Analysis of the 3% Rule in the Revised Commercial Act and Proposed Next Steps

1. Introduction: The Process of Advancing the Revised Commercial Act and the Need for Follow-up Discussion

On July 3, by agreement between the ruling and opposition parties, the Revised Commercial Act containing the 3% rule passed the plenary session of the National Assembly, and 12 days later, on July 15, it was finally promulgated through approval at a Cabinet meeting. The recent legislative process of the Revised Commercial Act passed this time can be summarized as follows. On November 19, 2024, a bill introduced by Representative Jeongmun Lee included directors’ duty of loyalty to shareholders, the introduction of cumulative voting, an increase in the number of audit committee directors, and the renaming of outside directors as independent directors, among other provisions, many of which were reflected in the recently passed Revised Commercial Act. Thereafter, on March 13, 2025, the bill passed the National Assembly plenary session with the support of at least two-thirds of the incumbent members, but on April 1, then Acting President and Prime Minister Deoksoo Han exercised a veto, citing concerns about weakened management activity and the need to prepare alternatives such as revising the Financial Investment Services and Capital Markets Act. Accordingly, the National Assembly held a revote on April 17, but the amendment was rejected for failing to meet the two-thirds threshold.

After the election of President Jae-myung Lee and the change of administration on June 3, 2025, the ruling and opposition parties formed a consensus on moving forward with the Revised Commercial Act, and on July 2 they reached agreement on an amendment including restrictions on the voting rights of controlling shareholders in appointing audit committee members (the 3% rule). The following day, July 3, the amendment finally passed the plenary session of the National Assembly, and it was promulgated on July 15 through Cabinet approval. Among the provisions of the amendment, the clause imposing directors’ duty of loyalty to shareholders took effect immediately upon promulgation, while the provisions on limiting voting rights exceeding 3% in the election and dismissal of audit committee members of listed companies, the independent director rules, and electronic shareholder meetings will take effect after a one-year grace period from the date of promulgation.

The main elements of the finally promulgated Revised Commercial Act are: 1) the expansion of directors’ duty of loyalty to include shareholders; 2) the renaming of “outside directors” as “independent directors” and the increase in the mandatory appointment ratio from 1/4 to 1/3; 3) the restriction of the largest shareholder’s voting rights to 3% of the total issued shares in the appointment and dismissal of audit committee members; and 4) the mandatory parallel holding of electronic shareholder meetings. In particular, the “3% rule” in the appointment of audit committee members has been extended to all audit committee members. As a result, the controlling shareholder, including related parties, may exercise only 3% of the voting rights, and the voting restriction previously limited to other non-executive directors has now been extended to independent directors (formerly outside directors).

These legislative measures are intended to block the controlling shareholder’s influence over the audit committee. However, considerable criticism has been raised that the institutional design is excessively rigid relative to reality and will produce various structural side effects. Accordingly, this legislative policy issue report seeks to analyze the major problems with the recently promulgated Revised Commercial Act and propose follow-up tasks.

2. Analysis of the Major Problems with the Final Revision of the Commercial Act Incorporating the 3% Rule

◩ Expansion of directors’ duty of loyalty to include “shareholders”: indiscriminate disputes such as lawsuits and criminal complaints for occupational breach of trust

At first glance, expanding the scope of directors’ duty of loyalty from the company alone to “shareholders” appears to strongly promote “shareholder democracy.” However, directors are entrusted with duties by the company; they have no actual contractual relationship with shareholders. It is both an established judicial principle and a global standard that directors do not bear direct responsibility to shareholders. The Commercial Act already embodies the intent to protect shareholders in all acts performed by directors, so the Revised Commercial Act may have a populist character (Junsun Choi, 2025). As the influence of minority shareholders and institutional investors increases, various forms of litigation seeking to hold directors accountable—such as shareholder derivative suits or direct actions—as well as criminal complaints for occupational breach of trust, are expected to increase indiscriminately.

There are 69 matters that a board of directors may resolve, including entry into new businesses and profit distributions, and with each resolution there is a strong likelihood that shareholders may object or pursue damages suits against directors. Until a judgment is reached, directors cannot use company funds to defend themselves against allegations of personal illegality, so they may have to pay for their own defense and suffer years of mental, temporal, and financial harm (Junsun Choi, 2025). Concerns have also been raised that decision-making on organizational restructuring, such as mergers and spin-offs among affiliates, could even lead to criminal litigation where the positions of major shareholders and ordinary shareholders conflict (SHIN & KIM, 2025). From the company’s perspective, under the amended Commercial Act, where conflicts among shareholders become significant, there will be a strong need to develop detailed decision-making procedures and protocols. Ultimately, this is likely to lead to passive management by directors and increase the possibility of growth stagnation.

