Recent Amendments to the Korean Commercial Code

Background
Amendments of 1998
Amendments of 2001

Additional amendments were made in July 2001 to the Korean Commercial Code as part of continuous efforts to improve transparency and flexibility, in response to the shareholder rights movement and the need for prompt corporate restructuring. This update outlines the changes made to the code in recent years.

Background

Since the International Monetary Fund financial crisis hit Korea in late 1997, the government has tried to facilitate the corporate restructuring procedure while maintaining the balance between management and the shareholders. Thus, the Commercial Code was amended substantially in December 1998 and in July 2001 the code experienced another wave of major changes.

Amendments of 1998

The salient features of the 1998 amendment that took effect in January 1999 (except for the cumulative voting rights effective from July 1 1999) concern the following:

Short form merger, small-scale merger and simplification of merger process
If the shareholders of the merged company unanimously consent to the merger or if the merging company owns at least 90% of the merged company, the merger can be approved by the board of directors of the merged company instead of at the shareholders meeting. If the number of new shares issued to the shareholders of a merged company by a merging company is at most 5% of the merging company's total number of outstanding shares, the merger can be approved by the board of directors of the merging company instead of at the shareholders meeting. Exceptions to this rule are mergers where (i) the total amount of merger proceeds exceeds 2% of the net assets of the merging company in the most recently settled balance sheet, or (ii) shareholders who own at least 20% outstanding shares of the merging company oppose the small-scale merger. Also, the amendments have reduced the public notice period to creditors from two months to one month.

Decrease of minimum par value and stock-split
The amendments lowered the minimum par value of a share from W5,000 to W100. Furthermore, a company can split shares by a special resolution at a shareholders meeting if two-thirds of the shares present and one-third of the total number of outstanding shares vote affirmatively. However, the minimum par value should be maintained.

Division of company
As a way to facilitate the restructuring of a company, the amendments made possible a variety of methods to divide a company through a special shareholder resolution, namely split-up, split-off and spin-off. The appraisal right serves to protect the interests of shareholders of the divided company. Even shareholders with no votes have the right to vote on division. To protect the interest of creditors to the divided company, a public notice of the division and the objection period shall be given. In case of an objection, the company must pay the debt, offer sufficient security interest or establish a trust for security purposes. As to the liabilities of the divided company, it and the recipient company are, in principle, jointly liable unless the shareholders adopt a resolution stating that the recipient company shall be responsible only for liabilities regarding divided assets.

Amendments of 2001

The most recent changes (effective from July 2001) are as follows:

Redemption of stock
Before the amendments, stock redemption was applicable only in a few limited cases: capital reduction; redemption with profits in accordance with the articles or redemption of redeemable shares. As a way to facilitate the redemption with profits, the company can redeem its shares to the extent of distributable income under the financial statements for the previous fiscal year by adopting a special resolution at a shareholder meeting. Like the case of interim dividend payments, a company cannot redeem its shares if the financial statement for the year suggests it is unlikely that the amount of net assets at the end of that fiscal year is below the total sum of paid-in capital, capital reserves and profit reserves. If at the end of the fiscal year the net assets of the company are below the sum of paid-in capital, legal reserves and profit reserves based on the previous year's balance sheet, the directors shall be jointly responsible for paying the difference to the company. However, if the directors can prove they exercised reasonable care, they shall not be responsible.

As a result of the amendments, companies can dispose of the previous year's retained earnings as interim dividends or purchase treasury stock without amending the articles. As for listed companies, the board can adopt a resolution to redeem stocks with profits if the articles provide for such a possibility. Since the code is also generally applicable to listed companies, another possibility is to implement stock redemption either by amendment to the articles and resolution by the board, or simply by resolution at a shareholders meeting. A peculiarity of the code is that while a company can redeem stock by a single shareholders resolution there is no need for a board meeting.

Stock for stock exchange and transfer
A company (A) can acquire the stock of another company (B) by issuing new shares or transferring treasury stock to the shareholders of B. Eventually, B becomes a wholly owned subsidiary of A while the shareholders of B remain as shareholders of A.

For the protection of minority shareholders, a special resolution at a shareholder meeting is required. The first step in a stock for stock exchange is the execution of a stock exchange agreement between A and B that must receive special approval at a shareholders meeting. Such an agreement must provide for:

• A's articles to be amended;

• the number and kind of newly issued or treasury shares of A;

• increased capital and capital reserve of A; and

• any cash payment to the shareholders of B.

