Corporate governance and directors' duties in South Korea: overview

A Q&A guide to corporate governance law in South Korea.

The Q&A gives a high level overview of board composition, the comply or explain approach, management rules and authority, directors’ duties and liabilities, transactions with directors and conflicts, company meetings, internal controls, accounts and audit, institutional investors and reform proposals.

To compare answers across multiple jurisdictions, visit the Corporate Governance Country Q&A tool.

The Q&A is part of the global guide to corporate governance law. For a full list of jurisdictional Q&As visit www.practicallaw.com/corpgov-mjg

Hyung Soo Lee and Yoon Young Kim, Hwang Mok Park P.C.
Contents

Corporate governance trends

1. What are the main recent corporate governance trends and reform proposals in your jurisdiction?

The amendment to the Commercial Code which took effect in April 2012 represents by far the largest reform since its enactment in 1962. The amendment was intended to promote free enterprise, raise accountability and transparency in corporate governance, and encourage the responsible management of companies by removing unnecessary regulations. Some of the most notable aspects of the amendment are as follows:

  • Recognition of new forms of corporate entity.

  • Introduction of executive officers and legal compliance officer.

  • Introduction of different types of stock.

  • Prohibition of misappropriation of business opportunity by directors.

  • Introduction of minority shareholder squeeze-out scheme.

To further encourage both transparency and efficiency in connection with corporate management and minority shareholders' rights, certain further reforms to the Commercial Code have also been suggested, and are currently being debated in South Korea, including:

  • Introduction of double derivate suits to recognise the rights of shareholders of a parent company to bring derivative suits against directors of its subsidiaries.

  • Mandatory adoption of executive officers.

  • Mandatory adoption of cumulative voting.

  • Restrictions on major shareholders' voting rights in the selection of audit committee members.

 

Corporate entities

2. What are the main forms of corporate entity used in your jurisdiction?

The following forms of corporate entity can be established in South Korea:

  • General partnership (hapmyung hoesa).

  • Limited partnership (hapja hoesa).

  • Limited liability company (yuhan chaekim hoesa).

  • Joint stock company (chusik hoesa).

  • Closed company (yuhan hoesa).

The most commonly established corporate entity is a joint stock company (chusik hoesa).

This chapter deals only with the regime applicable to a joint stock company, whether privately held or listed.

 

Legal framework

3. Outline the main corporate governance legislation and authorities that enforce it. How influential are institutional investors and other shareholder groups in monitoring and enforcing good corporate governance? List any such groups with significant influence in this area.

Corporate governance is principally regulated by the Commercial Code, and the primary enforcing authority of the Commercial Code is the Ministry of Justice.

Listed companies are also regulated by the Financial Investment Services and Capital Markets Act (FISCMA), which is primarily enforced by the Financial Supervisory Commission and the Financial Supervisory Service.

The Korea National Pension Service (the largest institutional investor in South Korea) has also gradually become responsible for closely monitoring and actively engaging in corporate governance issues.

The Citizens' Coalition for Economic Justice has long taken the initiative in representing minority shareholders and promoting transparency over corporate management. The Korea Corporate Governance Fund (Janghasung Fund) has been also established to promote high investment returns by increasing the values of the invested companies through minority shareholders' active engagement in corporate governance issues.

 
4. Has your jurisdiction adopted a corporate governance code?

Corporate governance is mainly governed by the Commercial Code, and by the Financial Investment Services and Capital Markets Act (FISCMA) for listed companies. No standalone corporate governance code exists in South Korea.

 

Corporate social responsibility and reporting

5. Is it common for companies to report on social, environmental and ethical issues? Highlight, where relevant, any legal requirements or non-binding guidance/best practice on corporate social responsibility.

It is not common for companies to report on social, environmental and ethical issues, unless such issues are either (particularly in connection with listed companies):

  • Deemed critical to investment decisions.

  • Deemed necessary to ensure that investors are fully informed.

There is not any single legal requirement or non-binding guidance solely focused on corporate social responsibility (CSR). However, given that the importance of CSR has been increasingly recognised in South Korea, more companies now pay closer attention to CSR and take active measures to promote CSR.

 

Board composition and restrictions

6. What is the management/board structure of a company?

Structure

Companies must have a board of directors (board). However, a company with a total capital amount of less than KRW1 billion (small scale company) can elect to have one or two directors, where there is no board.

If provided for by the articles of incorporation (AOI), companies can establish committees within the board. However, a listed company with an asset value of KRW2 trillion or more as of the end of the immediately preceding fiscal year (large scale listed company) must create an audit committee within the board.

