SOUTH KOREA Trends and Developments Contributed by: Bo Hee Park, Minhyun Cho, Ian Kim and Jun Hee Kwon, Jipyong LLC
Restructuring of the audit committee system Recognising that audit committee members perform oversight functions functionally equivalent to those of statutory auditors, the previous KCC sought to bol - ster corporate transparency by applying a 3% limit to the shareholders’ voting rights when appointing or dismissing audit committee members and by imple - menting a separate election for audit committee mem - bers. The recent amendments are a continuation of this overarching legislative intent. The “ Aggregated 3 % Rule ” ( combined cap ) Effective 23 July 2026, for listed companies with assets of KRW2 trillion or more and smaller listed companies with assets between KRW100 billion and KRW2 trillion that have established an audit commit - tee, a stricter voting cap applies to the appointment or dismissal of audit committee members. For the largest shareholder, their voting rights are capped at 3% in the aggregate, including shares held by their specially related persons (Article 542-12 (4) of the KCC). This prevents the practice of largest share - holders circumventing the cap by dispersing their shares to affiliated parties. For all other shareholders, the pre-existing 3% cap remains in effect and continues to be applied on an individual basis. Unlike the rule for the largest share - holder, their holdings are not aggregated with those of their specially related persons, allowing each share - holder to exercise voting rights up to the 3% threshold independently. Expansion of separate election Starting 10 September 2026, at least two members (up from the previous requirement of just one member) of the audit committee must be elected separately from other directors (Article 542-12 (2) of the KCC). Unlike the en-masse election method (where direc - tors are elected first and then committee members are chosen from among them), the separate election system ensures that certain directors are designated as audit committee members from the outset of the voting process. These changes are designed to insulate the audit committee from the undue influence of the largest
procedural transparency and substantive fairness in their decision-making processes. Key Reforms to the Corporate Governance Framework Mandatory cumulative voting for large listed companies Cumulative voting refers to a system where, in cases where more than two members of the board are being elected, each shareholder may cast a total number of votes equal to the number of shares they hold multi- plied by the number of directors to be elected. Share - holders may concentrate all their votes on a single candidate or distribute them among several. As the number of directors being elected increases, so does the ability of minority shareholders to consolidate their voting power, thereby facilitating their participation in management and providing a check against the con - trolling shareholder’s influence. Under the previous KCC, companies were permitted to opt out of cumulative voting through their AoI. In practice, the vast majority of Korean companies uti - lised this opt-out provision to bypass the system. However, the amended KCC mandates the adoption of cumulative voting for large listed companies (those with total assets of KRW2 trillion or more). This require - ment applies to any general meeting of shareholders convened to elect directors on or after 10 September 2026. Consequently, these companies can no longer exclude cumulative voting via their AoI. This legislative shift significantly increases the likeli - hood that activist funds, minority shareholders and foreign investors will be able to successfully appoint their preferred candidates to the board by leverag - ing cumulative voting in conjunction with shareholder proposal rights (under KCC Article 363-2). While the influence of controlling shareholders is expected to diminish, companies are already exploring defensive measures, such as imposing a ceiling on the total number of directors in their AoI or introducing stag - gered boards to dilute the concentration effect of cumulative voting.
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