South Korea';s corporate law framework entered a significant period of change in the first quarter of this year. Amendments to the Commercial Act, updated Financial Services Commission guidance, and a series of notable court decisions have collectively reshaped the obligations of companies operating in the jurisdiction. Foreign investors and multinational groups with Korean subsidiaries face new governance requirements, tightened disclosure rules, and revised liability standards for directors. This guide covers the key legislative changes, regulatory developments, and judicial rulings from Q1, along with their practical implications for international businesses.
The most consequential development of the quarter was the entry into force of amendments to the Commercial Act (상법), South Korea';s primary statute governing company formation, corporate governance, and shareholder relations. The revised provisions introduce a clearer separation between the roles of the board of directors and the audit committee, particularly for listed companies with assets above a statutory threshold. Under the amended framework, audit committee members must now be elected by a separate shareholder vote rather than being appointed from within the broader board election process. This change is designed to reduce the influence of controlling shareholders over audit oversight and has been a long-standing demand of institutional investors and governance reform advocates.
A second legislative development concerns the expanded definition of related-party transactions subject to board approval. The threshold for mandatory board review has been lowered, meaning that a broader range of intragroup transactions - including those between a Korean subsidiary and its foreign parent - now require prior approval from a majority of independent directors. Companies that previously relied on internal delegation procedures for routine intercompany dealings must revisit their approval workflows. A common mistake among foreign-owned subsidiaries is assuming that group-level approval processes satisfy Korean statutory requirements; they do not.
The amendments also introduce a new obligation for large listed companies to disclose the ratio of executive compensation to median employee pay. This requirement, modelled in part on disclosure regimes in other major economies, applies to companies listed on the Korea Exchange (KRX) with more than a defined number of employees. The first disclosures under this rule are due in annual reports covering the current financial year, giving companies limited time to build the necessary data infrastructure.
The Financial Services Commission (FSC) and its supervisory arm, the Financial Supervisory Service (FSS), issued several pieces of guidance in Q1 that carry direct implications for corporate governance and capital markets compliance. The FSC released updated guidance on the stewardship code, encouraging institutional investors - including foreign asset managers holding Korean equities - to engage more actively with portfolio companies on environmental, social, and governance matters. While the stewardship code remains voluntary in its application, the FSC has signalled that it will monitor compliance and may consider mandatory elements in future rulemaking.
The FSS separately issued a supervisory letter addressing deficiencies observed in the internal control systems of listed companies. The letter identifies three recurring weaknesses: inadequate segregation of duties in financial reporting, insufficient documentation of board deliberations, and gaps in whistleblower protection mechanisms. Companies that received individual supervisory feedback are expected to remediate identified gaps within a defined period. More broadly, the letter signals that the FSS intends to increase the frequency of targeted reviews of internal control frameworks across the listed sector.
For foreign companies with Korean depositary receipts or cross-listed securities, the FSC also clarified the application of periodic disclosure obligations under the Capital Markets and Financial Investment Business Act (자본시장법). The clarification confirms that foreign issuers must align their Korean disclosure timetables with those of domestic issuers, removing a previous ambiguity that some foreign companies had used to justify delayed filings. In practice, this means that foreign issuers should audit their current disclosure calendars and confirm alignment with Korean regulatory deadlines.
If your group has Korean-listed securities or a subsidiary subject to FSC oversight, a compliance review of internal controls and disclosure procedures is advisable. We can assist with documents and filings. Contact info@vlolawfirm.com to request a consultation.
South Korean courts issued several decisions in Q1 that clarify and, in some respects, expand the personal liability exposure of directors. The Supreme Court of Korea (대법원) affirmed a lower court ruling holding that outside directors of a listed company could be held jointly liable for losses arising from a related-party transaction that they approved without adequate due diligence. The court';s reasoning emphasised that the business judgment rule - which provides directors with a degree of protection when decisions are made in good faith and on an informed basis - does not shield directors who fail to request and review material information before casting a vote.
This ruling has immediate practical significance for foreign nationals serving as outside directors on Korean boards. Many international executives accept outside director roles in Korean subsidiaries of their employer group without fully appreciating the personal liability framework under Korean law. The Supreme Court';s decision reinforces that Korean courts apply a substantive standard of care, not merely a procedural one. Directors must be able to demonstrate that they actively engaged with the information presented to them, asked relevant questions, and exercised independent judgment.
A second significant decision, issued by the Seoul High Court, addressed the liability of a de facto director - a person who exercises directorial authority without holding a formal appointment. The court found that an individual who regularly attended board meetings, directed management decisions, and was treated by employees as having executive authority could be held liable as a de facto director under the Commercial Act, even though they held no formal title. This ruling is particularly relevant for foreign parent companies whose senior executives informally direct the operations of Korean subsidiaries without being formally appointed to the Korean board.
A third decision, from the Seoul Central District Court, concerned the validity of a shareholder resolution passed at a general meeting where certain minority shareholders had not received adequate notice. The court voided the resolution, applying a strict interpretation of the notice requirements under the Commercial Act. The practical lesson is that Korean procedural requirements for shareholder meetings - including notice periods, agenda disclosure, and the rights of minority shareholders to propose agenda items - must be followed precisely. Many foreign-owned subsidiaries treat Korean general meetings as administrative formalities; this decision illustrates the legal risk of that approach.
South Korea has continued its multi-year trajectory of strengthening minority shareholder rights, and Q1 brought further concrete steps in this direction. The Korea Exchange updated its listing rules to require that companies provide more detailed explanations when they reject shareholder proposals submitted in advance of the annual general meeting. Previously, companies could decline proposals with minimal explanation; the revised rules require a written statement setting out the specific grounds for rejection. This change gives minority shareholders - including foreign institutional investors - a stronger basis to challenge rejections they consider inadequate.
