The Korean Commercial Code (KCC) acknowledges the following five types of companies:

• joint stock companies (“jusik hoesa”in Korean);
• limited companies (“yuhan hoesa”);
• limited liability companies (“yuhan chaegim hoesa”);
• general partnerships (“hapmyeong hoesa”); and
• limited partnerships (“hapja hoesa”).

The most popular type is the joint stock company, accounting for about 91% of the companies established in Korea as of June 2022.

Unless otherwise specified, the scope of review herein is limited to the joint stock company.

When foreign investors establish their subsidiaries or joint ventures in Korea, the two most popular entity forms have been a joint stock company and a limited company. Recently, many foreign investors also use a limited liability company, which is modelled after, and thus comparable to, limited liability companies in the United States.

Each of the joint stock company, the limited company and the limited liability company provides limited liability to the equity holders of the relevant company. The equity holders’ respective liabilities would be limited to the capital amounts they have invested in the company.

When selecting the corporate form, foreign investors typically consider the following.

Corporate Formalities

A joint stock company has more corporate formalities than a limited company or a limited liability company. For example, only a joint stock company (unless its paid-in capital is less than KRW1 billion) is required to have a board of directors and a statutory auditor, while such corporate governance structure is optional for limited companies and limited liability companies. In addition, the shareholders of a joint stock company are generally not permitted to adopt resolutions by written consent but, rather, must adopt resolutions at a general meeting of the shareholders. On the other hand, the members of a limited company or limited liability company may adopt resolutions by unanimous written consent.

External Audit of Financial Statements

A joint stock company and a limited company, in each case, with total assets or annual sales of at least KRW50 billion as of the previous fiscal year end must have its financial statements audited by an external auditor and file such audited financial statements with the Financial Services Commission of Korea. Limited liability companies are not subject to these external audit and public disclosure requirements.

Business Activities, Public Offerings and Bonds

Other than certain limited exceptions, there are no restrictions on types of businesses that may be conducted for all three types of entities. However, only a joint stock company is permitted to make a public offering or issue bonds or debentures. Further, limited liability companies may not declare and/or pay interim dividends, while a joint stock company or a limited company can do so according to its articles of incorporation (AOI).

Public Perceptions

Generally, joint stock companies are viewed as having more “prestige” in Korea. Most of the major domestic companies are joint stock companies. Meanwhile, a foreign parent would often set up its Korean subsidiary as a limited company. In fact, a number of well-known multinational companies formed their Korean subsidiaries as limited companies. By comparison, limited liability companies have not been widely adopted by either domestic or foreign investors since such corporate form was first introduced in 2012, although recently increasing numbers of limited liability companies have been incorporated.

Tax Treatment

All these three entity types are treated the same for Korean tax purposes. However, tax treatment in other jurisdictions may be different by entity type. For instance, for US tax purposes, a limited company or a limited liability company may be treated as a partnership or a branch under the so-called check-the-box rule, while a joint stock company is ineligible for such treatment.

A joint stock company can issue common shares and class shares. Common shares carry voting and economic rights pursuant to the terms of the KCC and/or the AOI of the company, as discussed in detail below. Class shares refer to types of shares having special rights as set forth in the company’s AOI, which are different from the rights attached to common shares and include:

• shares entitled to preferred dividends;
• shares entitled to distribution of residual assets;
• shares without or with limited voting rights;
• redeemable shares; and
• convertible shares.

In order for a joint stock company to issue class shares, the terms and the authorised number of each class of shares must be prescribed in the AOI.

Shareholders of a Korean joint stock company have certain statutory rights pursuant to the provisions of the KCC, including the following:

• the right to receive dividends;
• in the event of a new share issuance, the right to subscribe for new shares in proportion to the number of shares held (ie, pre-emption rights);
• the right to claim and receive distribution of residual assets;
• the appraisal right for dissenting shareholders in the event of a business transfer, merger or similar corporate event;
• the voting right (except for any class shares with no or limited voting rights);
• the right to propose certain items be included as agenda for a general meeting of the shareholders;
• the right to call an extraordinary general meeting of the shareholders; and
• the right to inspect the company’s books and records and receive copies thereof.

Some of these rights are available only if certain shareholding thresholds are met. Further, the company’s AOI may set forth additional shareholder rights based on the type of shares and the shareholding percentage.

