On August 24, 2023, the Ministry of Justice (the “MOJ”) announced partial amendments to the Commercial Act of Korea to bolster regulations on corporate governance and protection of shareholders. The major proposed amendments are: (i) grant of appraisal rights to dissenting shareholders, (ii) improvement of policies underlying the controlling shareholders’ rights to request the sale of shares and the minority shareholders’ appraisal rights, and (iii) introduction of a virtual general shareholders’ meeting system (including digitization of convocation notices for a shareholders’ meeting, shareholder voting and the meeting as a whole).
The MOJ stated that the proposed amendments are expected to contribute towards developing the legal infrastructure in Korea by reinforcing the protection of shareholders’ rights and improving the business environment. The MOJ expects these amendments to be passed at the regular session of the National Assembly in September 2023 for implementation in 2024.
Major Proposed Amendments
1. Grant of appraisal rights to dissenting shareholders
Under the Commercial Act, if any of the following matters is adopted at a general shareholders’ meeting, any dissenting shareholders may invoke their statutory right to mandate the company to purchase their shares (“Appraisal Rights”): (i) a merger, (ii) transfer of all or substantial part of the business of a company or acquisition of all or substantial part of business of another company, and/or (iii) transfer of shares issued by a company or exchange of such shares with shares in another company.1 The Appraisal Rights serve as a critical tool to protect minority shareholders of the surviving company, as it allows them an opportunity to receive the fair market value for their shares, which would otherwise be exchanged in a merger or consolidation for shares of the surviving or consolidated company.
The current law grants the Appraisal Rights only to dissenting shareholders of “listed” companies in the event of vertical spin-offs.2 In other words, only dissenting shareholders of a “listed” company have the right to force the company to purchase their shares at a fair market value.
It is noteworthy that the proposed amendment serves to grant the Appraisal Rights to the shareholders, in case of a vertical spin-off by which the total assets transferred by the spun-off company exceeds ten percent (10%) of the total assets of the spun-off company before the spin-off, regardless of whether the company is listed or unlisted (proposed amendment of Article 530-12 (2) of the Commercial Act).
In essence, the proposed amendment extends the Appraisal Rights of dissenting shareholders to spin-offs of “unlisted” companies that involve a transfer of a certain threshold (i.e., more than ten percent (10%)) of the total assets of the spun-off company, thereby acting as a device to help protect minority shareholders that dissent to a corporate restructuring or a vertical spin-off of the core business unit of the company by availing themselves of the Appraisal Rights.
2. Improvement of policies underlying the controlling shareholders’ rights to request sale of shares and the minority shareholders’ appraisal rights
In addition to the foregoing corporate governance reform initiatives affecting minority shareholders of “unlisted” companies, the proposed amendments effectively introduce the following points to improve policies on the controlling shareholders’ rights to request the sale of shares.
The current law provides that in cases where it is necessary to achieve managerial objectives of a company, a shareholder who owns, on his/her own account, ninety-five percent (95%) or more of the total number of issued and outstanding shares of the company (“Controlling Shareholder”) may request the other shareholders of the company (“Minority Shareholders”) to sell their shares, upon obtaining prior approval at the general shareholders’ meeting.3
- If a company pays or deposits a purchase price of shares appraised by the company considering the current status of assets of the company, etc. (“Purchase Price”) in full to the dissenting shareholders upon a merger, divisional merger, comprehensive stock exchange, transfer, and other material business transfers (collectively, “Change in Corporate Structure”) until the effective date of the Change in Corporate Structure (the “Effective Date”) that give rise to the appraisal rights, the exercise of the appraisal rights shall be deemed to take effect on the Effective Date. However, if the company fails to pay the Purchase Price in full by the Effective Date, the dissenting shareholder or the company may request the court to determine the purchase price on their behalf. Even if the company pays the Purchase Price in full, the dissenting shareholder may request the court to assess the purchase price within two (2) months from the Effective Date, and if the court determines the purchase price at a value higher than the Purchase Price, the company must pay the difference and any resulting liquidated damages to the dissenting shareholders (proposed amendment of Articles 374-2 (2) to (4) of the Commercial Act).
