Central to the upcoming amendment to the Commercial Act, the so-called '3% rule' aims at limiting the influence of majority shareholders when appointing or removing audit committee members. The reform aims to reduce the influence of controlling shareholders and reinforce the management monitoring function.

Concerns are emerging that companies will inevitably have to formulate comprehensive countermeasures, ranging from securing the professional expertise of audit committees members to accumulating friendly stakes to defend management control.

The 3% rule (Article 542-12 of the Commercial Act) is expected to positively impact corporate governance.

Previously, when appointing or dismissing external directors who are audit committee members, the “individual 3% rule” was applied, whereby the largest shareholder and related parties could each exercise 3% of the voting rights without adding them together. When appointing or dismissing internal directors who are audit committee members, the “combined 3% rule” was applied, whereby a maximum of 3% of the voting rights could be exercised when aggregated.
 
However, the revised bill stipulates that the voting rights of major shareholders and related parties shall be combined and unified at 3%, irrespective of whether the audit committee member being appointed/removed is an internal or external director. This makes it difficult to appoint audit committee members that suit the controlling shareholders' preferences.

However, there is concern that this restriction on the voting rights of the largest shareholder could lead to difficulties in securing suitable audit committee members.

Attorney Jiho Kim of LIN LLC pointed out, “There is a risk that a nominee recommended by minority shareholders may be appointed as an Audit Committee member even if they lack expertise in the relevant industry or auditing tasks.”

She added, “In particular, there’s also the potential for sensitive internal information shared with the Board of Directors to be leaked externally.”

Kim emphasized, “It is critical to enhance the qualification requirements in the Articles of Incorporation to ensure the professional expertise of audit committee members.” She added, “Efforts must be made to appoint individuals who possess both expertise and the will to protect corporate value by, inter alia, strengthening shareholder communication and expanding investor relations (IR) activities.” She concluded that there is also a need to prevent concerns from minority shareholders by transparently disclosing information regarding audit committee member appointment procedure and decision-making.

For further details, refer to the original article below.
 
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