The Ministry of Justice also published a consultation paper on proposed further amendments to the Commercial Act that would introduce a statutory derivative action mechanism allowing minority shareholders holding above a defined threshold to bring claims on behalf of the company against directors. While these proposals remain at the consultation stage and have not yet been enacted, they signal the direction of travel and give companies reason to review their governance practices proactively. In practice, founders and controlling shareholders of Korean companies should consider whether their current governance arrangements would withstand scrutiny under a more permissive derivative action regime.
Foreign investors operating through joint ventures in South Korea face a particular consideration. Where a foreign partner holds a minority stake, the strengthened minority rights framework may give that partner enhanced leverage in disputes with the Korean majority shareholder. Joint venture agreements that were drafted under an older legal framework may not adequately address the rights that minority shareholders now hold under Korean law. A review of existing joint venture documentation is advisable for any foreign group with minority positions in Korean entities.
The cumulative effect of the Q1 legislative and regulatory changes is a meaningfully more demanding compliance environment for companies operating in South Korea. Foreign businesses should focus on four priority areas.
First, board composition and committee structure. Listed companies and large unlisted companies must verify that their board and audit committee arrangements comply with the amended Commercial Act requirements. This includes confirming that audit committee members are elected through the correct procedural mechanism and that independent director thresholds are met.
Second, related-party transaction governance. Any company engaged in intercompany transactions with Korean entities must map those transactions against the revised approval thresholds and confirm that the required independent director approvals are obtained and documented. Retroactive approval is not a recognised remedy under Korean law.
Third, disclosure and reporting. Companies with Korean-listed securities must align their disclosure calendars with FSC requirements. Companies subject to the new executive compensation disclosure rule must begin building the data collection processes needed to produce compliant disclosures.
Fourth, director training and liability awareness. Given the Supreme Court';s reinforcement of the substantive duty of care standard, companies should ensure that all directors - including outside directors and foreign nationals - understand their obligations under Korean law and have access to adequate information to discharge those obligations.
A scenario that illustrates the stakes: a European group with a wholly owned Korean subsidiary has historically managed the subsidiary';s board as a formality, with the Korean entity';s directors simply ratifying decisions made at group level. Under the current legal framework, this approach exposes both the Korean directors and potentially the foreign parent';s executives to liability as de facto directors. The group should formalise governance arrangements, ensure the Korean board operates with genuine independence, and document its deliberations properly.
A second scenario: a foreign institutional investor holds a significant minority stake in a Korean listed company and has previously been passive in its engagement. The FSC';s updated stewardship code guidance and the KRX';s revised listing rules now create both an expectation and a practical mechanism for more active engagement. The investor should review its engagement policy and consider whether its current approach is consistent with its stewardship obligations.
For international businesses navigating these changes, early legal review is more cost-effective than remediation after a regulatory inquiry or litigation. We can help structure the compliance approach correctly the first time. Reach out to info@vlolawfirm.com for a consultation.
What is the most significant governance change introduced by the recent Commercial Act amendments?
The most consequential change is the requirement that audit committee members of listed companies be elected through a separate shareholder vote, distinct from the general board election process. This is intended to limit the ability of controlling shareholders to influence the composition of the audit committee. For foreign-owned subsidiaries, the practical implication is that the parent company cannot simply designate audit committee members through its ordinary board appointment process. Companies must review their articles of incorporation and shareholder meeting procedures to ensure they comply with the new mechanism. Non-compliance can result in the invalidity of audit committee appointments and associated board decisions.
How quickly must companies adapt to the new related-party transaction approval requirements, and what are the cost implications?
The amended thresholds apply to transactions entered into after the effective date of the amendments, so companies should treat the requirement as immediately operative for any new or renewed intercompany arrangements. The primary cost is not a direct fee but rather the internal and external legal resource required to map existing transaction flows, identify those that now require independent director approval, and establish a compliant approval process. For groups with complex intercompany structures, this mapping exercise can be time-consuming. External legal fees for a comprehensive review typically fall in the low to mid thousands of USD equivalent, depending on the complexity of the group structure. Ongoing costs relate to the time of independent directors and the administrative burden of convening approval meetings.
Should a foreign company consider restructuring its Korean subsidiary';s board in light of the recent director liability decisions?
The recent Supreme Court and Seoul High Court decisions make a strong case for reviewing board arrangements, particularly where foreign parent executives exercise informal authority over Korean subsidiaries without formal appointment. The de facto director doctrine means that informal authority carries formal liability. Companies should consider whether to formalise the roles of individuals who currently act in a directorial capacity, or alternatively to establish clearer boundaries between group oversight and subsidiary management. In some cases, appointing a qualified independent director with Korean legal and governance expertise provides both a compliance benefit and a practical buffer against liability exposure. The right structure depends on the size of the Korean operation, the nature of its business, and the group';s overall governance philosophy.
South Korea';s corporate law environment has moved decisively in the direction of stronger governance, expanded minority rights, and heightened director accountability. The Q1 developments - spanning legislative amendments, regulatory guidance, and judicial decisions - collectively raise the bar for companies operating in the jurisdiction. Foreign businesses that treat Korean subsidiaries as administrative outposts rather than entities with their own governance requirements face real legal and financial exposure.
VLO Law Firms advises international clients on corporate law matters in South Korea. We can assist with board governance reviews, related-party transaction compliance, director liability assessments, and regulatory filings with the FSC and FSS. To request a consultation, contact: info@vlolawfirm.com