Korea

Author: | Published: 9 Oct 2003
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INTRODUCTION

Since the 1997 Asian financial crisis, the Korean government has made significant changes and reforms in the area of corporate governance. These new laws and regulations were intended to improve the transparency and accountability of Korean companies, strengthen the rights of minority shareholders, and provide systems of oversight in terms of management and financial auditing. This article outlines the basic corporate structure of Korean companies and sets out the current landscape of corporate governance in Korea.

CORPORATE STRUCTURE

Under the Korean Commercial Code (KCC), a company may take the form of either a Chusik Hoesa (joint stock corporation with limited liability) or a Yuhan Hoesa (close corporation with limited liability). Generally, the Chusik Hoesa form is preferred because it is considered more prestigious than the Yuhan Hoesa, which is associated primarily with small family-owned businesses. Because the majority of foreign-invested companies in Korea are structured as Chusik Hoesas, this article will focus on this type of company.

A Chusik Hoesa must have the following organizational structures, as set out in the KCC:

  • a general meeting of shareholders;
  • a board of directors;
  • a representative director; and
  • a statutory auditor.

The general meeting of shareholders is the supreme policymaking body of a company and determines fundamental corporate matters. The role of the board of directors is to decide important policy matters not reserved for determination by a general meeting of shareholders. By contrast, the representative director is responsible for implementing the decisions of the board or shareholders, representing the company with regard to third parties and running the company's day-to-day operations. The statutory auditor supervises the management of the company's business and audits the company's accounts.

The KCC does not expressly provide for a corporate president, chief executive officer, treasurer, or secretary, which are positions commonly used under the corporate laws of the US and other jurisdictions. However, it does not prohibit a company from conferring these titles and creating these positions by the inclusion of appropriate provisions in the articles of incorporation or through regulations adopted by the general meeting of shareholders or the board of directors.

General meetings of shareholders

Composition

The general meeting of shareholders is a standing body mandatory for all joint stock companies including those with a sole shareholder. When the meeting is convened, each shareholder is entitled to one vote per share held. In the event of a tie in any given vote, no shareholder is entitled to exercise a casting vote to decide the ultimate outcome.

In this regard, under the KCC, a joint stock company can issue a non-voting preferred stock with a preferential right to dividends up to 25% of the total number of issued and outstanding shares including the preferred stock involved.

Authority and voting requirement

The general meeting of shareholders is ultimately a company's highest policy-making body. Nonetheless, its powers are confined to those matters specifically provided for in the KCC or the articles of incorporation of the company. Depending on the importance of the corporate action in question, a simple majority or super-majority (or even unanimous consent in very exceptional matters) will be required, as prescribed in the KCC. Generally, the company's articles of incorporation can make the voting requirement more stringent but cannot relax the requirement.

Certain matters such as the election of directors or the declaration of dividends, must be authorized by an ordinary resolution of the shareholders, which refers to a resolution adopted by a majority of the shares present, representing 25% or more of the total number of the shares issued.

Other fundamental corporate actions such as an amendment of the articles of incorporation, merger, dissolution of the company, removal of a director or transfer of an important business asset require a super-majority and must be authorized by a special resolution of the shareholders, which must be adopted by two-thirds or more of the votes of the shareholders present, representing one-third or more of the total number of the shares issued.

Korean legal commentators generally agree that a company can specify in its articles of incorporation additional matters to be resolved at a general meeting of shareholders even if the KCC provides that such matters are to be resolved at a board of directors meeting, unless the nature of the matter makes this impractical. Therefore, a company has discretion as to which additional matters are to be subject to resolution by a general meeting of shareholders, by virtue of an appropriate provision of the company's articles of incorporation.

Convocation, voting and resolution

The general meeting of shareholders can be convened by a resolution of the board of directors. In limited circumstances, minority shareholders, a statutory auditor or a court can also convene a general meeting of shareholders. Subject to the relevant requirements set out in the KCC, the shareholders can exercise their vote by proxy or in writing.