◩ Expanded appointment of independent directors: difficulty in securing highly qualified independent directors and disruption to board composition

Under the current Commercial Act, due to restrictions on concurrent positions for outside directors, and because outside directors who are legally disqualified or external to the company are relatively vulnerable in terms of understanding the business and acquiring and analyzing information, expanding the mandatory appointment of independent directors at listed companies raises serious concerns. It may be difficult to secure sufficiently qualified independent directors on a mandatory basis, and this may also cause disruptions in board composition and company operations. Listed companies therefore need to proactively identify and carefully manage a pool of suitable independent director candidates in advance.

◩ Problem 1 with the 3% voting cap on controlling shareholders in audit committee appointments: concern over a collapse in the balance of corporate governance

First, the appointment of audit committee members is already a matter in which securing a quorum is difficult. If the 3% rule applies to all committee members, the likelihood that the appointment itself will fail due to the absence of the required quorum rises significantly. As a result, situations in which the audit committee cannot be constituted for a period of time or is effectively paralyzed may become a reality.

Second, foreign activist funds or private equity funds may secure more voting rights by splitting their shareholdings and escaping the category of related parties. As a result, the likelihood that they could effectively take control of the audit committee increases, which may lead to substantial management risks such as leakage of internal information, conflict within the board, and disclosure of strategic information to outside parties.

Third, substantial infringement on management control becomes unavoidable. For example, the possibility increases that external hostile capital may appoint audit committee members and thereby encroach upon management control, creating a structure that undermines the autonomy of business judgment. In particular, because Korea does not have management control protection devices such as the poison pill in the United States or dual-class voting rights systems in France and Japan, there is considerable concern that the institutional design is one-sided.

◩ Problem 2 with the 3% voting cap on controlling shareholders in audit committee appointments: avoidance of investment and contraction of strategic decision-making

The expansion of the 3% rule is not limited to board composition; it may also negatively affect companies’ long-term investment and risk-taking management. In industries requiring preemptive investment, such as semiconductors, batteries, and AI robots, companies often absorb large losses in pursuit of future returns. However, concern is spreading throughout the business community that directors personally may face lawsuits or criminal breach-of-trust complaints on the grounds of short-term stock price declines or reduced dividends. This may function as a factor causing management to avoid strategic decisions.

In the case of public enterprises that perform a public role, decisions such as suppressing rate increases for the stability of the national economy could become the target of breach-of-trust litigation from foreign funds on the grounds that shareholder interests were harmed. Such a situation creates a structure in which policy compliance is transformed into criminal liability, and it may become a representative case of conflict between public interest and shareholder interests.

A similar structure may arise in financial institutions as well. Participating in policies to restrict lending or dispose of non-performing loans in accordance with government policy may, from the shareholders’ perspective, be regarded as “giving up profits,” which in turn becomes a source of legal dispute. As a result, financial institutions face a serious dilemma between policy cooperation and legal risk.

◩ Problem 3 with the 3% voting cap on controlling shareholders in audit committee appointments: collapse of the balance between shareholder rights and management control protection

This revision of the Commercial Act was advanced with the strengthening of shareholder rights as its core objective, but no discussion whatsoever took place regarding corresponding devices to protect management control. As a result, a structure is being formed in which the influence of foreign speculative capital expands without defensive tools such as poison pills or dual-class voting rights, which are commonly found in global capital markets. This may not only undermine the stability of management control at Korean companies but also deepen the “Korea discount” phenomenon, in which the credibility and value of Korean companies decline in the global market.

3. Conclusion: Recommendations for Follow-up Tasks

◩ Follow-up legislative tasks: balancing the protection of entrepreneurship and institutional design

The fundamental purpose of the Commercial Act revision—protecting shareholder rights and strengthening directors’ accountability—can in itself be regarded as a positive direction. However, if this institutional direction is designed in a way that infringes on corporate autonomy and management stability, it may instead produce side effects such as reduced investment, inhibited innovation, and weakened global competitiveness.