Generally, there is no minimum capital requirement for joint stock companies, limited companies or limited liability companies, unless the business licence of such company provides for certain minimum capital requirements.

The KCC requires that the par value per share of a joint stock company be at least KRW100. Thus, a joint stock company can be formed with the minimum capital of KRW100.

A joint stock company, a limited company and a limited liability company must each have at least one shareholder or member. There are no residency or other eligibility requirements for such shareholders or members.

While the KCC provides for certain shareholder rights and the company’s obligations, such provisions are mostly applicable to listed companies or companies with a large shareholder base. Therefore, Korean private companies often have shareholders’ agreements or joint venture agreements setting forth the terms and conditions of the corporate governance and the relationship among the shareholders.

Shareholders’ agreements or joint venture agreements typically include provisions regarding:

• the shareholding structure, subsequent financing obligations of the shareholders and pre-emption rights of shareholders;
• the board of directors (including composition, board nomination rights, procedural requirements, quorum for meetings and resolutions and list of matters requiring a super-majority resolution of the board of directors);
• the management team of the company (including composition and officer nomination rights);
• the meeting of shareholders (including procedural requirements, quorum for meetings and resolutions, list of matters requiring a special resolution of the meeting of shareholders and list of matters requiring an approval or consent of certain shareholders);
• transfer restrictions (including lock-up period, permitted and/or prohibited transfers, rights of first offer or refusal, drag-along or tag-along rights and call or put options);
• shareholder information and inspection rights and other covenants such as non-compete undertakings;
• the occurrence and resolution of deadlock events; and
• termination and effect of termination (such as dissolution or exercise of penalty call or put options).

Once duly executed and delivered by the parties, shareholders’ agreements or joint venture agreements constitute a valid and binding obligation enforceable against each of the parties thereto. However, in the case of any breach of the terms or conditions of such agreement, the non-breaching party would only have a breach of contract claim against the breaching party, unless the provisions at issue also constitute a legal requirement under the KCC or other applicable laws or are otherwise reflected in the company’s AOI.

Copies of shareholders’ agreements or joint venture agreements of private companies are not publicly available.

Under the KCC, joint stock companies are required to convene an annual general meeting of the shareholders (AGM) once a year within three months after the end of each fiscal year. At an AGM, shareholders vote on the approval of the financial statements for the previous fiscal year and the declaration of dividends, if any, after the end of each fiscal year. Shareholders may also vote on the appointment of a director or a statutory auditor or the amendment of the AOI at the AGM.

Since the fiscal year of most joint stock companies ends on December 31st, joint stock companies typically hold an AGM within the first quarter of each calendar year.

In convening a general meeting of the shareholders, a notice of convocation must be sent to each shareholder at least two weeks (or, in the case of a joint stock company with paid-in capital less than KRW1 billion, ten days) prior to the date of such meeting, subject to a shorter notice period with the consent of all shareholders.

The notice of convocation of a general meeting of the shareholders should state the date, time, place and agenda of the meeting, and if the agenda includes any important matter such as an amendment of the AOI, capital reduction or merger, the key points of the agenda should also be stated in the notice of convocation.

Such notice does not have to be sent to the shareholders who have individually consented to waive the notice requirement. Thus, it is generally interpreted that, with the consent of all shareholders, a general meeting of the shareholders may be convened without the notice procedure.

In addition, in lieu of delivering a notice of convocation to shareholders holding no more than 1% of the total number of issued and outstanding voting shares, a listed company may give a public notice of convocation of the general meeting of the shareholders on the Data Analysis, Retrieval and Transfer System (commonly known as “DART”) as prescribed in the AOI of the company.

In principle, the board of directors has the authority to call a general meeting of the shareholders. An auditor or the audit committee may also request convocation of an extraordinary general meeting of the shareholders by submitting to the board of directors a written statement of the meeting agenda and the reason for convocation.

In addition, holders of at least 3% of the total issued and outstanding shares may request the board to convene an extraordinary general meeting of the shareholders. In the case of a listed company, holders of at least 1.5% of the total issued and outstanding shares for six consecutive months may also exercise such convocation rights. In such case, such holders should submit to the board a written statement of the meeting agenda and the reason for convocation. If the board fails to convene a general meeting after such request, such holders may directly convene a meeting with the court’s permission.