Management

The board must appoint one or more representative directors from among its directors to have authority to represent the company, unless the AOI otherwise requires the shareholders to resolve the appointment of representative directors. Representative directors execute the decisions made by the board and have the authority to represent the company.

Companies can have one or more executive officers appointed by the board in lieu of representative directors, where those companies are not allowed to have a representative director. Directors can serve concurrently as executive officers. Subject to supervision by the board, executive officers are authorised to manage the company's affairs and to make decisions on the matters mandated by the AOI or the board. If there are two or more executive officers, the board must also appoint a chief executive officer to represent the company.

Board members

The board must consist of directors of the company. An auditor is entitled to attend a board meeting and present their opinion. Executive officers are required to report their works to the board at least once every quarter or when requested to do so by the board. When deemed necessary, an executive officer can request that a board meeting be convened by submitting a document stating the meeting agenda and the reason for convening the board meeting to a director who is authorised to call for a board meeting.

Employees' representation

Employees do not have a right to board representation.

Number of directors or members

Companies must have three or more directors. However, a small scale company can elect to have one or two directors (see above, Structure).

 
7. Are there any general restrictions or requirements on the identity of directors?

Age and nationality

There are no age or nationality restrictions on being a director. Only a natural person can serve as a director.

Gender

There are no gender restrictions on serving as a director. Listed companies must disclose the genders of their directors in the corporate disclosure information.

 
8. Are non-executive, supervisory or independent directors recognised or required?

Recognition

Only the following three types of directors can be recognised in South Korea, and their rights and obligations as directors are basically identical:

  • Inside directors, who are engaged in the regular business of the company.

  • Outside directors, who are not engaged in the regular business of the company.

  • Directors who are not engaged in the regular business of the company but are not outside directors.

Board composition

Listed companies must have a quarter or more of the board comprised of outside directors. A large scale listed company (see Question 6, Structure) must have three or more outside directors, and those outside directors must form the majority of the board.

Independence

Unless otherwise provided for in the articles of incorporation (AOI), there are no requirements relating to the independence of directors, excluding outside directors.

Because the independence of outside directors must be preserved, the following cannot serve as an outside director of the company:

  • Inside directors, executive officers and employees of the company and those who have served as the company's inside directors, executive officers, auditors or employees within the past two years.

  • Largest shareholder of the company, and:

    • if a natural person, their spouse, lineal ascendants and descendants; or

    • if not a natural person, its directors, auditors and employees.

  • Spouses, lineal ascendants and descendants of the company's directors, auditors or executive officers.

  • Directors, executive officers, auditors and employees of the company's:

    • parent company; and

    • subsidiaries.

  • Directors, executive officers, auditors and employees of a corporation having significant interests in the company.

  • Directors, executive officers, auditors and employees of a corporation where the company's directors or employees serve as that corporation's directors or executive officers.

For listed companies, there are additional factors that can disqualify a person from acting as an outside director. For example, a shareholder who can exercise actual influence over the company's major business affairs (such as the appointment or dismissal of directors or auditors) cannot act as an outside director for the company in which it holds those shares.

 
9. Are the roles of individual board members restricted?

There are no legal restrictions on the roles of individual board members.

 
10. How are directors appointed and removed? Is shareholder approval required?

Appointment of directors

Directors are appointed by an ordinary resolution at a shareholders' meeting (an ordinary resolution is passed by the affirmative votes of a majority of the shareholders present at the meeting and representing at least a quarter of the total issued and outstanding shares with voting rights) (see Question 33). Unless otherwise provided for in the articles of incorporation (AOI), cumulative voting is allowed for the appointment of two or more directors at a shareholders' meeting when it is requested by the shareholders holding 3% or more of the total issued and outstanding shares with voting rights.

A large scale listed company must establish a committee to recommend the candidates to be appointed as outside directors within the board.

Removal of directors

Directors can be removed at any time by an extraordinary resolution at a shareholders' meeting (an extraordinary resolution is passed by the affirmative votes of two thirds of the shareholders present and representing at least one third of the total issued and outstanding shares with voting rights) (see Question 34). Directors are entitled to seek compensation for damages arising from the dismissal if they are removed during their terms of office without justifiable cause.

 
11. Are there any restrictions on a director's term of appointment?

The director's term of office cannot exceed three years. If provided for in the articles of incorporation (AOI), a director's term of office can be extended until the conclusion of the annual shareholders' meeting for the last fiscal year, where that fiscal year ends within three years from the director's appointment.

 

Directors' remuneration

12. Do directors have to be employees of the company? Can shareholders inspect directors' service contracts?

Directors employed by the company

Directors are not automatically considered to be employees of the company. However, directors (except for outside directors) are not prohibited from becoming employees of the company.

