This country-specific Q&A provides an overview to tax laws and regulations that may occur in South Korea.
This Q&A is part of the global guide to Corporate Governance. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/corporate-governance/
What is the typical organizational structure of a company and does the structure typically differ if the company is public or private?
Under the KCC, a Company has the following executive units: (i) the general meetings of the shareholders (“GMS”); (ii) the board of directors (“BOD”) comprised of registered directors of the Company(under the KCC, a director means a registered director); (iii) the representative director(s) appointed among the directors; and (iv) the statutory auditor(s) or the audit committee.
The GMS is the supreme decision-making body of a Company and determines fundamental matters. The BOD decides important matters related to daily operations of the Company not specially reserved for determination by the GMS. The representative director, being one of the directors but functionally equivalent to a chief executive officer, is the administrative arm responsible for implementing the decisions of the GMS and BOD with the authority to bind the Company. The amendment to the KCC effective April 15, 2012 has introduced the executive officer positions that are separate from the BOD and responsible for the daily operation of the Company and implementing GMS/BOD decisions. If a Company decides to have executive officers under its Articles of Incorporation (“AOI”), there will be no representative director. The statutory auditor supervises the management of the Company’s business and audits the Company’s accounts.
A listed Company with total assets of KRW 100 billion or more is required to have at least one (1) full-time statutory auditor or alternatively establish an audit committee. A listed Company with total assets of KRW 2 trillion or more is required to establish an audit committee in lieu of having statutory auditor(s). In such case, the audit committee must consist of three (3) or more directors with at least two-thirds of the committee members composed of outside directors, the representative of the audit committee must be an outside director and at least one (1) committee member must be an accounting or financial expert.
Who are the key corporate actors (e.g., the governing body, management, shareholders and other key constituencies) and what are their primary roles? How are responsibilities divided between the governing body and management?
All matters concerning management of a Company’s business including, but not limited to, disposition or transfer of material assets, borrowing a substantial amount, establishment and the closing of a branch office and appointment and discharge of a representative director or executive officers, must be carried out pursuant to a resolution of the BOD. Korean legal commentators generally take the position that all important matters concerning the management of a Company’s business are to be decided by a BOD resolution, unless the KCC or the AOI provide they are to be decided by a resolution of the shareholders. Other matters need not be decided by a BOD resolution, but instead may be delegated to another organ or body of the Company. In practice, the representative director or representative executive officer of the Company will be responsible for carrying out the decisions resolved by the BOD. Important corporate decisions such as corporate merger, split, business transfer or dissolution requires a special resolution of the GMS as well as a resolution of the BOD. Approval of the financial statements requires a resolution of the GMS, in principle, and election of a director must also be carried out pursuant to a resolution of the GMS. Please refer to Item 20 for specific matters reserved for determination by the GMS.
As a member of the BOD, a director participates in the decision-making processes and exercises supervisory oversight over the conduct of the duties by the representative director or representative executive officer, among others roles. Under the KCC, the directors of a Company have various duties and responsibilities towards the Company. Such duties and responsibilities include (among others): (i) duty of due care, (ii) duty to be faithful (duty of loyalty), (iii) duty of confidentiality, (iv) duty not to compete with the company, (v) duty against self-dealing and (vi) duty against appropriation of business opportunities.
If a Company has implemented the representative director system, then the representative director, who is also a member of the BOD, has the general power and authority to represent the Company in dealings with third parties, to execute commitments in the name of the Company and to manage the general affairs of the Company in the ordinary course of business subject to the general policy and resolutions of the BOD and GMS. On the other hand, if a Company adopts the representative executive officer system, the executive officers are required to carry out the executive role with the BOD exercising supervisory oversight over them.
What are the sources of corporate governance requirements?