- Where a shareholder requests the company to purchase shares (including, without limitation, via exercise of the right to request the sale of shares by controlling shareholders, or of the appraisal rights of minority shareholders), the company shall purchase the shares within two (2) months from the date of such request. Even if the court has not made a ruling on the purchase price of the shares, the company may pay or deposit a part of the Purchase Price determined by the company or the controlling shareholder to the shareholder. At this time, the company will be exempt from the obligation to pay liquidated damages within the scope of such payment or deposit (proposed amendment of Articles 335-5, 335-6, and 360-24 of the Commercial Act).
- The company shall include the Purchase Price and the basis for appraisal when sending out convocation notices of a general shareholders’ meeting to change the corporate structure or demand the sale of shares by the controlling shareholder. Moreover, the company shall retain the records on the appraisal of the Purchase Price and the evaluation of a certified appraiser at the head office for a certain period for public inspection before and after the general shareholders’ meeting (proposed amendment of Articles 360-24 (11), 374 (2), 374 (3), 374-3 (4), 374-3 (5), 522-3 (3), 527-2 (3), and 527-2 (4) of the Commercial Act).
3. Introduction of a virtual general shareholders’ meeting system
The proposed amendment introduces a virtual general shareholders’ meeting system that enables, inter alia, convocation notices for the meeting to be served via electronic means, as well as shareholder voting and the meeting to be conducted digitally, in real time.
The virtual general shareholders’ meeting is impermissible under the current law, regardless of its form. It is understood that the virtual general shareholders’ meeting is being institutionalized in consideration of the demand and practical need for a virtual general shareholders’ meeting that has gradually increased in the wake of COVID-19.
The key highlights of the virtual general shareholders’ meeting system are:
- A company may elect, by prescribing in the Articles of Incorporation, to provide the means of holding a general shareholders’ meeting as (i) an “in-person general shareholders’ meeting” in which the shareholders physically attend the meeting at the place for convocation, (ii) a “hybrid general shareholders’ meeting” in which shareholders may attend either in person or virtually, or (iii) a “purely virtual general shareholders’ meeting” in which shareholders cannot attend in person, but have to make use of online methods of attendance and participation (proposed amendment of Articles 364 and 364-2 of the Commercial Act).
- Unless otherwise prescribed in the Articles of Incorporation, a company is required to hold a general meeting of shareholders as an in-person general shareholders’ meeting. Nonetheless, it is impermissible to prescribe in the Articles of Incorporation that both in-person and hybrid general shareholders’ meetings are excluded altogether (proposed amendment of Article 364 (2) and Article 364-2 (1) of the Commercial Act).
- When holding a virtual general shareholders’ meeting, a company is required to enable the shareholders to participate in the proceedings and resolutions of the meeting in real time (proposed amendment of Article 368-5 (1) of the Commercial Act). Provided, however, that even if there is a defect in the means of resolutions as to the exercise of voting rights or carrying on of proceedings due to technical reasons such as disruptions in electronic communications at the virtual general shareholders’ meeting, a lawsuit to nullify such resolution cannot be filed for the foregoing reasons (unless it is due to the company’s willful misconduct or gross negligence) (proposed amendment of Article 368-5 (2) of the Commercial Act).
- A company shall retain electronic records regarding the convocation of a virtual general shareholders’ meeting for public inspection at the head office for three (3) months from the closing of said meeting and preserve the records of the meeting for five (5) years from the closing of the meeting (proposed amendment of Article 368-5 (5) and (6) of the Commercial Act).
- When a company convenes a general meeting of shareholders (including a virtual general shareholders’ meeting convened pursuant to Article 364-2), it shall give a written notice or notice in an electronic form to each shareholder by obtaining the consent of each shareholder at least two (2) weeks prior to the date set for such meeting. Provided, however, that if such notice has not arrived at the address of a shareholder recorded on the register of shareholders for three (3) consecutive years, the company may elect not to give such notice to that shareholder (proposed amendment of Article 363 (1) of the Commercial Act).
1 Article 360-5 of the Commercial Act.
2 Article 176-7, Paragraph 1 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act, amended as of December 27, 2022.
3 Article 360-24 of the Commercial Act.