Shareholders' inspection

The shareholders are not entitled to inspect the directors' service contracts.

 
13. Are directors allowed or required to own shares in the company?

Directors are allowed (but not required) to hold shares in the company. If so held, listed companies must disclose this fact in their corporate disclosure information under the Financial Investment Services and Capital Markets Act (FISCMA).

 
14. How is directors' remuneration determined? Is its disclosure necessary? Is shareholder approval required?

Determination of directors' remuneration

Unless otherwise provided for in the articles of incorporation (AOI), directors' remuneration is determined by an ordinary resolution at a shareholders' meeting (see Question 33). In practice, the aggregate remuneration for directors is resolved at a shareholders' meeting and the respective remuneration for each director is then determined by the board.

Disclosure

Listed companies must disclose the following items regarding directors' remuneration in their corporate disclosure information under the Financial Investment Services and Capital Markets Act (FISCMA):

  • Aggregate remuneration for directors approved at a shareholders' meeting.

  • Average remuneration paid to directors.

  • Stock options granted to directors.

  • Respective remuneration for certain directors, and specific calculation standards and methods (this disclosure provision only applies where a director's remuneration exceeds KRW500 million).

Shareholder approval

Directors' remuneration can be determined by either the articles of incorporation (AOI) or an ordinary resolution at a shareholders' meeting (see Question 33). If provided for by the AOI, stock options can be also granted to directors by an extraordinary resolution at a shareholders' meeting (see Question 34).

General issues and trends

Since stock options were first introduced in 1997 to promote the good performance of directors/employees and hire good directors/employees, performance-based stock options linked to stock prices, revenue increase, market ratio, return on investment and so on have become popular. Currently, restricted stocks and stock grants (which are similar to stock options but different in certain aspects) are also being used by some companies, but in the absence of specific legal provisions and court precedents allowing such schemes, it remains to be seen how they will work under the existing legal system.

 

Management rules and authority

15. How is a company's internal management regulated? For example, what is the length of notice and quorum for board meetings, and the voting requirements to pass resolutions at them?

A company's internal management is regulated by the:

  • Commercial Code.

  • Company's articles of incorporation (AOI).

  • Other internal company regulations.

  • Resolutions of the board.

Notice of a board meeting must be provided to each director and auditor at least one week before the date of the board meeting, unless the notice period is otherwise shortened by the AOI.

A board resolution is approved by the affirmative votes of a majority of the directors present, where a majority of all directors are present. A director who has special interests in a board resolution is prohibited from exercising their voting right.

Unless otherwise provided for by the AOI, video and audio conferences can be used at a board meeting. Neither a written resolution nor a proxy is allowed to pass a board resolution.

 
16. Can directors exercise all the powers of the company or are some powers reserved to the supervisory board (if any) or a general meeting? Can the powers of directors be restricted and are such restrictions enforceable against third parties?

Directors' powers

Under the Commercial Code, shareholders' approval is required for certain matters, including the following:

  • Appointment or removal of directors and auditors.

  • Approval of financial statements.

  • Approval of directors and auditors' remuneration.

  • Change to the articles of incorporation (AOI).

  • Business transfer, capital reduction, merger, company split and dissolution.

The AOI can also restrict directors' powers so that certain matters require shareholder approval.

Restrictions

Certain matters can only be resolved by shareholder approval under both the:

  • Commercial Code.

  • The AOI.

Under the Commercial Code, a company's AOI can require shareholders' approval and restrict the board's power in relation to certain matters (for example, the appointment of representative directors, and the issuance of new shares, convertible bonds or bonds with warrant).

 
17. Can the board delegate responsibility for specific issues to individual directors or a committee of directors? Is the board required to delegate some responsibilities, for example for audit, appointment or directors' remuneration?

Under the Commercial Code, the representative director(s) is authorised to give effect to the decisions which have been made by the board or the shareholders, and has autonomy in the management of the company in respect of general operational matters.

The board can delegate responsibility for specific issues regarding the day-to-day operations to third parties (including directors). However, the following matters cannot be delegated by the board:

  • Disposing of the company's important assets.

  • Opening or closing branch offices.

  • Appointing or dismissing managers.

Where committees are established within the board, the board can delegate certain functions to the committees, except for the following matters:

  • An issue requiring a resolution by the shareholders' meeting.

  • Appointment or dismissal of a representative director.

  • Creation of committees and appointment or dismissal of their members.

  • Other matters stipulated in the AOI.

 

Directors' duties and liabilities

18. What is the scope of a director's general duties and liability to the company, shareholders and third parties?

Under the Commercial Code, directors are subject to certain duties, including the following:

  • Duty of care as a prudent manager.

