Kyusung Lee Attorney at Law

– Why Foreign Investors and Activist Funds Should Be Watching Closely

Two amendments to Korea’s Commercial Act are about to reshape how listed companies elect their audit committees — and, by extension, how much real influence minority and foreign shareholders can exert over the board.

Effective July 23, 2026, the rule capping a controlling shareholder’s aggregated voting power at 3% now applies to the election and removal of every audit committee member, regardless of type. Effective September 10, 2026, the minimum number of audit committee members who must be elected separately from other directors doubles from one to two.

Together, these changes mean that in a typical three-member audit committee, the two separately-elected seats will form a majority — and the controlling shareholder’s bloc, no matter how large its actual stake, will be capped at 3% of the vote in that election. For foreign institutional investors, activist funds, and any minority shareholder engaging with Korean listed companies, this is one of the most consequential governance changes in years.

Key Takeaways Effective July 23, 2026: controlling shareholders and related parties are capped at a combined 3% voting cap in the election or removal of any audit committee member. Effective September 10, 2026: the mandatory minimum number of separately-elected audit committee members rises from one to two. In companies with a three-member audit committee, the two separately-elected seats become a majority — a real structural opening for minority shareholders and activists.

Change	What It Does	Effective Date
Expanded 3% aggregate voting cap	Caps the controlling shareholder bloc at 3% in every audit committee election or removal vote	July 23, 2026
Expanded separate election requirement	Raises the mandatory minimum of separately-elected audit committee members from one to two	September 10, 2026

1. How Korea Elects Audit Committee Members

1.1 General (Combined) Election

Under the general election method, a candidate is first elected as an ordinary director, and the audit committee member is then chosen from among the sitting directors in a second vote. The 3% cap generally does not apply at the first stage — the controlling shareholder can use its full voting power to elect its preferred slate of directors. The cap only bites at the second stage, when the audit committee member is chosen.

1.2 Separate Election

Under separate election, a candidate is elected directly as a ‘director who becomes an audit committee member’ — director election and audit committee election are combined into a single vote, so the 3% cap applies from the very first stage. This is why separate election has traditionally been the more effective route for minority shareholders and institutional investors seeking to place an independent voice on the board.

2. July 23, 2026 — The Expanded 3% Aggregate Voting Cap

The amended Commercial Act now aggregates the shares held by the controlling shareholder, its related parties, and other persons designated by presidential decree, and bars voting on any portion of that combined stake above 3% of total shares entitled to vote — for any audit committee election or removal. This is not a cap on ownership; it is a cap on voting power in this specific type of resolution.

2.1 ‘Aggregate 3%’ vs. ‘Individual 3%’

Shareholder Type	How the Cap Applies
Controlling shareholder bloc	All shares held by the controlling shareholder and related parties are aggregated; the combined bloc may vote up to 3% only
Ordinary shareholders (independent of the controlling shareholder)	Each shareholder is capped individually at 3%

2.2 Illustration — A Controlling Family with Dispersed Holdings

Consider a company with 100 million voting shares. Even if the controlling shareholder, spouse, children, and an affiliate together hold 35% of the company, their combined bloc can vote no more than 3% on an audit committee resolution. The 3% is not granted separately to each named holder — it applies once, to the aggregated total.

Shareholder	Shares Held	Stake
Controlling shareholder	20,000,000	20%
Spouse	5,000,000	5%
Child	3,000,000	3%
Affiliate	7,000,000	7%
Total	35,000,000	35% → capped to 3% votable

2.3 Illustration — Multiple Independent Institutional Investors

Where each institutional investor is genuinely independent of the controlling shareholder, each is capped individually at 3% — so several institutions together can vote a combined 11%, even while the controlling shareholder’s much larger actual stake is capped at 3%. This asymmetry is precisely what gives coordinated minority shareholders real leverage.

Shareholder	Stake Held	Votable
Institutional Investor A	8%	3%
Institutional Investor B	6%	3%
Activist Fund C	4%	3%
Minority Shareholder D	2%	2%

2.4 What Changed From the Prior Rule

Before this amendment, the scope of the aggregate 3% cap varied by the type of audit committee member, and it applied most consistently to non-outside-director audit committee members. As of July 23, 2026, the cap applies uniformly — regardless of whether the member is independent, and regardless of whether they were separately or generally elected.

2.5 Applies to Removal, Too

The same 3% cap applies when a controlling shareholder seeks to remove an unfriendly audit committee member. Removal votes carry their own special-resolution and quorum requirements, so the practical outcome still depends on turnout and the distribution of votes among the remaining shareholders.

3. September 10, 2026 — Two Mandatory Separately-Elected Seats

Previously, companies were required to separately elect at least one audit committee member, with the articles of incorporation permitted to raise that to two or more. Under the amendment, the statutory minimum rises to two, and companies may set the bar even higher — three or more — in their articles.