The KCC is the primary statute governing company structures and organizations in Korea. In addition, certain regulated industries (for example financial services, telecommunications and broadcasting) are additionally subject to separate corporate governance regulations applicable to companies in their respective industries (e.g., financial institutions are governed by the Act on the Corporate Governance of Financial Companies). The Monopoly Regulations and Fair Trade Law (“MRFTL”) also aims to lessen the concentration of the economic power of large conglomerates by banning cross-shareholding, circular-shareholding and debt guarantees for affiliates, restraining undue assistance between affiliates, requiring BOD approval for affiliate transactions and imposing other similar restrictions.
Although Korea is a civil law jurisdiction, there is a significant number of civil and criminal case precedents concerning corporate governance matters used in interpreting and applying the relevant statutory provisions.
What is the purpose of a company?
According to the KCC, a Company means a corporation established for the purpose of engaging in commercial activities and any other profit-making activities. The purpose of a for-profit Company is not merely for engaging in external profit-making activities, but also for distributing the gained profits to its shareholders. The business objective of a Company is materialized in the AOI, and certain business objectives may require prior government approval.
Is the typical governing body a single board or comprised of more than one board?
The typical governing body is comprised of a single BOD. Under the KCC, the BOD of a Company occupies the dual role of the executive organ with decision-making authority for important matters and the supervisory organ which exercises oversight over the Company’s management. In addition to the BOD, a Company can adopt the executive officer system, in which case, the executive officer has authority to make decisions on the duties delegated by the AOI or BOD resolutions.
How are members of the governing body appointed and removed from service?
At the time of incorporation of a Company, the directors are elected by the promoters or at the inaugural general meeting of promoters, and after the incorporation of a Company, the directors are elected by an ordinary resolution (a resolution adopted by a majority of the votes of the shareholders present representing at least one-fourth of the total number of the issued and outstanding shares) at the GMS. Since outside directors of a listed Company have different qualifications from those of internal directors and their appointment procedures are different, in practice, they are elected separately at the GMS and separately described in the notice of convening the GMS. The directors must be elected by an ordinary resolution based on one-person one-vote principle, unless a cumulative voting system is adopted. Since the GMS has exclusive authority to elect the directors, such authority cannot be delegated by the AOI or via a resolution of the GMS.
The directors can be dismissed at any time by a special resolution of the GMS (a resolution adopted by at least two-thirds of the votes of the shareholders present representing at least one-third of the total number of the issued and outstanding shares), and such special resolution is the only method of dismissing directors. Due to this requirement, the AOI cannot establish the method of dismissal of the directors in such a way that the directors can be dismissed by a resolution of the BOD or the decision of the representative director. If a director is dismissed before the expiration of his or her term of office without justifiable reason, the director may demand compensation from the Company for damages arising from such dismissal based on grounds of lost expected remuneration that he or she would have been entitled to during term of office.
In the case of a Company which adopts the executive officer system, the BOD has the authority to elect and dismiss an executive officer. Such BOD resolution requires the presence of a majority of the directors in office and affirmative vote of a majority of the directors present.
Who typically serves on the governing body and are there requirements that govern board composition or impose qualifications for directors regarding independence, diversity or succession?
Subject to certain basic standards set forth below, no specific restrictions exist on the qualifications of a director. Under the KCC, a corporation may not serve as a director of a Company, and statutory auditors may not serve as directors of the Company or the Company’s subsidiaries.
On the other hand, under the KCC, some restrictions exist on the qualifications of an outside director. An outside director is defined under law, as a director who does not engage in the business of the Company on a full-time basis and who does not meet any of the disqualification criteria listed in the relevant statute (such as being the largest shareholder or an officer of the Company). For listed Companies with total assets of KRW 2 trillion or more, the majority of the BOD must consist of outside directors, and for listed Companies with total assets of KRW 100 billion or more, at least one-fourth of the BOD must consist of outside directors.
Under the KCC, an outside director is subject to certain qualification restrictions. Among the several restrictions, the following persons cannot serve as outside directors: (i) directors and employees who are engaged in regular business of the relevant Company; (ii) if the largest shareholder of the Company is a natural person, the principal, his spouse and lineal ascendants and descendants; (iii) if the largest shareholder of the Company is a corporation, directors, auditors and employees of the corporation; (iv) spouses, lineal ascendants and descendants of directors, auditors and executive officers; (v) directors, auditors, executive officers and employees of a parent or subsidiary company of the relevant Company; (vi) directors, auditors, executive officers and employees of a corporation that has a significant interest in the relevant Company; and (vii) directors, auditors, executive officers and employees of another corporation for which directors and employees of the relevant Company work as director, auditor, executive officer or employee.