Accordingly, the following legislative supplements are needed in the future operation of the system. First, it is necessary to resolve practical quorum problems by diversifying the pool of audit committee candidates and to prepare supplementary provisions that allow temporary substitution when appointments fail. Second, companies should be given flexibility to design, to some extent, their own methods of appointing audit committee members through their articles of incorporation and similar means. Third, sufficient consideration should be given to consistency with existing and future legislation, such as cumulative voting and the separate election system, so as to prevent conflicts among laws. Fourth, as parallel institutional measures for the protection of management control, practical defensive devices should be 마련ed, such as introducing poison pills and examining dual-class voting rights systems.

In conclusion, legislation intended to enhance corporate efficiency and market trust must be built on a balance between rights and responsibilities, and between autonomy and discipline. Continuous institutional review and policy coordination are required so that shareholder democracy is not designed in a way that threatens the autonomy and growth potential of the market as a whole.

◩ Follow-up tasks for delegated legislation

Institutional supplementation through the refinement of subordinate regulations and delegated legislation, such as presidential decrees and enforcement rules, is also urgently needed. The revised Commercial Act currently delegates to presidential decree the detailed procedures and requirements needed to secure the effectiveness of several core systems, but these details remain insufficient. First, at the level of the enforcement decree, a rational readjustment of the scope of permitted concurrent positions and institutional support for fostering a pool of independent director candidates should be undertaken in parallel.

Second, as the 3% rule is now applied more broadly in appointing audit committee members, the enforcement decree must be carefully designed so that it protects the controlling shareholder’s reasonable range of voting rights while also preventing abuse by speculative capital. In particular, Article 542-12(4) of the amended Commercial Act includes among those whose holdings are aggregated for the 3% cap “persons prescribed by presidential decree,” meaning that how the enforcement decree defines that scope could have a significant impact on a company’s actual governance structure.

Third, with respect to the electronic shareholder meeting system, the amended Commercial Act provides that detailed operational standards are to be established through the enforcement decree (Articles 542-14 and 542-15). Because this system may increase the technical and administrative burden on listed companies, the enforcement decree stage should at a minimum clearly prescribe effective procedural standards, system standardization, and support mechanisms for small and medium-sized enterprises.

In conclusion, just as important as introducing the amended Commercial Act itself is bridging the gap between the rigidity of the statutory text and market realities through the sophisticated design of enforcement decrees and enforcement rules that support its operation. Going forward, the government needs, through the refinement of subordinate regulations, to establish flexible procedures and standards that take corporate realities into account, while also presenting institutional coherence and administrative support measures to prevent market confusion. Otherwise, the original purpose of the amendment—“protecting shareholder rights”—may instead turn into a constraint on corporate growth.

◩ References

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Maeil Business Newspaper (2025). “Business Community Shocked by Inclusion of the ‘3% Rule’ in the Revised Commercial Act… ‘Internal Information Could Be Leaked.’” Maeil Business Newspaper, 2025. 7. 3.

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SHIN & KIM LLC (2025), “The Lee Jae-myung Administration’s ‘Further Strengthened’ Revised Commercial Act Passed the Plenary Session - The Golden Time to Review Governance Risks,” SHIN & KIM Newsletter, No. 2889, 2025.07.03.

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Bae, Kim & Lee LLC (2025), “Passage of the Revised Commercial Act,” LEGAL UPDATE, 2025.07.03.

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Seoul Shinmun, February 26, 2025, Professor Junsun Choi: “Revision of the Commercial Act, a Bad Law That Ruins the Economy... Revising the Capital Markets Act Is More Advantageous for Shareholders.”

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Bill No. 8496, Partial Amendment to the Commercial Act (Alternative) (Chair of the Legislation and Judiciary Committee). 2025. 2.

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Bill No. 11251, Partial Amendment to the Commercial Act (Alternative) (Chair of the Legislation and Judiciary Committee), 2025. 7.

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Junsun Choi (2025), Trends in Shareholder Activism in Korea, presentation materials for the Corporate Law Research Society.

Wiki:

https://www.cfe.org/w/bbsDetail.php?&idx=14

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Original title: 3%룰 상법 개정안 분석 및 후속과제 제안

Author: Center for Free Enterprise (CFE)

Date: 2025-07-17

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=issue&pn=1&idx=27905