All shareholders are entitled to receive a notice of convocation of a general meeting from the company and to ask questions about or participate in a discussion on whether to approve the agenda in the course of exercising their voting rights at the general meeting.

Shareholders may also request access to or receive copies of the shareholders’ register, the AOI, the minutes of general meetings and other documents kept at the head office of the company.

Under the KCC, a general meeting of the shareholders should be held at a physical location and shareholders must attend the meeting in person to adopt resolutions. The KCC does not recognise a general meeting in which all attendees are present online.

Some companies recently provided an online broadcast of a general meeting in parallel with the meeting held at a physical location in order to prevent COVID-19 transmission, allowing shareholders to view the meeting online. However, even in such case, the shareholders viewing the meeting online are deemed to have not attended the meeting.

Under the KCC, the concept of a quorum for a general meeting of the shareholders does not exist, but only the concept of a quorum required for a resolution exists. An ordinary resolution at a general meeting of the shareholders requires the affirmative vote of “a majority of the voting shares present at the meeting” representing “at least one-fourth (¼) of the total number of issued and outstanding shares”.

In practice, the requirement for the affirmative vote of “at least one-fourth (¼) of the total number of issued and outstanding shares” tends to serve as a de facto quorum. However, such requirement may be waived solely in the case of the resolution on the appointment of auditors or audit committee members, if voting by electronic means is permitted. In such case, only the affirmative vote of a majority of the voting shares present at the meeting is required.

Resolutions adopted at a general meeting of the shareholders include ordinary resolutions, special resolutions and extraordinary special resolutions.

• Ordinary resolutions are passed by the affirmative vote of “a majority of the voting shares present at the meeting” representing “at least one-fourth (¼) of the total number of issued and outstanding shares”.
• Special resolutions require the affirmative vote of “at least two-thirds (²∕₃) of the voting shares present at the meeting” representing “at least one-third (¹∕₃) of the total number of issued and outstanding shares”.
• Extraordinary special resolutions need the consent of all shareholders. 

Companies may adopt stricter voting requirements in the AOI beyond the statutory requirements under the KCC. However, they may not ease the voting requirements in the AOIs below the statutory requirements under the KCC.

Agenda items requiring approval by an ordinary resolution at the general meeting of the shareholders include:

• appointment of directors and auditors;
• determination of remuneration for directors and auditors;
• approval of yearly financial statements as of the end of each fiscal year;
• distribution of dividends;
• reduction of capital to compensate for deficit; and
• reduction of legal reserves.

Agenda items requiring approval by a special resolution at the general meeting of the shareholders include:

• amendment to the AOI;
• transfer of all or a material part of the business;
• removal of directors or auditors;
• reduction of capital (except for the purpose of compensating for deficit);
• merger, split-off, split-merger, comprehensive share exchange, comprehensive share transfer; and
• grant of stock options.

Extraordinary special resolutions requiring the consent of all shareholders include resolutions to exempt a director from liability to the company and resolutions on organisational change to convert a joint stock company to a limited company.

A shareholder may cast their vote in person at a general meeting of the shareholders or designate a proxy to exercise their vote at such meeting.

Shareholders may also cast their vote themselves (without using a proxy) without attending the shareholder meeting in person, by way of an electronic voting if the company has adopted an electronic voting system by board resolution, or in writing if the AOI allows casting of votes in writing, in each case without duplication with any other method of voting.

There is no separate restriction on the voting method at a shareholder meeting, such as by a show of hands, standing up or polling, so long as it is a reasonable method by which the intent of shareholders can be confirmed.

At a general meeting of the shareholders, shareholders may resolve on only the matters set forth as the meeting agenda in the notice of convocation. Matters not listed in the notice are not allowed to be resolved at such meeting without the consent of all shareholders, even if the shareholders present at the meeting consent to the inclusion of such new matters in the agenda. For example, a shareholder may not request appointment of directors to be presented as an agenda item at a general meeting of the shareholders convened for approval of financial statements, and even if such agenda item is presented and resolved, such resolution at the general meeting of the shareholders is unlawful and may be revoked.

However, at a general meeting of the shareholders held for the purpose of appointing Candidate A as a director, it is allowed to change the ballot at the meeting to the appointment of Candidate B, instead of Candidate A. The agenda for such meeting would be deemed an appointment of a director, not a specific person as a director. Yet, in the case of a listed company, a director must be appointed only among the candidates notified in advance. Also, at a general meeting of the shareholders convened with the agenda on payment of dividends, requesting to increase the dividend amount is allowed, and a resolution to pay dividends in the increased amount will be held valid.