Outside directors of listed Companies must also meet additional basic qualifications, and the following persons cannot serve as outside directors of listed Companies: (i) minors or incompetent persons; (ii) a person subject to bankruptcy adjudication without his rights having been reinstated; (iii) a person subject to imprisonment or heavier punishment during the past 2 years; (iv) a person dismissed or removed from office during the past 2 years due to violation of financial regulations as determined by a Presidential Decree; (v) the largest shareholder and its specially related persons, (vi) a shareholder owning more than 10% of the total issued and outstanding shares, other than non-voting shares or exerts de facto influence on important matters of listed Companies and his spouse and lineal ascendants and descendants; and (vii) a person determined by a Presidential Decree, as having difficulty performing duties of an outside director or who may have influence on the management of listed companies.
A Company must have at least 3 directors. In the case of a Company with total paid-in capital of less than KRW 1 billion, the number of the directors may be one or two.
What is the common approach to the leadership of the governing body?
The KCC does not provide for specific regulations regarding the chairperson of the BOD. In general, the representative director is often elected as the chairperson of the BOD, but this is not a requirement under the KCC. The matters concerning the chairperson of the BOD including the method of election, powers and term of office are generally specified in the AOI or the BOD regulations.
What is the typical committee structure of the governing body?
The BOD may establish committee(s), consisting of two or more members, and delegate certain of the BOD’s authority to such committee. Once a committee adopts a resolution, such resolution must be notified to all directors, and any director may request that a BOD meeting be convened for a separate resolution at the BOD level. An exception is with respect to matters resolved by the audit committee, which cannot be subject to separate BOD review for resolution.
In case of a listed Company or a financial institution, the KCC and other applicable laws and regulations mandate the establishment of an audit committee and an outside director nomination committee. For audit committees, at least two-thirds of the members must be outside directors. In the case of a listed company with total assets of at least KRW 2 trillion, the representative of the audit committee must be an outside director, and at least one (1) of the committee members must be an accounting or financial expert. The boards of listed and non-listed companies have discretion to establish other types of committees, but the AOI must provide for the establishment of such non-mandatory committees under the board.
In practice, large Companies generally establish a number of committees under the board to enhance efficiency (e.g., management committee or executive committee composed of executive directors) or for purposes of granting independent decision-making process with respect to certain specific matters (e.g., inter-affiliate transaction committee or compensation committee).
How are members of the governing body compensated?
Under the KCC, the maximum remuneration of directors must be determined by the GMS by ordinary resolution, unless it is already provided for under the AOI. The amount of director remuneration need not be determined for each director at the GMS or in the AOI; instead, in practice, the aggregate ceiling will generally be determined at the shareholders’ meeting (or in the AOI), with the individual director remuneration being delegated to and determined by the BOD.
The fairness of director compensation is an issue that has received increasing attention in Korea. If the amount of remuneration is deemed excessive in light of the performance of the person concerned or the Company’s financial condition, the decision of the BOD approving such payment may be subject to challenge as being contrary to the interests of the Company.
Under the Financial Services and Capital Markets Act (“FSCMA”), companies that are required to submit a business report to the Financial Services Commission (“FSC”) and the Korea Exchange (“KRX”) must also include in their annual and semi-annual report, information on the amount and calculation method of the compensation made to (1) each director or statutory auditor who received KRW 500 million or more and (2) each officer who received KRW 500 million or more and the top 5 compensated personnel in the relevant business year (or half-year for semi-annual reports).
Are fiduciary duties owed by members of the governing body and to whom are they owed?