  • Duty to monitor the other directors' management.

  • Duty of confidentiality.

  • Fiduciary duty.

Directors who intentionally or negligently violate the provisions of the Commercial Code or the articles of incorporation (AOI), or neglect to perform their duties, will be jointly and severally liable to the company. Where a director's violating actions are taken intentionally or with gross negligence, the directors will be jointly and severally liable to third parties. However, under the current court precedents, shareholders are very rarely considered to qualify as third parties in these circumstances.

Where a violating action or negligence is caused by a board resolution, directors who vote for that resolution will be jointly and severally liable to both the company and third parties. Where directors have participated in the board meeting and have given dissenting votes, those dissenting votes must be stated in the minutes of the board meeting, otherwise the directors will be deemed to have voted for the board resolution.

 
19. Briefly outline the regulatory framework for theft, fraud, and bribery that can apply to directors.

Directors can be subject to civil and/or criminal liabilities if they:

  • Take, or cause third parties to take, economic benefits by breaching their duties.

  • Cause damage to the company.

Directors can be subject to civil and/or criminal liabilities if they:

  • Endanger the assets of the company.

  • Make a false report to the court or a shareholders' meeting with respect to the value of the company's net assets for the purpose of effecting an organisational change.

  • Use a share/bond subscription form, prospectus, advertisement or other documents relating to an offering of shares or bonds which contain misstatements as to material facts in connection with that offering.

  • Commit the act of disguising either:

    • a payment for the subscription price; or

    • the fulfilment of an investment in kind.

  • Issue shares in excess of the total number of shares authorised to be issued by the company.

  • Receive, demand or promise economic benefits in response to an unlawful solicitation in connection with their work.

The scope of civil liabilities is generally determined by the amount of damage that is caused by directors. Criminal penalties can also be imposed, depending on the damage caused, and can result in a maximum penalty of life imprisonment.

 
20. Briefly outline the potential liability for directors under securities laws.

Under the Financial Investment Services and Capital Markets Act (FISCMA), a director of a company that submits a business report, annual reports or other similar documentation containing a false description or false representation of a material fact, or omitting a material fact, can be subject to civil and/or criminal liabilities.

Under the FISCMA, a director of a listed company who uses any non-public material information related to the company's business in the trading of securities and so on, or who permits a third party to use that information, can be subject to civil and/or criminal liabilities, such as compensation for the damage caused and a maximum penalty of life imprisonment.

 
21. What is the scope of a director's duties and liability under insolvency laws?

Insolvency matters are principally regulated by the Debtor Rehabilitation and Bankruptcy Act (DRBA) and the Corporate Restructuring Promoting Act.

The following two types of insolvency proceedings are recognised under the DRBA:

  • Rehabilitation (hoesaeng).

  • Bankruptcy (pasan).

Under the rehabilitation or bankruptcy proceeding, a receiver or trustee is authorised to take control over all material decisions (subject to the court's supervision and approval), and a director of the company is therefore prohibited from infringing upon, or unjustifiably interfering with, the receiver or trustee's exercise of this authority as granted under the DRBA.

A director of a company who incurs damages to, or conceals, the assets of the company, falsely increases the liabilities of the company, or takes any similar action in order to promote their own, or another's, interests, or causes damage to the creditors of the company, can be subject to civil and/or criminal liabilities under the DRBA where a rehabilitation or bankruptcy proceeding is then commenced at a later date.

Where a rehabilitation or bankruptcy proceeding commences, the court can (either voluntarily or on the request of a receiver or trustee) take preliminary measures against the assets of a director to preserve certain rights of the company to claim against that director under the DRBA, if this action is deemed necessary.

 
22. Briefly outline the potential liability for directors under environment and health and safety laws.

In South Korea, environment, health and safety matters are regulated by certain laws, including the following:

  • Framework Act on Environmental Policy.

  • Environmental Health Act.

  • Sustainable Development Act.

  • Act on Special Measures for the Control of Environmental Offences and Aggravated Punishment (ASMCEOAP).

  • Occupational Safety and Health Act.

  • Toxic Chemical Control Act.

  • Natural Environment Conservation Act.

  • Asbestos Injury Relief Act.

  • Clean Air Conservation Act.

  • Water Supply and Waterworks Installation Act.

  • Sewage Act.

  • Waste Management Act.

Any entity or person (including a director) who violates any laws related to the environment or health and safety matters can be subject to civil, administrative and/or criminal liabilities. Where there are aggravating circumstances, additional criminal sanctions of up to life imprisonment can be imposed on the violators under the ASMCEOAP.

