareholders often hold significant influence over board appointments, mechanisms such as cumulative voting and separate elections remain important tools for enabling minority shareholder participation. Their broader adoption could help address ongoing structural imbalances in board representation, though practical use remains limited in many cases.  

Treasury share cancellation appears set to become the next legislative focus. On 9 July, Democratic Party lawmaker Kim Nam-geun submitted a bill proposing mandatory cancellation of treasury shares. This move responds to ongoing concerns that controlling shareholders misuse treasury stock to maintain control through friendly shareholder swaps. The proposal aligns with broader expectations that the Democratic Party-led government will pursue structural reforms to improve market functioning. With corporate governance remaining a key issue in discussions around the “Korea discount,” how the legislature approaches treasury shares will be closely watched.