	Before	After
Statutory minimum separately-elected members	1	2
Maximum settable by articles of incorporation	2 or more	3 or more

For a three-member audit committee, this is not a marginal change: two separately-elected seats out of three is an outright majority. If minority shareholders or institutional investors can win both seats, they gain effective control of the audit committee’s decision-making.

4. The Combined Effect

From September 10, 2026 onward, a typical three-member audit committee must have at least two separately-elected members, and every one of those elections is subject to the 3% aggregate cap on the controlling shareholder’s bloc. The timeline below shows how the two changes stack.

Period	Applicable Rules
Through July 22, 2026	Separate election: minimum 1 member. Expanded 3% cap not yet in effect.
July 23 – Sept. 9, 2026	Separate election: minimum 1 member. Expanded 3% cap applies to all audit committee elections.
From Sept. 10, 2026	Separate election: minimum 2 members. Expanded 3% cap applies to all audit committee elections.

5. Transition Risk — What Companies Are Racing to Fix

Companies affected by this transition are typically working through several items in parallel:

• Amending the articles of incorporation
• Finalizing additional separately-elected candidates
• Convening an extraordinary general meeting if needed
• Restructuring the resignation or term of an existing audit committee member
• Electing an additional audit committee member
• Adjusting the size of the audit committee and board

6. When an Existing Member’s Term Hasn’t Expired

Companies that need two separately-elected members in place by September 10, 2026 often cannot simply wait for a current term to run out. Options under consideration typically include:

• Having an existing audit committee member resign and be re-elected under the separate election method
• Expanding the audit committee to four members and separately electing a new member
• Combining a resignation, an articles amendment, and an additional election at a single extraordinary general meeting

Each path raises its own questions around the relationship between director and audit-committee-member status, any temporary shortfall below the statutory quorum, independent-director eligibility, candidate nomination committee procedures, and the sequencing of quorum and effective dates.

7. Fragmented Holdings, Friendly Shareholders, and Concerted Action

Splitting shares across family members or affiliates does not escape the cap — if those holders are aggregated with the controlling shareholder, the combined bloc is still capped at 3%. Genuinely independent shareholders, by contrast, keep their own individual 3% cap. Foreign investors evaluating a Korean target should watch for facts that could re-classify an apparently independent holder as part of the controlling bloc, including:

• An explicit agreement to vote shares in concert
• Financing provided by the controlling shareholder to acquire the shares
• A nominee or trust arrangement (myungui shinтак)
• Voting exercised on the controlling shareholder’s instructions
• An affiliate relationship or de facto control/subordination
• Beneficial ownership that traces back to the controlling shareholder

8. Implications for Activist and Institutional Investors

• A controlling shareholder holding 30–50% is still capped at 3% in an audit committee vote — which meaningfully increases the leverage of a coordinated minority coalition.
• Winning both separately-elected seats can deliver two of three audit committee seats to the minority side.
• A minority-controlled audit committee has enhanced standing to demand information on related-party transactions, treasury stock, executive compensation, accounting treatment, and subsidiary dealings.
• It also raises the practical likelihood of pursuing director liability claims, injunctive relief, litigation, or the appointment of outside experts if misconduct is found.

9. Bottom Line

1. From July 23, 2026, every audit committee election or removal — regardless of the member’s type or election method — is subject to a 3% aggregate voting cap on the controlling shareholder’s bloc.

2. From September 10, 2026, the statutory minimum number of separately-elected audit committee members rises from one to two.

3. In a three-member audit committee, two separately-elected seats form a majority, which can materially change who actually controls the committee’s decisions.

4. Affected companies — and investors evaluating them — should review the articles of incorporation, existing members’ terms, the mechanics of any additional election, the need for an extraordinary general meeting, and the controlling shareholder’s votable stake well before the effective dates.

This article is provided for general informational purposes only and does not constitute legal advice. Outcomes will vary depending on a company’s specific articles of incorporation, asset size, applicable special statutes, audit committee members’ terms, and shareholder structure. For a company-specific assessment, please contact us using the information below.

About Attorney Kyusung Lee
Education	B.A. in Economics, Brown University / J.D., Yonsei University Law School
Professional Background	Samsung C&T (international contracts, legal team) / BofA Merrill Lynch (equity research) / CAMS (Certified Anti-Money Laundering Specialist)
Practice Areas	International contracts, startup law, foreign investment, corporate law, corporate governance & shareholder activism, commercial disputes
Bar Membership	Korean Bar Association

Get in Touch For advice on preparing for Korea’s 2026 audit committee election reform — articles of incorporation review, shareholder meeting strategy, or minority shareholder engagement — please reach out below. Phone: +82-2-6264-7604 Email: kyusungii@gmail.com Website: http://www.kyusunglee.com Naver Blog: blog.naver.com/hotchkiss777

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