 
23. Briefly outline the potential liability for directors under anti-trust laws.

In respect of anti-trust matters, certain acts are restricted or prohibited under the Monopoly Regulation and Fair Trade Act (MRFTA), including the following:

  • Abuse of a dominant position in the market.

  • Collaborative acts which unfairly restrict competition.

  • Unfair trade practices.

An entity or person (including a director) who engages in any of these restricted or prohibited acts under the MRFTA can be subject to civil, administrative and/or criminal liabilities, such as compensation for damage caused, an administrative fine of up to KRW50,000,000, a criminal fine of up to KRW200,000,000, and imprisonment of up to three years.

 
24. Briefly outline any other liability that directors can incur under other specific laws.

Any entity or person (including a director) who violates certain laws which contain mandatory provisions (for example, the Corporate Tax Act, the Labour Standard Act and the Personal Information Protection Act) can be subject to civil, administrative and/or criminal liabilities.

 
25. Can a director's liability be restricted or limited? Is it possible for the company to indemnify a director against liabilities?

A director can be exempted from liability with the unanimous consent of all the shareholders.

Where relevant provisions are contained in the articles of incorporation (AOI), a director's liability can be limited to six times their remuneration (including bonuses and profits from exercising stock options) for the most recent one year prior to the date of the act that triggers their liability. Where this provision is included in the AOI, a similar provision limiting the liability of outside directors to three times their remuneration can also be included. However, neither of these two limitations will be applied where:

  • A director intentionally commits a wrongdoing.

  • A director is grossly negligent in performing their duties.

  • A director engages in competitive business without a board approval.

  • A director misappropriates a business opportunity without a board approval (see Question 28).

  • A director engages in self-dealing without a board approval (see Question 29).

 
26. Can a director obtain insurance against personal liability? If so, can the company pay the insurance premium?

Directors can obtain a certain level of coverage from directors' and officers' liability insurance in connection with their personal liabilities towards third parties and the company which arise during the performance of duties. However, the insurance does not generally cover fraudulent, criminal or dishonest acts, or wilful breach of duty. Either the director or the company can pay the insurance premium.

 
27. Can a third party (such as a parent company or controlling shareholder) be liable as a de facto director (even though such person has not been formally appointed as a director)?

Under the Commercial Code, a third party who has not been formally appointed as a director can be liable to the company or a third party as a de facto director if they:

  • Instruct a director to carry out the business of the company by using their influence over the company.

  • Carry out the business of the company by using the name of a director.

  • Carry out the business of the company by using a title which may misrepresent themselves as the person authorised act on the company's behalf.

 

Transactions with directors and conflicts

28. Are there general rules relating to conflicts of interest between a director and the company?

Board approval must be obtained if a director wishes to:

  • Engage in a transaction in the same line of business as the company.

  • Become an unlimited liability member, or a director, of any other company with a business purpose that is identical to the company.

  • Engage in a transaction with the company for their own, or another's, account.

  • Use any business opportunity which could be used by the company that may be of present or future benefit to the company for their own or another's account.

The director concerned cannot exercise their voting right at the board meeting convened to obtain the approval.

Where a director does any of the above acts without board approval, he can be dismissed and/or subject to civil liabilities. In addition, the transaction which the director carried out without board approval can be voided.

 
29. Are there restrictions on particular transactions between a company and its directors?

If a director wishes to engage in a transaction with the company for their own or another's account, an approval of two thirds or more of the total number of directors must be obtained at a board meeting, where the material facts of the particular transaction must be disclosed to the board in advance. The director concerned is prohibited from exercising their voting right at that board meeting. The particular transaction must be fair in terms of its particulars and procedures.

A listed company is not allowed to grant certain types of credit to, or for, directors. However, it can lend money to directors up to the value of KRW300 million where the funds are used for something which promotes the director's welfare (for example, school tuitions, housing loans, medical expenses and so on).

 
30. Are there restrictions on the purchase or sale by a director of the shares and other securities of the company he is a director of?

A director of a listed company is not allowed, under the Financial Investment Services and Capital Markets Act (FISCMA), to:

  • Use any non-public material information related to the company's business in the trading of securities and so on.

  • Permit a third party to use such information.

Where a director of a listed company owns certain securities related to the listed company, their ownership of those securities, and any change to their ownership of those securities, must be reported to the Securities and Futures Commission and the Korea Exchange within five days from the date of either their ownership commencing or the change occurring.

 

Disclosure of information

31. Do directors have to disclose information about the company to shareholders, the public or regulatory bodies?

Commercial Code

A company must keep the following documents at the head office and/or branch office:

  • Articles of incorporation (AOI).

  • Minutes of the shareholders' meetings.

  • Shareholder register.

  • Bond register.

  • Financial statements, business reports and audit reports, with supplementary schedules.