One distinguishing feature of the Korean corporate governance regime is that a Company’s BOD owes fiduciary duty only to the Company (and not to the Company’s shareholders) and, therefore, directors are required to perform their duties in the best interests of the Company itself. According to the legal commentators, however, the directors should, while not legally required, also consider shareholders’ interests in determining the best interests of the Company.
Do members of the governing body have potential personal liability? If so, what are the key means for protecting against such potential liability?
(1) Potential personal liability
The KCC sets forth the fundamental principles concerning civil liability of directors of a Company. If a director acts in contravention of the requirements of the laws, regulations or the AOI, or neglects to perform his or her duties, such director will be liable (and in cases of multiple directors, jointly and severally liable) for damages incurred by the Company as a result of such acts or omissions. If such acts were taken pursuant to a BOD resolution, all directors who voted for such resolution will be jointly and severally liable. By law, directors are required to compensate the Company for all damages suffered by the Company having reasonable causal connection to the improper act.
If a Company does not take proper action to seek damages from the directors, its shareholders can initiate a derivative action pursuant to the KCC. Any shareholder(s) holding at least 1% of the total number of issued and outstanding shares (or, in the case of a listed company, 0.01% shareholding for a period of at least six months) may demand in writing that the Company initiate an action to hold the directors liable. If the Company does not initiate such action within 30 days of such shareholder request, the shareholder(s) may initiate the derivative action on behalf of the Company against the responsible directors.
In order to protect third parties, the KCC provides that a director will be liable to a third party for any damages incurred by such third party as a result of the director’s neglect of his or her duties to the Company, if such neglect results from wrongful intent or gross negligence. All directors involved in the decision-making process are jointly and severally liable, and in the event of any action taken pursuant to a resolution of the BOD, the directors who voted for such resolution will be jointly and severally liable.
Directors may also be exposed to criminal liability if they breach their fiduciary duties (e.g., breach of trust under the Korean Criminal Code). For a director to be found criminally liable, such director must have (i) acted with criminal intent and (ii) either gained benefit or caused a third party to gain benefit, resulting in damages or threatened damages to the Company.
2. Key means for protection
Director and officer liability insurance is available in Korea, and the subscription of such insurance policies by companies is common practice in Korea. The risk insured by liability insurance is the liability of directors and statutory auditors of a company for their breach of duty to the company and the company’s shareholders or members subject to specific terms and conditions of the relevant insurance policies.
Under the KCC, a Company may exempt its director from liability for damages. Specifically, a director can be exempt from liability for any amount of damages exceeding 6 times the amount of his or her remuneration for the past 1 year prior to the date on which a director caused the underlying activity. In other words, a Company’s AOI can provide to limit the amount of a director’s liability to 6 times the amount of annual remuneration. An outside director’s liability for damages may be limited to 3 times the amount of annual remuneration. As a general matter, and notwithstanding these limitations, the shareholders can vote to entirely exempt a director from liability via unanimous resolution.
How are managers typically compensated?
There are no specific regulations governing the remuneration of managers under the KCC, but the general view is that such remuneration should be decided by the BOD. The aggregate ceiling of remuneration of officers who are directors must be either set forth in the AOI or decided pursuant to a shareholders’ resolution. For remuneration of non-director officers, there is no legal requirement for shareholders’ approval. For a Company to treat management compensation as expenses for tax purposes, the remuneration of officers should generally be paid in accordance with the standards set forth in the AOI or as approved by the BOD. Otherwise, it is more likely that such remuneration will not be acknowledged as expenses by the tax authorities.
How are members of management typically evaluated?
The KCC does not provide for specific regulations regarding evaluation of members of management of a Company, and management evaluations are generally conducted based on internal regulations. Under the KCC, an officer who is director may be dismissed by a special resolution at the GMS—this is not applicable to a non-director officer.
Do members of management typically serve on the governing body?
Korean Companies typically have management members who do not serve on the BOD. Officers who do not serve on the BOD are generally referred to as “unregistered officers”, and the KCC does not provide for specific regulations applicable to such unregistered officers.