Any shareholder of A and B has the right of appraisal. Within 20 days of the resolution at a shareholders meeting, they can exercise the appraisal right to the company by sending a written notice. Even after the stock exchange is completed, a shareholder can file a suit within a six-month period to invalidate the exchange.

Company A, through its shareholders, can establish a new company B and B issues new shares to the shareholders of A in exchange for the shares of A. Subsequently, A would become a wholly owned subsidiary of B while the shareholders of A remain as shareholders of B. Although this is known as a 'stock for stock transfer', the only difference between this and the 'stock for stock exchange' is that new parent company B is initially established by the shareholders of A. Thus, the procedural requirements are the same: execution of a stock transfer agreement, approval at a shareholders meeting and maintenance of relevant records by directors. The protective mechanisms for minority shareholders (ie, the appraisal right, the right to file a suit to invalidate a transfer within six months and the limit on the amount of increased capital) are also the same as those for a stock exchange.

If a company owns at least a 50% equity interest of another subsidiary, the subsidiary in principle cannot acquire the stock of the parent company. As exceptions, stock for stock exchange and transfer were added. However, because the shareholders of a subsidiary and not the subsidiary itself will acquire the stock of the parent company, it is unclear why stock for stock exchange and transfer should be added as exceptions;

Special resolution for material business acquisitions
A company wishing to acquire all of another company's business must pass a special resolution at a shareholder meeting. One of the amendments expands the scope of business acquisitions that is subject to the special resolution. Thus, acquiring part of the business of another company requires a special resolution if such an acquisition has a material impact on the business of the company.

Regarding transfer, any transfer of an important part of a business requires a special resolution. Although the specific wordings are different, the phrases 'important part' and 'any part which has a material impact' would have the same meaning. Due to a dearth of legal precedents it has been difficult to distinguish between business transfers that require a shareholders meeting and those that require a board meeting. Ten percent has been proposed since the Securities Transaction Law, as a point of reference, requires a public disclosure when transferring assets of 10% or more. The most recent report on corporate governance mentions 20% in terms of assets or sales revenues. A specific figure might be helpful to remove any need for speculation.

Improvement of appraisal value decision mechanism
Previously, determination of the appraisal value occurred in three phases: negotiations between the shareholder and the company, valuation by accountants and court decisions. The amended code provides for two simple stages. First, the company and the shareholders have 30 days for negotiations of the appraisal value. If they fail to reach an agreement within that time, either party may go to court for determination of the appraisal value. As for listed companies, the Securities Transaction Law provides a formula based on the market value at the exchange. Accordingly, there is no need for the decision mechanism, only the 20-day notice period after the shareholder meeting plus the 30-day payment period.

Effectuation of board meetings
Each director can call for a board meeting unless the articles provide otherwise. A director can ask the designated director(s) for a board meeting and cannot be rejected without just cause. Each director can also request that the representative director report to the board on the business of other directors or employees. Each director is required to report to the board about the management of the company every three months. The board has general authority over the management of the company. Specifically, the amendment lists examples of management affairs to be decided by the board, such as the disposal of important assets and large loans. The scope of an 'important asset disposal' or 'large loan' should be defined by the internal regulations of the board. The listed items cannot be delegated to the representative director or to the shareholders, but a resolution by the board is necessary. However, the listed items are not exclusive, but exemplary. For example, the report also lists approval of the business plan or annual budget. For asset disposal, 5% percent of the assets or sales revenues is the criterion.

Limited exceptions to pre-emptive rights
A shareholder has the pre-emptive right unless the articles state otherwise. The legally permissible extent to which the articles can exclude pre-emptive rights has been the subject of intense debate as controlling shareholders can abuse pre-emptive rights to maintain their majority interest. Accordingly, the amendment requires a managerial need for the exclusion of pre-emptive rights. Introduction of new technology and improvement of financial standing are two examples of this need.

For further information on this topic please contact Young-Cheol Jeong or Young Sun Cho at Woo, Yun, Kang, Jeong & Han by telephone (+822 528 5200) or by fax (+822 528 5228) or by e-mail ([email protected] or [email protected]).