A company must disclose the balance sheet to the public immediately after the balance sheet has been approved at a shareholders' meeting.

Shareholders and creditors of a company can access the company's financial statements, business reports and audit reports at any time during business hours. A shareholder of an unlisted company with at least a 3/100 share of the total issued and outstanding shares of the company can access the accounting books of the company. In order to do the same, a shareholder of a listed company must have owned at least a 10/10,000 share of the total issued and outstanding shares of the company consecutively for the preceding six months or more.

Act on External Audit of Stock Companies (AEASC)

The following companies must have external auditors to audit their accounts (they must also keep financial statements and audit reports by external auditors at the head office and/or branch office and disclose these to the public):

  • A company with total assets of KRW10 billion or more as of the immediately preceding fiscal year end.

  • A company with total assets of KRW7 billion or more and a total debt amount of KRW7 billion as of the immediately preceding fiscal year end.

  • A company with total assets of KRW7 billion or more and a total number employees of 300 or more as of the immediately preceding fiscal year end.

  • A company that is listed, or wishes to be listed in the next fiscal year.

External auditors must submit the company's business reports to the Securities and Futures Commission and the Korean Institute of Certified Public Accountants.

Financial Investment Services and Capital Markets Act (FISCMA)

Listed companies and certain unlisted companies must submit:

  • Business reports to the Financial Services Commission and the Korea Exchange within 90 days after a fiscal year.

  • Semi-annual and quarterly reports to the Financial Services Commission and the Korea Exchange within 45 days after the half-yearly and quarter-yearly points in the fiscal year.

Listed companies and certain unlisted companies must promptly submit to the Financial Services Commission a report on certain material events which are deemed critical to investment decisions or necessary to ensure that investors are fully informed, no later than the following day of the occurrence of that event.

 

Shareholder rights

Company meetings

32. Does a company have to hold an annual shareholders' meeting? If so, when? What issues must be discussed and approved?

A company must hold an ordinary general meeting of shareholders at least once a year at a fixed date (annual shareholders' meeting). In practice, it is held within three months from the end of the previous fiscal year.

Financial statements approved by the board and audited by auditors must be provided and approved at the annual shareholders' meeting. Business reports must be provided and reported at the annual shareholders' meeting. If provided for in the articles of incorporation (AOI), financial statements can be approved by a board and can then be later reported at the annual shareholders' meeting, provided that:

  • The external auditor's report states that the financial statements correctly represent the financial status and performance of the company in accordance with the laws and the AOI.

  • All auditors accept the financial statements.

  • Any other requirements under the AOI are met.

Any other issues provided for by the Commercial Code or the AOI as matters that can be resolved by the shareholders' meeting can also be discussed and approved at the annual shareholders' meeting.

 
33. What are the notice, quorum and voting requirements for holding meetings and passing resolutions?

A shareholders' meeting must be convened by a board decision, unless otherwise agreed by all shareholders.

A written notice stating the date, time and agenda of a shareholders' meeting must be provided to each shareholder at least two weeks prior to the date of the shareholders' meeting, unless such notice period is otherwise extended by the articles of incorporation (AOI).

The items requiring a shareholders' resolution under the Commercial Code or the AOI can be discussed and approved at a shareholders' meeting. Most of them can be resolved at a shareholders' meeting by the affirmative votes of a majority of the shareholders present and representing at least a quarter of the total issued and outstanding shares (ordinary resolution). Certain material items require an approval at a shareholders' meeting by the affirmative votes of two thirds of the shareholders present and representing at least one third of the total issued and outstanding shares (extraordinary resolution).

If provided for by the AOI, shareholders can exercise their voting rights in writing. When the prior notice is given that the shareholders' meeting will be convened, this notice must be accompanied by any documents and other reference materials necessary for shareholders to place their vote in writing. Shareholders can also appoint a proxy to participate in a shareholders' meeting and exercise voting rights on their behalf.

A shareholder who has a special interest in any particular resolution is prohibited from exercising their voting rights on that resolution.

 
34. Are specific voting majorities required by statute for certain corporate actions?

Most corporate actions requiring a shareholders' resolution under the Commercial Code or the articles of incorporation (AOI) can be approved by an ordinary resolution at a shareholders' meeting (see Question 33). However, certain material corporate actions must be approved by an extraordinary resolution at a shareholders' meeting (see Question 33), including the following:

  • Amendment to the AOI.

  • Share splits.

  • Share swaps.

  • Transfer of the whole, or a substantial part, of the business.

  • Capital reduction.

  • Acquisition of another's entire business.

  • Dismissal of directors or auditors.

  • Company merger.

  • Company split.