Even if a resolution is adopted by the affirmative vote that meets the quorum necessary for a resolution at a general meeting of the shareholders, if there is any defect in the substance of the resolution or in the process, a shareholder may dispute the validity of the resolution.

Action to Revoke a Resolution

A shareholder may file a lawsuit with the court to revoke the resolution adopted at a general meeting of the shareholders within two months from the date of such resolution if the procedures for convening such general meeting or the manner of passing such resolution are in violation of the applicable laws or the AOI, or are materially unfair (eg, the convocation notice has not been given to some shareholders, or an agenda not included in the convocation notice has been resolved), or if the substance of the resolution is in violation of the AOI.

Claim for Invalid Resolution

If the substance of a resolution adopted at a general meeting of the shareholders is in violation of applicable laws or regulations (eg, a resolution in violation of the principle of the equality of shareholders, or a resolution approving unlawful financial statements), a shareholder may file a lawsuit with the court to seek the affirmation of invalidity of such resolution.

Claim for Non-existence of Resolution

If there is a material defect in the procedures for convening such general meeting or the manner of passing the resolution (eg, the convocation notice has not been given to all or most shareholders), a shareholder may file a lawsuit to seek the affirmation of non-existence of the resolution of the general meeting of shareholders.

A general meeting of shareholders should be held in a physical location, and resolutions should be adopted in the presence of shareholders in person. In principle, adopting a written resolution without actually holding a general meeting of shareholders is not allowed.

However, as an exception, a company with the total paid-in capital of less than KRW1 billion may adopt a written resolution in lieu of the resolution of the general meeting of shareholders, and such company will be deemed to have adopted a written resolution if all shareholders have consented to the agenda of the resolution in writing.

The approval of a general meeting of shareholders is required in order to appoint or remove a director to/from the board of a company. Although generally the board may call a general meeting of shareholders to appoint or remove a director, holders of at least certain percentage of shares have the right to call a general meeting and propose to elect or remove a director at such meeting.

Right to Convene a Shareholder Meeting

A general meeting of shareholders may be held annually or at such time as the board calls for such meeting. In addition, shareholders holding at least 3% of the total issued and outstanding shares have the right to demand the company convene an extraordinary general meeting of shareholders or, if the company refuses to do so, the right to demand that a court issue an order to convene such meeting. In the case of a listed company, holders of at least 1.5% of the total issued and outstanding shares for six consecutive months also have such right.

Right to Propose Agenda for Shareholder Meeting

Generally, the board has the right to propose the agenda for a general meeting of shareholders. However, holders of at least 3% of the total issued and outstanding shares may also propose the agenda for a general meeting of shareholders by written notice to the board at least six weeks prior to the date of the general meeting. Such agenda may include the election or removal of a director.

Required Approval

A director may be elected by the ordinary resolution of shareholders. On the other hand, a director may be removed by the special resolution of shareholders.

Remedies

Holders of at least 3% of the total issued and outstanding shares have the right to petition the court for removal of a director in the event such director’s removal was rejected at a general meeting of shareholders notwithstanding such director’s misconduct or other material violation of law or AOI, provided that such petition should be made within one month after the date of the shareholders’ resolution. In the case of a listed company, shareholders meeting the following threshold also have the same right: (i) 0.5% of the total shares continuously held for at least six consecutive months; or (ii) 0.25% if the paid-in capital in the immediately preceding financial year is KRW100 billion or more.

Any shareholder, so long as such person holds at least one share, has the right to bring an action in court for revocation or nullification of a board resolution. The court will then decide whether to revoke or nullify the resolution, based on the applicable grounds at law.

Holders of at least 1% of the total issued and outstanding shares have the right to demand, on behalf of the company, that a director not take certain actions or cease to take certain actions that are in violation of law or the AOI of the company, if such actions would result in irreparable harm to the company. In the case of a listed company, shareholders meeting the following threshold also have the same right: (i) 0.05% of the total shares continuously held for at least six consecutive months; or (ii) 0.025% if the paid-in capital of the immediately preceding financial year is at least KRW100 billion.

