Significance of The "3% Rule" In the Revision of the Commercial Act in Korea

• One of the most important changes in the revisions of the Commercial Act in Korea that was passed in the Parliament last week was the "3% rule."

• In this insight, we provide details of this 3% rule and how it is likely to significantly impact the Korean equity markets.

• Major impact of the 3% rule is it is likely to shake up the BODs at many Korean companies. Many global activist investors will likely be more active in Korea.

The 3% rule is likely to strengthen minority shareholders rights, in which top shareholders and related parties will have their voting rights capped at 3 percent when electing audit committee members. Previous to this revision, the 3% limit was previously applied only when appointing internal directors to the audit committee. Post revision, 3% rule will also apply to election of outside directors to the audit committee.

With regards to the timing, the revisions of the Commercial Act passed on 3 July 2025. This comes with a one year grace period so the revisions will become effective starting 3 July 2026.

Main Highlights of the 3% Rule

If shareholders hold at least 3% of the issued and outstanding shares of a listed company, they are granted the right to propose candidates for outside directors to the audit committee. Under the revised 3% rule, the controlling family can apply the 3% rule on a combined basis, not on an individual basis when electing outside directors to the audit committee.

In other words, when appointing audit committee members in listed companies, voting rights of the largest shareholder (and related parties) are capped at 3% of shares. Any excess cannot be used in the vote.

Companies with total assets over 2  trillion won must conduct a separate vote at the shareholder meeting to appoint at least one audit-committee director. The 3% voting cap applies from the director nomination stage, not just during committee selection.

The main purpose of this rule is to enhance corporate governance by allowing minority shareholders a greater voice in board composition and corporate decision-making. The new 3% rule encourages greater independence in board nominations, potentially leading to more objective and professional oversight.

Example - It is probably easier to under this change using an example. The table below provides the major shareholders of Samsung C&T (028260 KS). Jae-Yong Lee is the largest single shareholder with a 19.9% stake. The combined stakes of Jae-Yong Lee (19.9%) and his two sisters (Seo-Yeon Lee - 6.9%; Bu-Jin Lee - 6.2%) and mother (Ra Hee Hong - 1.1%) is 34%.

Prior to the Commercial Act revision, Jae-Yong Lee, Seo-Yeon Lee, and Bu-Jin Lee each had 3% limit when electing outside directors to the audit committee (combined amount of 9%).

Post revision to the Commercial Act, the 3% rule will kick in so that the total amount of their limit will be reduced to 3% on a combined basis (down from 9% previously).

This is a major change indeed.