Under the KCC, a director must be elected at the GMS. Other non-director officers who are engaged in business operations and conduct the business of the Company are technically not directors, and thus, not subject to obligations imposed to a director under the KCC. However, the KCC does provide that such officers or members of the management who use certain titles (e.g., chairman) and manage the business affairs of a company to be subject to the same liability as if he or she was a director in relation to third parties. In certain cases, a Company would adopt the executive officer system, in which case, the executive officers may act as a separate governing body of the company (other than the BOD).
What are the required corporate disclosures, and how are they communicated?
Disclosure requirements are frequently triggered under the following laws and regulations:
First, under the KCC, the following documents must be prepared, kept at the Company’s head office (and branch offices, if any) and made available for inspection by shareholders and creditors at least one week in advance of the ordinary GMS: (i) a business report prepared by the director(s), (ii) financial statements prepared by the director(s) and (iii) an internal audit report prepared by the statutory auditor (or the audit committee if applicable).
Second, under the Act on External Audit of Stock Companies, any listed company, any company (joint stock company or limited company) with assets or sales equal to or greater than KRW 50 billion, or any company that is not a small-sized company as defined in the Enforcement Decree of the Act on External Audit of Stock Companies must have its financial statements audited by its external auditor and make the external auditor’s audit report available to the shareholders at its head office and branch offices.
Third, the FSCMA and the relevant disclosure regulations require various reports to be made by listed companies and their shareholders, including the following:
(i) In terms of periodic reports, a listed company is required under the FSCMA to submit to the KRX its annual reports within 90 days of the end of each fiscal year and semi-annual and quarterly reports within 45 days of the end of the applicable quarter.
(ii) A listed company is also required under the FSCMA to promptly report to the FSC certain events or BOD resolutions that are enumerated in the FSCMA (the general guideline being that such events or resolutions may affect an investor’s decision). For example, a listed company is required to file a report with the FSC regarding a contemplated merger, business transfer, spin-off or comprehensive stock swap or the acquisition or disposal of treasury stock. Such reports filed by listed companies are made available to the public by the FSC and the KRX via their websites.
(iii) In the event where the information provider of the fair disclosure intends to selectively release certain information to specific recipients such as institutional investors, the applicable listed company is required to notify or report such fact and the contents of such information to KRX, which is then disclosed to the public.
(iv) Once an investor in a listed company (including specially related persons and other parties acting in concert) holds 5% or more of the voting shares or certain other equity securities issued by such company, the investor must file a report regarding such acquisition with the FSC within five business days. For purposes of this report, the investor is deemed to hold the shares upon entering into a share purchase agreement. When the shareholding of the investor reaches 10% or more of the issued and outstanding voting shares of the listed company, a separate report must be filed with the Securities and Futures Commission (“SFC”) within five business days, and any change in shareholding must be reported to the SFC within five business days of such change.
Fourth, the MRFTL requires any large-scale affiliate transactions (that is those valued at KRW 5 billion or greater, or as otherwise prescribed by the MRFTL) to be subject to a BOD resolution and subsequent public disclosure.
Finally, from 2019, a KOSPI listed company with total assets of KRW 2 trillion or more is required to submit a corporate governance report providing the details of corporate governance such as shareholders, the BOD and auditors.
How do the governing body and the equity holders of the company communicate or otherwise engage with one another?
Communication is generally made via disclosures and the GMS. In certain cases, a shareholder may send letters to the management for consultation, and the management is required to comply with the fair disclosure regulations, which prohibits it from selectively providing information to specific shareholder(s) in the process. Listed Companies often engage in investor relations channels to provide information on the Company’s performance.
Are dual or multi-class capital structures permitted and how common are they?
The KCC permits class shares, and examples are shares entitled to (i) preferred dividends or distribution of residual assets, (ii) exercise of voting rights, (iii) redeemable rights and (iv) conversion rights. For a Company to issue class shares, this must be provided for in its AOI with specific terms and conditions and the number of each class share. Issuance of class shares must be registered and be publicly disclosed and recorded on share subscription forms, shareholder registry and share certificate. Class shares may be issued within the extent set forth in the AOI, in the type and number of shares determined by the promoters at the time of incorporation or by the BOD at the time of issuing new shares.