Shareholders do not have the power to require a director to take certain actions. However, if a director commits an unlawful act resulting in damage to the company, shareholders may sue or demand the company sue the director or adopt a resolution to remove the director.

In principle, the provisions of the KCC applicable to directors apply mutatis mutandis to auditors. Therefore, shareholders have the right to propose to the board the appointment or removal of an auditor and adopt a special resolution to remove an auditor, subject to the same shareholding thresholds as applied to the shareholder rights with respect to directors.

If any person, alone or together with such person’s specially related persons, holds 5% or more of the total issued shares of a listed company, such person must report their shareholding information to the Financial Services Commission and the relevant securities exchange, until their holding falls below 5%. Initially the report must be made within five business days from the date when such person first becomes a 5% holder. Thereafter, each time the number of shares held by them has changed by 1% or more of the total issued shares of the company or the purpose of shareholding has changed, the person must report the change to the Financial Services Commission and the relevant securities exchange within five business days from the date of such change.

In addition, directors and officers (whether registered or not) and major shareholders of a listed company (ie, a holder of, directly or indirectly, 10% or more of the total voting interests or a person who exercises de facto influence over material business decisions of the company) must report to the Securities and Futures Commission and the relevant securities exchange the number of shares beneficially owned by them within five business days after they become a director, officer or major shareholder. They must also report any change in the number of shares held by them to the Securities and Futures Commission and the relevant exchange within five business days from the date of such change.

Shareholders are entitled to grant security interests over their shares. Security interests on shares may be granted by way of creating a pledge on such shares pursuant to the provisions of the KCC or creating a security transfer (“yangdo-dambo”in Korean, which means a transfer of the ownership of shares to a creditor as a collateral).

A statutory pledge on shares may be created as (i) a summary pledge or (ii) a registered pledge. A summary pledge is effected by mutual agreement of the parties and the transfer of a share certificate. A registered pledge requires, in addition to the foregoing, that the company reflect, at the request of the pledgee, the name and address of the pledgee on the register of shareholders and the pledgee’s name on the share certificate.

Meanwhile, under the Act on Electronic Registration of Stocks and Bonds, listed shares are registered in the electronic register without the issuance of share certificates. Therefore, in order to establish a pledge on listed shares, the pledgee should apply for electronic registration of a pledge to the Korea Securities Depository through a securities company.

In principle, shares are freely transferable. The KCC provides for a free transfer of shares so that shareholders may recoup their share capital.

Under the KCC, shares can be transferred by way of transfer of share certificates. No transfer of shares would be valid and in effect until the share certificates have been transferred. Nonetheless, shareholders may validly transfer shares without share certificates if the company has failed to issue share certificates within six months from the date of incorporation or the payment due date for the subscription price for such shares, or if the company confirms in writing no issuance of share certificates.

The AOI may provide that board approval is required with respect to a share transfer. In this case, in the absence of the requisite board approval, no transfer of shares should be effective against the company. If the board of directors does not approve a share transfer, the transferring shareholder may request the company purchase the shares or designate a transferee acceptable to the company.

The company may pay dividends if (i) the company has distributable income and (ii) dividend payment is approved at the general meeting of shareholders, or, in the event that the board approves the financial statements of the company, by the board.

Distributable income means the amount available from the net assets in the balance sheet of the company as at the end of the immediately preceding financial year, after deducting (i) the paid-in capital, (ii) the statutory capital reserve, (iii) surplus earnings to be cumulated as the statutory capital reserve as at the end of the current financial year, and (iv) unrealised profit. Under the KCC, since shareholders have a junior claim to the claims of creditors, dividend payments are permitted strictly within the scope of the distributable income.

Once dividend payment is approved by the resolution of shareholders or the board, dividends must be paid within one month after the date of such resolution, unless the date of payment is determined otherwise in such resolution.

If there are concerns that the company may be insolvent (ie, unable to pay its debts without significant difficulty), holders of at least 10% of the total issued and outstanding shares have the right to petition the court for rehabilitation of the company pursuant to the Debtor Rehabilitation and Bankruptcy Act.

