South Korea's Commercial Act Reform: Implications for the Stock Market

The South Korean government is actively pushing for amendments to the Commercial Act. These legal reforms aim to enhance corporate governance, improve shareholder rights, and attract foreign investments by addressing structural issues in the Korean capital market.

🔍 Key Highlights of the Reform

• Expanded Fiduciary Duty: Directors' duty of loyalty extends beyond the company to include all shareholders.
• 3% Rule: Voting rights of major shareholders for appointing audit committee members will be capped at 3%.
• Mandatory Electronic Shareholder Meetings and cumulative voting provisions are included.
• Independent Directors: Provisions require more independent and diverse board members.

Note: Although parts of the bill have passed the National Assembly, presidential vetoes and political negotiations are delaying final enforcement.

📈 Impact on the Korean Stock Market

1. Revaluation Potential

Market experts believe these reforms could raise company valuations and narrow the so-called "Korea Discount," which refers to the undervaluation of Korean stocks due to governance issues. Foreign investors are showing increased interest in anticipation of stronger shareholder protection.

2. Beneficiaries: Holding Companies & Financial Stocks

Investment is flowing into holding companies and undervalued financial stocks, which are expected to benefit the most from improved corporate governance structures.

3. Positive Index Movements

• KOSPI surged over 2.7% on the first trading day after the inauguration of the new administration.
• Market optimism continues as reforms signal greater alignment with international standards.

4. Risks and Uncertainties

Despite positive sentiment, uncertainties remain due to the possibility of vetoes, unclear timelines, and some companies potentially preemptively restructuring in response.

🧭 Summary Table

Factor	Market Impact
Corporate Governance Reform	Enhanced investor trust, higher valuations
3% Rule, Independent Directors	Limits on owner dominance, increased transparency
Foreign Capital Inflows	Improved perception of the Korean market
Political Uncertainty	Short-term volatility

🌍 Global Recognition

Global financial media including Financial Times and Reuters have acknowledged the reform’s potential to elevate Korea's market to developed status in MSCI indexes. However, successful and swift implementation remains key.

📰 Sources

• Financial Times
• Reuters
• Bizwatch
• EKN
• M&I
• Korea Daily