The unanimous consent of all shareholders is required where either:

  • The directors, executive officers or auditors are being made exempt from their liabilities to the company.

  • The company changes its form of corporate entity into a closed company (yuhan hoesa).

 
35. Can shareholders call a meeting or propose a specific resolution for a meeting? If so, what level of shareholding is required to do this?

Shareholders can request that a shareholders' meeting be convened by submitting to the board a document stating the meeting agenda and the reasons for convening the meeting, provided that:

  • In the case of an unlisted company, the shareholders hold a share equalling at least 3/100 of the total issued and outstanding shares.

  • In the case of a listed company, the shareholders have held a share equalling at least 15/1,000 of the total issued and outstanding shares consecutively for at least the preceding six months.

Shareholders can propose certain items for the agenda at a shareholders' meeting by submitting to the directors a document outlining those proposed items for the agenda at least six weeks prior to the shareholders' meeting, provided that:

  • In the case of an unlisted company, the shareholders hold a share of at least 3/100 of the total issued and outstanding shares with voting rights.

  • In the case of a listed company, the shareholders have held a share of at least 10/1,000 of the total issued and outstanding shares with voting rights consecutively for at least the preceding six months.

  • In the case of a listed company with a total capital of KRW100 billion or more as at the end of the preceding fiscal year, the shareholders have held a share of at least 5/1,000 of the total issued and outstanding shares with voting rights consecutively for at least the preceding six months.

Minority shareholder action

36. What action, if any, can a minority shareholder take if it believes the company is being mismanaged and what level of shareholding is required to do this?

If shares are issued in violation of the law or the articles of incorporation (AOI), or in a substantially unfair manner, any shareholders likely to be disadvantaged by that issuance can request that the company cease the issuance.

If a director commits an act in violation of the law or the AOI and that act is likely to cause irreparable damage to the company, shareholders can request that the director cease from committing the act on the company's behalf provided that:

  • In the case of an unlisted company, the shareholders hold a share of at least 1/100 of the total issued and outstanding shares.

  • In the case of a listed company, the shareholders have held a share of at least 50/100,000 of the total issued and outstanding shares consecutively for at least the preceding six months.

Shareholders can request that the company file an action against a director or the directors which seeks to enforce the director(s) to perform their obligations, provided that:

  • In the case of an unlisted company, the shareholders hold a share of at least 1/100 of the total issued and outstanding shares.

  • In the case of a listed company, the shareholders have held a share of at least 1/10,000 of the total issued and outstanding shares consecutively for at least the preceding six months.

Certain shareholders can access the company's accounting books (see Question 31).

If it is suspected that the company has committed wrongdoing or violated the law or the AOI, shareholders can request that the court appoint an inspector to inspect the company's business and assets, provided that:

  • In the case of an unlisted company, the shareholders hold a share of at least 3/100 of the total issued and outstanding shares.

  • In the case of a listed company, the shareholders have held a share of at least 15/1,000 of the total issued and outstanding shares consecutively for at least the preceding six months.

If the dismissal of a director who committed wrongdoing or violated the law or the AOI is not approved at a shareholders' meeting, shareholders can request that the court dismiss the director, provided that:

  • In the case of an unlisted company, the shareholders hold a share of at least 3/100 of the total issued and outstanding shares.

  • In the case of a listed company, the shareholders have held a share of at least 50/10,000 of the total issued and outstanding shares consecutively for at least the preceding six months.

 

Internal controls, accounts and audit

37. Are there any formal requirements or guidelines relating to the internal control of business risks?

Under the Commercial Code, listed companies with total assets of KRW500 million or more as at the end of the immediately preceding fiscal year must establish compliance guidelines and procedures to comply with the laws and ensure proper management. These listed companies must have one or more compliance officers appointed by the board who are responsible for all matters concerning these compliance guidelines and procedures.

The companies subject to the Act on External Audit of Stock Companies (AEASC) (see Question 31) (excluding a non-listed company with total assets of less than KRW100 billion as at the end of the immediately preceding fiscal year) must also establish internal accounting management regulations, together with an internal organisation to manage and operate these regulations for the purpose of preparing and publicly announcing reliable accounting information.

Under the Financial Investment Services and Capital Markets Act (FISCMA), financial investment business entities must establish appropriate internal control guidelines and procedures to comply with the laws and protect investors in respect of the executives' and employees' performance of their duties.

Under the Supreme Court's decisions, directors are also subject to certain obligations to establish appropriate reporting and internal control systems.

 
38. What are the responsibilities and potential liabilities of directors in relation to the company's accounts?

If directors violate the law or the articles of incorporation (AOI) in connection with the company's accounts, they can be subject to civil and/or criminal liabilities (see Questions 19 and 20).