Appraisal Right

A shareholder holding at least one share has the right to request the company to purchase the shares owned by such holder if such holder dissents from any of the following resolutions:

• a transfer of all or a material portion of the business of the company;
• entering into, altering or rescinding a contract for leasing the whole business, for giving authority to manage such business, or for sharing with another person all profits and losses of the company, or other similar contracts;
• assuming all or a material portion of the business of another company which significantly affects the company’s business;
• a comprehensive share swap or transfer;
• a merger; or
• a corporate split or a split merger.

Court Actions/Demand Right

A shareholder holding at least one share has the right to bring an action in court and/or to demand the company take or not take certain actions as follows:

• to petition the court for revocation or nullification of a resolution passed at a general meeting of shareholders;
• to petition the court to nullify the issuance of new shares;
• to demand the company suspend the issuance of new shares;
• to petition the court to nullify the incorporation of the company;
• to petition the court to nullify a merger or consolidation;
• to petition the court to nullify a corporate split or split merger;
• to petition the court to nullify any reduction in paid–in capital;
• to demand the company suspend any unfair issuance of convertible bonds or bonds with warrants; and
• to petition the court for retrial of the confirmed final decision, in the event that a derivative suit is brought and the plaintiff and defendant colluded to have a decision rendered for the purpose of injuring the company’s rights.

Further, holders of at least 1% of the total issued and outstanding shares have the following rights:

• to demand, on behalf of the company, that a director not take certain actions or cease to take certain actions that are in violation of the law or the AOI of the company, if such actions would result in irreparable harm to the company; and
• to bring an action in court and/or to demand that the company bring an action in court against (a) promoters, (b) directors, (c) statutory auditors, (d) those who have colluded with the company to subscribe to shares at a considerably unfair price, (e) shareholders who have received profits from the company, or (f) liquidators.

In the case of the right in the first bullet above, shareholders of a listed company may also exercise the same right if they satisfy the following shareholding threshold: (1) 0.05% of the total issued and outstanding shares continuously held for at least six consecutive months; or (2) 0.025% if the paid-in capital of the immediately preceding financial year is KRW100 billion or more.

In the case of the right in the second bullet above, shareholders of a listed company may also exercise the same right if they hold 0.01% of total issued and outstanding shares for at least six consecutive months.

Holders of at least 1% of the total issued and outstanding shares have the right to demand, on behalf of the company, that a director not take certain actions or that they cease to take certain actions that are in violation of the law or the AOI of the company, if such actions would result in irreparable harm to the company. Alternatively, shareholders of a listed company may exercise the same right if they hold at least 0.05% of the total issued and outstanding shares for at least six consecutive months, or 0.025% if the paid-in capital of the company in the immediately preceding financial year is KRW100 billion or more. Such demand right may be exercised by way of communications to the director or bringing an action in court.

A shareholder may file a claim against a director or the company for any damages incurred by such shareholder as a result of such director’s neglect of his duties to the company if such neglect results from “wilful misconduct or gross negligence”, even where such negligence does not constitute a tort against the shareholder under the Civil Code. This liability is joint and several for all directors involved; and in the event of any action taken pursuant to a resolution of the board of directors, the directors who voted for such resolution will be jointly and severally liable.

However, in case a director misappropriates the corporate assets, as a result of which the assets of the company decrease and consequently the shareholders’ economic interests are adversely affected, the Supreme Court held that such damages are indirect damages for which the shareholder cannot claim damages based on the foregoing statutory right.

If a director has intentionally or negligently acted in violation of law or the AOI or has neglected their duties, all directors shall be held liable, jointly and severally, for damages incurred by the company as a result of their actions.

Holders of at least 1% of the total issued and outstanding shares have the right to bring an action in court on behalf of the company against directors (ie, a derivative suit). In addition, shareholders of a listed company have the same right if they hold at least 0.01% of total issued and outstanding shares continuously for at least six consecutive months. Prior to exercising the right to institute such derivative suit, the relevant shareholders must first deliver to the company a written notice demanding the filing of an action against directors. If the company does not file an action against directors within 30 days after receipt of such notice, the shareholders may bring an action on behalf of the company.

However, if the company may suffer irreparable harm due to the lapse of the 30-day period, the relevant shareholders may immediately file the lawsuit. So long as the shareholders satisfied the requisite shareholding threshold at the time of filing the lawsuit, they may cease to maintain the shareholding threshold after filing the lawsuit. The company may join the derivative suit filed by the shareholders.