In addition, legal scholars generally concur that shareholders can agree among themselves to exercise their voting rights in a particular way. However, it is understood that a breach by a party of the shareholders' agreement cannot be a basis for challenging the validity of a resolution made by the general meeting of shareholders. In such a case, the non-breaching party may be entitled only to seek indemnity from the breaching party as provided in the shareholders' agreement.

Board of directors and representative director

Election and dismissal

The directors are appointed or dismissed by the general meeting of shareholders. After all the directors have been elected, the board of directors appoints the representative director(s) from among the directors, although the articles of incorporation may provide that the representative director(s) must be appointed by a resolution at a general meeting of shareholders.

Authority of the board of directors

Under the KCC, 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 closing of a branch office, and appointment and discharge of a branch manager, should be carried out pursuant to a resolution of the board of directors.

Korean legal commentators generally take the position that all the important matters concerning the management of a company's business are to be decided by a resolution of the board of directors unless the KCC or the articles of incorporation provide they are to be decided by a resolution of the shareholders. Other matters need not be decided by a resolution of the board of directors but instead may be delegated to another part of the company (for instance, the representative director).

Meetings and resolutions

In principle, directors must physically attend board meetings. A meeting of the board of directors can also be convened by means of a telecommunications system transmitting and receiving live audio and video communications, whereby all directors participate in the meeting. However, exercise of the voting right by proxy is not allowed.

Authority of representative director

The representative director 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 board of directors and general meeting of shareholders. Moreover, the company can limit or restrict the authority of the representative director by the articles of incorporation or by a resolution of the general meeting of shareholders or of the board of directors. However, any such internal limit or restriction on this power of representation is not effective against a bona fide third party acting in good faith.

Statutory auditor

Authority

By law, each company must have one or more statutory auditors, who serve as an independent watchdog over the management of the company. Alternatively, a company may have an audit committee comprised of three or more directors. The KCC empowers the statutory auditor and audit committee to observe and ensure the proper management of the company by the board of directors and the representative director.

Appointment

To ensure independence from the controlling shareholders and the management, the voting rights of the large shareholders are limited with respect to the election of statutory auditors.

CORPORATE INTEGRITY AND RESPONSIBILITY

A framework of checks and balances provided by the KCC and the Securities and Exchange Law (SEL), for privately-held and publicly-traded companies, respectively, serves to maintain the transparency and independence of corporate governance. These mechanisms for enhanced corporate responsibility include a regime of minority shareholders' rights, outside director requirements, audit requirements, prescribed directors' fiduciary duties, a mandatory disclosure system and restrictions on self-dealing.

Minority shareholders' rights

Minority shareholders in Korea have a progressive degree of rights afforded to them in accordance with their share ownership ratio. In this context, the KCC sets out various thresholds at which prescribed rights are triggered for privately-held companies, and the SEL sets less stringent thresholds for many of the same rights applicable to publicly-traded companies. Examples of the types of rights afforded to minority shareholders include:

  • the right to bring actions to unwind corporate actions, if illegally taken, such as issuance of new shares or merger;
  • the right to bring derivative actions;
  • the right to inspect books and records;
  • the right to apply to court for the removal of a director or suspension of a director's authority; and
  • the right to apply for dissolution of the company.

In addition, under the KCC and SEL, a shareholder (both of common and preferred shares) who objects to certain key resolutions passed by the general meeting of shareholders such as merger or business transfer has a right to demand that the company purchase the shareholder's shares at a price determined pursuant to the process prescribed by law. Furthermore, the National Assembly is considering an amendment to the SEL to allow certain minority shareholders to institute a class action against certain large-scale listed companies.

Outside directors

An outside director (or independent director) is a non-standing director who is not affiliated with the controlling shareholders or the management of the company. To preserve the independent nature of outside directors, the SEL enumerates certain persons who cannot serve in this capacity, including specially-related persons of the largest shareholder of the company and standing officers or employees of affiliated companies.

The SEL requires that at least a quarter of the board directors of a company listed on the Korea Stock Exchange be outside directors. Furthermore, Korea Stock Exchange-listed companies whose assets total W2 trillion (approximately $1.7 billion) or more must have not less than three outside directors, who will account for not less than half of the total number of its directors. Companies listed on KOSDAQ are subject to the same requirements with limited exceptions.

