The Amendment of the Commercial Act was approved by the National Assembly on December 9, 2020, promulgated on December 29, 2020, and enforced on the same day. Key aspects of the recent amendment include the implementation of multiple derivative suits by shareholders, change in the composition of audit committees, etc.

[2] Reinforcement of Independence of Audit Committee Members (Gamsa wiwon)

1) Separate Election Process for Audit Committee Members

Audit Committee is one of the board of directors’ meeting. Generally, it is not required of companies except for “large-scale listed companies” (daegyumo sangjanghoesa), which are defined by the pursuant Enforcement Decree as stock companies with total assets of more than two trillion KRW (Article 542-11(1) of the Commercial Act). This large-scale listed company must appoint members of the audit committee from among directors appointed by a general meeting of shareholders (Article 542-12(2). This signifies that in order to be appointed as an audit committee member one needs to go through a two-part process—he needs to be first appointed as a director and then be appointed as the audit committee member.

When shareholders vote to elect audit committee members, shareholders owning more than 3% of the total number of shares issued cannot exercise their voting rights exceeding 3% of total shares. This is commonly referred to as the “3% cap rule). This rule aims to “strengthen the independence”, in other words, safeguard the objectivity of audit committee members.

Before the Amendment, the 3% cap rule only applied to the second part of the appointing process. The Amended Commercial Act requires that at least one audit committee member go through a separate election process at the general shareholders meaning. This signifies that the 3% cap rule must be applied from the early stage of director appointment for at least one of the audit committee members.

For listed companies that are not large-scale—stock companies with over 100 billion KRW of total assets but less than two trillion KRW of total assets—the installation of an audit committee is not required but if the company chooses to install one, regulations on the audit committee apply to that company as well.

Some related issues open to debate concern the amendment which states that more than one audit committee member may be appointed through the new separate election process if it is included in the companies’ Articles of Incorporation. Whether the appointment of more than one audit committee member is valid without any provisions in the Articles of Incorporation is open to debate. This is because since the separate election process signifies a reinforcement in corporate governance regulation, there is no need to make such appointment of audit member invalid.

However, if it is interpreted that only one audit committee member can go through the separate election process unless indicated by the Articles of Incorporation, as long as the audit committee member elected through this process maintains his position no other audit committee member may be elected through the separate election process.

2) Unifying the dual 3% cap rule

Before the Amendment, the 3% cap rule was applied differently for the appointment of audit committee members who were outside directors and for those who were not outside directors. In case of appointing a member who is an outside director, the 3% cap rule applied to all shareholders with more than 3% of total shares; for the appointment of a member is not an outside director, the 3% cap rule applied only to the biggest shareholder and persons who were especially related to that shareholder (Article 542-12(3) and (4).

The Amended Commercial Act now applies the 3% cap rule to “only the biggest shareholders and his specially related persons” for the appointment of audit committee members regardless of whether they are outside or non-outside directors. The same rule applies for when audit committee members are dismissed.

3) Significance of the Amendment

The unification of the dual 3% cap rule for audit committee members who are or are not outside directors is not as significant as the “separate election process” newly implemented by this 2020 Amendment. Not only does it mean that small shareholders can now appoint at least one audit committee member to their taste, but also it means that they can appoint at least one director making decisions in favor of small shareholders.

However, the separate election process may also have setbacks. It may cause large shareholders to divide their shares into 3% shares to hinder small shareholders from appointing a director of their choice.

For legal advice on your company compliance, please contact Cha & Kwon Law Offices.