Democratic Party vies to amend Commercial Act

Lee Jae-myung, the leader of the Democratic Party of Korea, announced that he would push to amend the Commercial Act to expand the scope of directors’ duty of loyalty in the upcoming plenary session. While agreeing to the abolition of the financial investment income tax promoted by the People Power Party, he stated he would instead pursue amendments to the Commercial Act to ‘advance the stock market.’ The issue, however, is that this amendment may lead to an increase in lawsuits against directors, potentially undermining corporate value in the medium to long term — the exact opposite of the Democratic Party’s legislative intent.

About 10 Democratic Party lawmakers have already submitted a bill to amend the Commercial Act to add ‘shareholders’ and ‘total shareholders’ to the list of those eligible for directors’ duty of loyalty, which is currently limited to ‘companies.’ In the ruling party, Financial Supervisory Service Chief Lee Bok-hyun has repeatedly expressed the need to revise the Commercial Act but has struggled to settle on a clear stance after facing opposition from the business community, which argues that the business environment would deteriorate rapidly.

The business community is concerned that expanding the duty of loyalty to include ‘total shareholders’ will make companies vulnerable to external attacks. If activist funds with partial stakes in a company file lawsuits challenging board decisions, directors may feel psychologically pressured, making it difficult for them to make crucial decisions such as restructuring and mergers and acquisitions (M&A). The demands of minority shareholders could force companies to allocate more resources to dividends and share buybacks to boost share prices in the short term, rather than investing for the future.

The Democratic Party also aims to strengthen the ‘cumulative voting system,’ which allows shareholders to allocate all their votes to specific director candidates, and the ‘separate appointment of audit committee members,’ which requires companies to have independent auditors in addition to directors chosen by the majority shareholder. Unlike in developed countries, such a system would compel companies to use excessive resources defending their management rights, as there are no protective measures such as differential voting rights.

Domestic and foreign hedge funds have been buying stakes recently in Korean conglomerates and demanding changes in board composition and dividend increases. Additionally, companies are facing unprecedented challenges, including shifts in trade dynamics due to the U.S.-China hegemonic rivalry and industry restructuring driven by artificial intelligence (AI). It would be counterproductive to push for legislation that slows down corporate decision-making and ties down the hands of management, especially when support measures to cope with rapidly changing conditions are insufficient.

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