Class shares are widely used in practice; however, class shares must also apply the principle of “one voting right per share” and comply with certain legal restrictions. For example, the total number of class shares having no or limited voting rights cannot exceed 25% (50%, if listed company) of the total number of issued shares.
What percentage of public equity is held by institutional investors versus retail investors?
According to the KRX, 19.6% of KOSPI investors were institutional investors, 26% were foreigners, and 53.4% were individual retail investors, as of the end of July 2018. In the case of KOSDAQ, 5.1% were institutional investors, 9% were foreigners and 85% were individual retail investors. In total, the percentage in the two markets is as follows: 13.1% institutional investors, 18.4% foreigners and 67.6% individual retail investors.
What matters are subject to approval by the shareholders and what are the typical quorum requirements and approval standards? How do shareholders approve matters (e.g., voted at a meeting, written consent)?
(1) Matters subject to GMS resolutions and relevant requirements
Although the GMS may be considered as a Company’s highest decision-making body, the KCC limits its power to those matters specifically set forth in the KCC or the Company’s AOI. Under the KCC, the following matters must be authorized by a shareholders resolution duly adopted at a GMS.
(a) Matters Requiring Ordinary Resolution
Certain matters must be authorized by an “ordinary” resolution of the shareholders, which refers to a resolution adopted by a majority of the votes of the shareholders present representing at least one-fourth of the total number of issued and outstanding shares. A Company’s AOI may make the voting requirement more stringent, but may not relax such requirement. Such matters include:
- Election of a director or a statutory auditor;
- Election of a representative director (if the AOI requires a GMS resolution for such election);
- Determination of remuneration of directors, statutory auditor(s) or liquidators;
- Approval of annual financial statements and declaration of dividends (could be delegated to the BOD pursuant to the AOI under certain conditions);
- Approval of the largest shareholder’s squeeze-out of minority shareholders;
- Election or dismissal of a liquidator; and
- Approval of completion of liquidation.
(b) Matters Requiring Special Resolution
Other matters must be authorized by a “special” resolution of the shareholders, which refers to a resolution adopted by at least two-thirds of the votes of the shareholders present representing at least one-third of the total number of the issued and outstanding shares. While not specifically prescribed in relevant regulations, according to the prevailing view, a Company’s AOI may make the voting requirement more stringent but may not relax the requirement. The matters requiring a “special” resolution include:
- Amendment of the AOI;
- Transfer of all or an important part of the business;
- Making, altering, or rescinding a contract for leasing the whole of the business, for giving authority to manage such business or for sharing with another person all profits and losses in relation to the business, or any similar contract;
- Acquiring all or a part of the business of another entity that has a material impact on the business of the Company;
- Dismissal of a director or a statutory auditor;
- Issuance of shares at a price less than par value;
- Reduction of paid in capital;
- Dissolution and liquidation;
- Approval of a merger or spin-off;
- Approval of a comprehensive stock swap; and
- Issuance of stock options.
(c) Matters Requiring Unanimity
Releasing a promoter, a director or a statutory auditor from a liability owed to the Company requires the unanimous consent of all shareholders, although not necessarily by means of a resolution adopted at a GMS. The change of a company structure from a Company to a limited company (Yuhan Hoesa in Korean) also requires a resolution adopted by the unanimous vote of all shareholders.
(2) Shareholder Approval Method
In principle, shareholders or the authorized proxies attend the GMS and participate in exercising voting rights, and to the extent the AOI contains applicable provisions, voting may be done in writing in lieu of attending the shareholders meeting. If a shareholder submits a document expressing the intention to exercise his or her voting right in writing, such voting right is deemed as represented at the meeting, and counted as affirmative or negative as expressed.