Audit system

Audit committee

At their discretion, privately-held companies can establish an audit committee that functions in place of the statutory auditor. However, publicly-traded companies whose total assets are W2 trillion or more are required to organize an audit committee, for which two-thirds or more of the total members must be outside directors. Unlike the statutory auditor, who is elected by the shareholders and is therefore independent of the board of directors, the audit committee members are members of the board of directors.

External audit

Under the Joint Stock Company External Audit Law, if a company's total assets for the preceding fiscal year were at least W7 billion (approximately $6 million), the company must appoint an outside accounting firm as an independent auditor within the first four months of the new fiscal year, with the consent of the statutory auditor or the audit committee, to serve as the independent auditor of the company. The appointed independent auditor will be authorized to conduct a financial audit pursuant to the statutory requirements under the Joint Stock Company External Audit Law.

Internal accounting management system

The Corporate Restructuring Promotion Law (CRPL) requires that a company whose total assets for the preceding fiscal year were at least W7 billion adopt an Internal Accounting Management Regulation at its board of directors meeting and appoint one of its full-time directors as the internal accounting manager, who must review the implementation and enforcement of the foregoing system and include the results of the review in its annual report.

Directors' fiduciary duties

In Korea, as in most developed jurisdictions, directors owe certain fiduciary duties to the company and, arguably, to the shareholders. As fiduciaries, directors bear a duty of due care, equivalent to that of a good manager, to their company. Breach of this duty can result in both civil and, in extreme instances, criminal liability.

Furthermore, under certain circumstances, directors may bear liability to third parties who incurred damages due to the directors' willful misconduct or gross negligence with respect to their duties to the company.

Disclosure system

Disclosure of corporate and accounting information constitutes the practical foundation of the checks-and-balances mechanisms adopted by Korean laws aimed at achieving accountability and transparency.

In this connection, a company is required to keep its financial statements, business reports and audit reports (plus external audit report, if applicable) and any ancillary documents at its principal office and the branch offices for a certain prescribed period. Additionally, the balance sheet of a company once approved by the general meeting of shareholders must be publicly posted in a nationally circulated newspaper. Apart from these general requirements, the SEL:

  • provides strengthened and extensive disclosure requirements applicable to an initial public offering, securities transactions and business and corporate affairs or performance of a publicly-listed company; and
  • imposes severe sanctions against violations of these additional disclosure requirements.

Restrictions on self-dealing

To prevent conflicts of interest or the appearance of conflict of interest, under the KCC, shareholders or directors who have personal interests in a particular agenda issue cannot exercise their respective voting rights with regard to any resolution on the agenda at the general meeting of shareholders or the board of directors meeting. Furthermore, the consent of the board of directors is required for transactions between a director and the company involving the director's account or the account of a third party.

TRENDS IN CORPORATE GOVERNANCE

A recent trend in the corporate governance field in Korea involves increased aggressive activities of minority shareholders. Many Korean business conglomerates, or chaebols, which traditionally have been managed by family members of the respective founders, find themselves increasingly subject to scrutiny by minority shareholders who call for more transparency in corporate governance. In addition, several civic organizations in recent years have provided assistance, including legal services, to minority shareholders in bringing derivative suits against companies. Finally, the Korea Fair Trade Commission has been more active recently in monitoring the activities of, and enforcing fair trade laws with respect to, Korean companies.

CONCLUSION

Corporate governance in Korea has generally evolved in a gradual and incremental manner. However, as seen following the 1997 financial crisis, the Korean government is also capable of sweeping reforms intended to correct structural flaws as they relate to corporate governance issues. For example, the concepts of audit committees and outside directors are relatively new in Korea and were implemented in order to foster increased transparency and accountability on the part of Korean companies. Korean companies will continue to improve in these areas, and it is encouraging to see that the Korean government has taken, and will continue to take, active measures and the lead role in promoting an improved system of corporate governance.


Kim & Chang
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Seoul 110-720
Korea
Tel: +82 2 3703 1114
Fax: +82 2 737 9091
Email: ktjung@kimchang.com