Korea Implements Commercial Code Reform, Initiating Governance Updates

South Korea’s long-anticipated reforms in corporate governance and commercial law have taken a significant step forward with the passage of a number of amendments to the Korean Commercial Code (KCC) by the National Assembly on July 3, followed by a presidential proclamation on July 22, 2025.

This legislative milestone marks a renewed push for reform after a period of slowdown due to political uncertainty and presidential vacancy. With the new administration under President Lee Jae-myung taking office in June, momentum is building as the government moves swiftly to advance its broader policy agenda.

Below are summaries of the key changes and their implications:

What has changed?

1. Expanded Director Duties:
   The law has been amended to explicitly require directors to act in the best interests of all shareholders, not just the company, and to ensure fair treatment of all shareholders in performing their duties. (Additional background, including past discussions and developments, is provided in our previous article.) This amendment is effective immediately, starting July 22, 2025.
2. Extended application of the 3% Rule:
   Currently, the 3% rule limits large shareholders’ voting rights in appointing statutory auditors and audit committee members by capping their combined holdings with related parties at 3%. However, this restriction has applied only when electing candidates who are not independent. For independent candidates, only direct holdings are considered, allowing each to hold up to 3% voting power independently. The revision addresses this inconsistency by applying the 3% threshold consistently across all cases, including related-party holdings. This broadens the scope of the rule and aims to reduce the influence of controlling shareholders in all audit committee appointments. This change takes effect in July 2026, one year from the date of the amendment.
3. “Outside Directors” Renamed to “Independent Directors”:
   The term “outside directors” is being changed to “independent directors” to emphasize their impartial role, and the minimum independence requirement will increase from one-quarter to one-third of the board in listed companies. This change takes effect one year from now, with companies given an additional year to comply, making the deadline by July 2027.
4. Mandatory Hybrid Shareholder Meetings:
   Listed companies will be permitted to hold hybrid shareholder meetings, combining in-person and remote participation, in line with practices in countries like Germany and Japan. For large companies with assets exceeding 2 trillion KRW, this will be mandatory, starting January 2027.

Aligned with broader government initiatives, these reforms seek to enhance market transparency, accountability, and shareholder protections. Their aim is to boost investor confidence and attract investments, ultimately helping to address Korea’s longstanding market discount—the gap between market value and intrinsic value.
While these reforms are designed to bring about positive change, it is crucial to consider what they will mean in practice and how they may influence market dynamics and corporate behavior.

What does it mean?

For example, i) the proposed expansion of directors’ duties aims to clarify and reinforce directors’ responsibilities toward shareholders, particularly in addressing issues common in the Korean market, where minority shareholders’ interests are compromised by management decisions—such as unfair mergers or split listings. However, the specific criteria for when directors will be deemed to have failed in their duties and be held legally liable for breach of duty remain unclear.

Market concerns highlight that, without clear guidelines, even decisions made in good faith or in the company’s best interest could lead to criminal prosecution under the current regulatory framework. This could raise fears of excessive penalties,increased lawsuits, and activist interference, resulting in discouraged boards hindering corporate activities.

In response, the government has recognized the related concerns and announced plans to revise regulations to establish clearer responsibility standards moving forward, aiming to protect companies from undue legal actions while ensuring efficient decision-making and sustained competitiveness.

Another example is ii) the 3% rule. Along with iii) the increase in board independence, the revision is designed to prevent major shareholders from exerting excessive influence, thus enhancing transparency and corporate fairness. However, critics contend that the proposed exemption is overly broad, potentially undermining the principle of equal rights among all shareholders. They warn that it could also expose companies to risks of foreign speculative capital leveraging the access to exert excessive demands or influence over management.

Applicable companies also face the burden of hosting iv) hybrid meetings, which require advancing IT infrastructure and making other technical preparations in time.

What’s to come?

The overall market response remains cautiously optimistic about the long-term benefits. However, many companies remain vigilant about risks posed by legal challenges and activist pressures. While moving fast, the Korean government has also demonstrated a willingness to consider market concerns and fill regulatory gaps with further guidance and changes.

Looking ahead, the coming months will be pivotal in shaping the future of Korea’s corporate governance landscape.

Active discussions continue around additional amendments, such as mandatory cumulative voting and expanding separate appointments of the audit committee, signaling a strong push toward enhanced oversight and shareholder rights. Alongside these regulatory developments, we also anticipate investor and proxy advisor policies to evolve, reflecting these reforms and influencing corporate practices.

For companies, closely monitoring these legislative developments—particularly in areas like organizational restructuring and capital transactions—will be essential. Establishing transparent, fair decision-making processes that genuinely safeguard shareholder interests, especially for those with a history of issues in minority rights, has become more important than ever.

Staying attuned to these ongoing developments and proactively engaging with diverse stakeholders—including investors and proxy advisors—will be essential to accurately assessing the practical impact of Korea’s evolving policy landscape and successfully navigating its corporate governance reforms.