 
39. Do a company's accounts have to be audited?

A company's accounts must be audited, unless there is no auditor because it is a small scale company (see Question 6) and it elects not to have an auditor.

 
40. How are the company's auditors appointed? Is there a limit on the length of their appointment?

Auditor

A company must have one or more auditors (unless it is a small scale company (see Question 6)). Auditors are appointed by an ordinary resolution at a shareholders' meeting. When electing an auditor, a shareholder who holds a share of more than 3/100 of the total issued and outstanding shares with voting rights is prohibited from exercising their voting rights in respect of the shares exceeding the 3/100 threshold.

Auditors' terms of office continue until the conclusion of the annual shareholders' meeting for the last fiscal year ending within three years from their appointment.

Audit committee

As set out in the articles of incorporation (AOI), a company can establish an audit committee within the board in lieu of auditors. However, a large scale listed company (see Question 6) must have an audit committee. The audit committee consists of three or more directors, and two thirds of those directors must be outside directors.

Members of the audit committee are appointed at a board meeting. However, the members of an audit committee of a listed company with total assets of KRW100 billion or more as at the end of the preceding fiscal year (including a large scale listed company) are appointed at a shareholders' meeting, where there are certain restrictions on the exercise of shareholders' voting rights in respect of electing audit committee members.

External auditor

The companies subject to the Act on External Audit of Stock Companies (AEASC) (see Question 31) must appoint an external auditor within four months from the commencement of each fiscal year. However, external auditors of listed companies are appointed to conduct an audit for three consecutive fiscal years. Appointment of an external auditor must be approved by the auditors and/or the audit committee (if applicable), which must also be reported to at the first ordinary shareholders' meeting following the external auditor's appointment.

 
41. Are there restrictions on who can be the company's auditors?

Auditor

An auditor is prohibited from concurrently holding the office of a director, manager or employee of the company or its subsidiary. There are certain restrictions on an auditor of a listed company where its total assets are greater than KRW100 billion but less than KRW2 trillion.

Audit committee

An audit committee must consist of three or more directors, and two thirds of those directors must be outside directors. Listed companies are subject to certain restrictions on members of the audit committee (for example, there must be at least one accounting or financial expert in a large scale listed company).

External auditor

Only accounting firms or audit teams registered with the Korean Institute of Certified Public Accountants can be appointed as external auditors under the Act on External Audit of Stock Companies (AEASC) (see Question 31).

 
42. Are there restrictions on non-audit work that auditors can do for the company that they audit accounts for?

Auditors are subject to certain restrictions as described above (see Question 41).

Under the Act on External Audit of Stock Companies (AEASC) and the Act on Certified Public Accountants, a certified public accountant who serves as an accounting auditor cannot do certain non-audit work for the company.

 
43. What is the potential liability of auditors to the company, its shareholders and third parties if the audited accounts are inaccurate? Can their liability be limited or excluded?

Auditors who neglect to perform their duties will be jointly and severally liable to the company. If that negligent performance is made intentionally or with gross negligence, auditors will also be jointly and severally liable to third parties.

The limitation of directors' liabilities under the Commercial Code (see Question 25) applies mutatis mutandis to auditors.

 
44. What is the role of the company secretary (or equivalent) in corporate governance?

In South Korea, no legal position exists in a company corresponding to that of a company secretary. Similar functions are usually carried out by the general affairs department and/or legal department of the company.

Under the Commercial Code, compliance officers for certain listed companies take responsibility over the matters concerning the companies' compliance guidelines and procedures (see Question 37).

 

Online resources

Ministry of Government Legislation

W http://www.moleg.go.kr/english/

Description. This is the official website maintained by the Ministry of Government Legislation. It provides up-to-date legislative information, including full texts of statutes together with notable case law in Korea.

Korea Legislation Research Institute

W http://elaw.klri.re.kr/eng_service/main.do

Description. This website provides English translations of Korean legislation for reference only.



Contributor profiles

Hyung Soo Lee, Partner

Hwang Mok Park P.C.

T +82 2 772 2826
F +82 2 772 2800
E hslee94@hmplaw.com
W www.hmplaw.com

Professional qualifications. South Korea, 2006; New York, US, 2014

Areas of practice. M&A; foreign investment; corporate governance; labour and employment; anti-trust and fair trade.

Yoon Young Kim, Associate

Hwang Mok Park P.C.

T +82 2 772 2719
F +82 2 772 2800
E yykim@hmplaw.com
W www.hmplaw.com

Professional qualifications. South Korea, 2009

Areas of practice. M&A; corporate governance; capital markets; IT & telecommunications.


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