Electronic voting is also possible pursuant to a BOD resolution. Shareholders exercising their voting rights electronically must obtain shareholder confirmation with a certified digital signature as set forth in the Digital Signature Act, and then cast their electronic votes in the manner prescribed by the Company, after logging on to the website notified by the Company. While the Company determines the electronic voting period, the electronic voting must be closed by the day immediately preceding the date of the GMS.
In the case of small-sized Companies with a total amount of paid-in capital less than KRW 1 billion, a matter could be approved via written resolutions in lieu of resolutions by the GMS. Unlike the written voting system, such a written resolution does not require for a GMS to be convened at all. While the KCC, in principle, requires shareholder resolutions to be made at physical GMS, this is an exception for small-sized Companies to reduce their operating expenses.
Are shareholder proposals permitted and what requirements must be met for shareholders to make a proposal?
Any shareholder who holds at least 3% of the total issued and outstanding shares (in the case of a listed Company, a shareholder who has held at least 1% (or 0.5% in case of a listed Company with at least KRW 100 billion of total paid-in capital) of the total issued and outstanding shares for at least six months, exclusive of non-voting shares, may propose an agenda item six weeks prior to the date of a GMS and such shareholder may explain the subject matters at the meeting. For ordinary general meeting of shareholders (“OGMS”), shareholder proposals must be submitted six weeks prior to the date of the year corresponding to the date of the OGMS in the immediately preceding year.
May shareholders call special meetings or act by written consent?
Minority shareholders holding in the aggregate at least 3% shareholding have the right to demand the company to convene an extraordinary GMS (“EGMS”). In the case of listed companies, such right is given to minority shareholders who have continuously held at least 1.5% of the total number of issued shares for at least six months.
Is shareholder activism common and what are the recent trends?
There are a number of public interest groups that actively seek to advance shareholders’ rights, monitor the activities of the large-scale enterprise groups and publicly disseminate the results of relevant studies, and provide assistance (including legal assistance) to minority shareholders in bringing derivative actions against companies.
In addition to the recent legislative efforts driven by shareholder activism, Korean authorities have actively encouraged institutional investors to exercise their shareholder rights and responsibilities. The Korean version of the Stewardship Code was also recently introduced, which provides guidelines for the institutional investors’ active exercise of shareholders’ rights and addressing any issues that may obstruct exercise of such shareholder rights.
Korea Corporate Governance Service (“CGS”) is responsible for enacting and amending the Stewardship Code, as well as supporting the participation and performance of institutional investors, researching market trends and creating the general environment.
Recently, domestic and foreign activists have become more involved in extraordinary corporate actions, such as corporate mergers and splits. There is a growing tendency for activists to proactively claim their rights as shareholders.
What is the role of shareholders in electing the governing body?
Please refer to our comments in Item 6.
Are shareholder meetings required to be held annually or otherwise, and what information needs to be presented?
The GMS is either an OGMS or EGMS. The OGMS is convened once every fiscal year and main agendas include approval of financial statements and business reports and election of director(s).
Under the KCC, the following documents must be prepared, kept at the company’s head office (and branch offices, if any) and made available for inspection by shareholders and creditors at least one week in advance of the OGMS: (i) a business report prepared by the director(s), (ii) financial statements prepared by the director(s) and (iii) an internal audit report prepared by the statutory auditor (or the audit committee if applicable).
Do any organizations advise or counsel shareholders on whether to approve matters?
Institutional Shareholders Services and Glass Lewis are the major foreign proxy advisory organizations which advise shareholders of companies in Korea. CGS, Sustinvest and Daishin Economic Research Institute are some of the active Korean local organizations. These organizations continue to exert significant influence over exercise of shareholder rights.
What role do other stakeholders, including debt holders, employees, suppliers and customers and the government, typically play in the corporate governance of a company?
Other than the exercise of voting rights by employee stock ownership associations, Korean law does not provide for other venues that allow employees to be engaged in corporate governance. Employees may utilize activist groups to indirectly affect major corporate decision-making process, by engaging in strikes or negotiating collective bargaining agreements.
Creditors could impose certain restrictions on corporate actions pursuant to loan agreements and bondholders can also exercise certain rights via bondholder meetings. Customers and government entities generally do not have direct legal rights over corporate governance matters.