The purpose of the representative suit is to hold directors liable for damages incurred by the company as a result of the actions of directors. The derivative suit shall not be available for the purpose of seeking damages incurred by third parties or shareholders as a result of the actions of the directors.

Legal Framework for Shareholder Activism in Korea

Shareholder activism is generally subject to the provisions of the KCC, the Financial Investment Services and Capital Markets Act (FSCMA) and the Korea Exchange (the “KRX”) regulations. The government has been reinforcing laws and regulations to improve transparency in large business groups’ investments structures as well as their corporate management, and to strengthen shareholders’ rights in individual companies.

Rights under KCC

Activist shareholders generally rely on the specific rights afforded to minority shareholders under the KCC, including the right to call a general meeting of shareholders, the right to propose agenda of such meeting, the right to request a cumulative voting with regard to the appointment of directors, the right to request an injunction (suspension) against a director’s misconduct, the right to institute a derivative suit, and the right to inspect books and records.

The KCC has a number of ‘special provisions’ applicable to listed companies that relax the shareholding ratio requirement for minority shareholders to exercise their rights. To prevent abuse of these provisions, the KCC generally requires a minimum holding period (eg, six months) as well.

FSCMA Disclosure Requirements

On the other hand, shareholding disclosure requirements under the FSCMA may serve to check shareholder activism. Under the FSCMA, if a shareholder comes to own at least 5% of a listed company, such shareholder must report its shareholding status and the purpose of ownership to the Financial Services Commission and the KRX within a specified period. Thereafter, such shareholder must also file a detailed account of any changes in its shareholding ratio by at least 1% of the total issued and outstanding shares, any changes in its purpose of shareholding, or any other material matters.

Recent Changes to FSCMA

However, in February 2020, an amendment to the Enforcement Decree of the FSCMA was adopted to relax the 5% reporting obligation, for the purpose of enhancing and supporting institutional investors’ shareholder activism. The key amendments to the new FSCMA Enforcement Decree are intended to (i) clarify and reduce the scope of shareholding with the “intent to influence corporate management” which is subject to 5% reporting requirements, (ii) further segment the reporting obligations depending on the purpose of shareholding, and (iii) ease the 5% reporting requirement applicable to institutional investors.

Regarding the amendment item (i) above, the new FSCMA Enforcement Decree excluded the following activities from the scope of shareholding with the “intent to influence corporate management”:

• exercise of minority shareholders’ rights available under the KCC;
• initiatives by professional investors to amend the AOI of the company to improve corporate governance;
• shareholder activities related to the declaration of dividends; and
• simple or public expression of opinion.

Recent Changes to KCC

Further, the following amendments to the KCC adopted in December 2020 would lend support to shareholder activism.

• The election of any director who will serve as a member of the audit committee must be held separately from the election of other directors, in order to ensure the independence of the audit committee members of a listed company.
• Shareholders of the parent company have the right to bring a derivative suit against the directors of a direct or indirect subsidiary (ie, the company of which more than 50% of the shares are held by the parent company), so long as such shareholders hold at least 1% of the total issued and outstanding shares of the parent company or, in the case of the parent company that is a listed company, at least 0.5% of the total issued and outstanding shares for at least six months.
• Minority shareholders of listed companies may exercise their rights selectively in their discretion pursuant to either the special provisions or the general provisions applicable to listed companies. That is, minority shareholders may comply with either the higher shareholding threshold not subject to any holding period, or the lower shareholding threshold subject to a holding period, whichever is easier to meet.

The key aims of activist shareholders are to enhance the corporate value and thereby the shareholder value. To that end, activist shareholders tend to propose the following matters to the management, or actively oppose the agenda proposed by the management:

• recommending director and officer candidates and campaigning for the appointment of directors (especially, an outside director who is elected as an audit committee member separately from other directors) who would represent the interests of minority shareholders;
• challenging excessive compensation for directors or their management misconduct and requesting improvement thereof;
• matters relating to shareholder return policies, including reasonable determination of the size of dividends, acquisition of treasury shares, and optimisation of capital structure; and/or
• disposal of idle assets serving non-core/non-business purposes, or corporate restructuring through mergers and acquisitions.

Strategies used by activist shareholders in Korea are similar to those used in other countries and depend on their objectives or the circumstances of the relevant companies. Informally, activist shareholders may communicate their request in a letter to the board or ask for a conversation with the management. Official/legal procedures, on the other hand, include exercising shareholder rights to propose a shareholder meeting agenda and/or to call for a shareholder meeting, and soliciting the votes of other shareholders by proxies.

In particular, the right to propose a shareholder meeting agenda is most frequently exercised. If the company rejects inclusion of the agenda proposed by the activist shareholder, the shareholder often files a preliminary injunction in court to include such proposed agenda.

To put pressure on the largest controlling shareholder, certain activist funds take a step beyond soliciting proxy votes to entering into voting trusts or other alliances with significant shareholders other than the controlling shareholder.

In Korea, no particular industries or sectors tend to be targeted by activist behaviour. Instead, the following types of companies are generally vulnerable to and likely to be targeted by activist shareholders:

• companies with a weak or no major shareholder;
• companies with a high foreign shareholding ratio actively participating in the general meeting of shareholders;
• companies with low shareholder returns (eg, low share prices or low dividends);
• companies with uncertainty of distributable cash or free cash flow according to their balance sheets;
• companies with a controversial agenda pending, such as a restructuring; and
• companies under public criticism due to events such as ongoing criminal or administrative investigations.

Shareholder Activist Funds

The recent increase in the number of asset managers and assets managed by asset managers has led to a balloon effect resulting in a rise of the market for shareholder activist funds. With the emergence of new asset managers, funds advocating shareholder activism have emerged, such as those employing strategies of investing in the shares of undervalued listed companies and then eliminating the factors that led to the undervaluation of the relevant company by improving the governance structure and strengthening dividends through actively exercising minority shareholders’ rights, and thereafter obtaining investment returns.

National Pension Service

In 2018, the state-run National Pension Service (NPS), which is the world’s third-largest pension fund, adopted a stewardship code, and, owing to certain recent highly publicised cases of misbehaviour by owners, there is growing public opinion in Korea that shareholders should actively exercise their shareholder rights.

In connection with the foregoing, the NPS enacted its internal shareholder activism guideline, which became effective on 27 December 2019 and establishes detailed standards and processes for shareholder activism based on the stewardship code. With this guideline in effect, the NPS is expected to take a more active stance as a shareholder and, for certain portfolio companies selected by its fund management committee, to exercise its shareholder rights to the fullest extent permitted under applicable laws and regulations.

While it is difficult to ascertain what proportion of public activist demands have been met, a number of activist demands have led to significant changes in corporate governance in recent years.

For instance, a group of activists successfully carried out a public campaign opposing a large public company’s corporate restructuring in a shareholder ballot. In certain other instances, the listed companies voluntarily accepted the activist shareholders’ proposal to diversify the composition of the board to include foreign and/or female outside directors, or to expand the shareholder return policies.

Furthermore, activist shareholders have a better chance of successfully appointing their director designee to the audit committee, due to the following changes in law:

• the election of any director who becomes a member of the audit committee must be conducted separately from elections for other directors to ensure independence of members of audit committees of listed companies; and
• the amended KCC limits all shareholders from casting votes in respect of their shares in excess of 3% in respect of the appointment or removal of audit committee members; provided that the largest shareholder is restricted from casting votes in respect of its shares in excess of 3% (which is aggregated with shares held by its specially related parties) in respect of the appointment or removal of audit committee members who are not outside directors.

Korean companies have limited options in responding to an activist shareholder. Poison pills and supervoting shares are not available to Korean companies, since each share must carry one vote under Korean law. They may consider increasing the shareholding stake of a friendly third party by way of issuing new shares or disposing of treasury shares to such third party. However, the court may invalidate the new issuance of shares to a third party if such issuance does not serve any reasonable business purpose but rather purports solely to defend against shareholder activism.

Fundamentally, companies should keep track of changes in shareholding to identify early warning signs. Activist shareholders will try to set shareholders against the board and management, so it is important that the company maintains open communications with major institutional investors, asset managers and other shareholders.

In Korea, NPS and other major institutional investors, labour unions and other social groups have led governance activism. Governance activism has developed to put pressure on companies to adopt independent directors, ESG policies, and other best practices for good corporate governance and corporate social responsibilities. Companies may adopt such best practices to address the concerns of the shareholders driving governance activism. Even if they cannot accept all such requests from shareholders, the companies should actively engage with shareholders to explain their reasons and build rapport with shareholders.