What consideration is given to environmental and social issues, including climate change, sustainability and product safety issues, and are there any legal disclosure obligations regarding the same?
Due to legal reforms and social pressures, as well as increasing sensitivity to reputation and standing in the global marketplace, many Korean companies have increased awareness on corporate social responsibility, environmental and social issues, sustainability and product safety issues, which had not been issues that previously received management attention. In particular, anti-corruption and other compliance issues have gained increasing regulatory and legislative traction, reflecting the changing needs and demands of the Korean society at large. Given the foregoing, Korean companies are expending greater resources to address social responsibility and compliance matters due to the changing environment.
Korean companies are required to make disclosures on certain issues. The Framework Act on Low Carbon, Green Growth requires business reports to provide information on designation and cancellation of companies that manage facilities, greenhouse gas emission and energy usage quantities and green technology/green industry certification issues. The Ministry of Environment also requires “green enterprises” and other public institutions and large companies whose businesses have significant impact on the environment to disclose information related to environmental issues.
How are the interests of shareholders and other stakeholders factored into decisions of the governing body?
In general, the governing body of a Company is established pursuant to shareholders’ decision and approval at the GMS (please see Item 6 for more detail). Shareholders may also consider other requests from non-shareholder stakeholders, but are not legally bound to do so. If a Company adopts the executive officer system, its BOD would be formed by shareholders but the executive officers are elected by the BOD. After election, the directors and executive officers do take into account the interests of the shareholders and other stakeholders, but carry out their corporate actions in accordance with their fiduciary duties.
Do public companies typically provide earnings guidance on either a quarterly or annual basis?
At the beginning of each quarter, certain public (listed) companies make fair disclosure of their potential operating performance upon calculating their performance of the immediately preceding quarter, and provide earnings guidance by means of making correction reports and re-issuing public disclosures on the relevant matters upon receiving the BOD’s approval on the company’s performance in the immediately preceding quarter. Public companies also engage investor relations and disclose business plans in compliance with the fair disclosure regulations.
May public companies engage in share buybacks and under what circumstances?
Korean regulations, including the KCC and the FSCMA, do permit acquisition of treasury stock subject to certain restrictions. Treasury stock may be acquired by listed companies within the extent of the distributable profit of the immediately preceding settlement period, and by a resolution of the BOD. There are certain exceptions, and acquisition of treasury stock is not limited to distributable profit if (i) caused by the merger of the company or the transfer of all businesses of another company, (ii) necessary to obtain the objectives in connection with enforcing the rights of the company, (iii) required for the disposal of fractional shares or (iv) a shareholder exercises his or her appraisal right.
What do you believe will be the three most significant issues influencing corporate governance trends over the next two years?
(1) Shareholder activism and the Stewardship Code
Shareholder activism and the successful implementation of the Stewardship Code described in Item 23 will be major corporate governance issues in the near future. It has become increasingly important to develop various corporate strategies in response to requests of shareholder activism funds, which tend to be more active when there are important corporate actions such as corporate restructuring. Passive institutional investors should be monitored and in particular, the extent of market intervention of the National Pension Service, which holds a large number of shares in major corporations, is a matter of nation-wide interest.
(2) Amendments to the KCC
In connection with corporate governance structure, a number of proposed amendments to the KCC, which mainly concern matters such as “introduction of the multi-step derivative action,” “mandatory cumulative voting system,” and “separate elections for audit committee members,” is currently pending at the National Assembly. Whether any amendments to the KCC will be passed by the National Assembly and the impact of such amendments on corporate governance will be key issues in 2019.
(3) Amendments to the MRFTL
On August 24, 2018, the Korea Fair Trade Commission issued a pre-announcement on the legislation of the proposal for a major amendment to the MRFTL. This proposal extensively covers past discussions regarding regulations concerning the MRFTL. If passed by the National Assembly, the proposal will significantly affect governance structures of corporate groups as well as overall corporate activities, including internal transactions, holding company structures, and disclosures.