JIPYONG LLC

The Korean Commercial Code (the “KCC”) requires Korean corporations to establish and maintain a statutory audit body (i.e., a statutory auditor or audit committee) to supervise their management and audit accounts.

However, the corporation may be (a) exempted from appointing a statutory auditor or (b) required (or permitted) to (i) appoint a full-time auditor or (ii) establish an audit committee within its board of directors in lieu of appointing a statutory auditor, depending on the amount of the corporation’s total capital or assets.

Below is an overview of the KCC requirements.


1. Overview of Requirements to Establish an Audit Body

A. Private Companies with Total Capital less than KRW 1 Billion

A private company with total capital less than KRW 1 billion is exempt from appointing an auditor or establishing an audit committee (Article 409(4), KCC).  This exemption applies from incorporation, and the authorities and role of the statutory auditor are exercised by a general meeting of shareholders instead.

B. Private Companies with Total Capital of KRW 1 Billion or more or Publicly Traded Companies with Total Assets less than KRW 100 Billion

A private company with total capital of KRW 1 billion or more or a publicly traded company with total assets less than KRW 100 billion must either appoint an auditor or establish an audit committee within its board of directors pursuant to Article 415-2 of the KCC (“Article 415-2 Audit Committee”).

An audit committee is one of the sub-committees which may be created within a board of directors.  If a corporation establishes an Article 415-2 Audit Committee in lieu of appointing an auditor, the committee should consist of at least three (3) directors and 2/3 of the committee members should be independent directors (Article 415-2(2), KCC).  While a member of the Article 415-2 Audit Committee may be appointed by a majority vote of directors, removal of a member of the Article 415-2 Audit Committee requires 2/3 votes of the total number of directors (Article 415-2(3), KCC).

C. Publicly Traded Companies with Total Assets of KRW 100 Billion or more but less than
KRW 2 Trillion

A publicly traded company with total assets of KRW 100 billion or more but less than KRW 2 trillion must either appoint an auditor or establish an audit committee within its board of directors pursuant to Article 542-11 of the KCC (“Article 542-11 Audit Committee”).  If an auditor is appointed by such corporations, such auditor should be working for the corporation regularly on a predetermined schedule (‘sang-geun-gam-sa ’ in Korean).

D. Publicly Traded Companies with Total Assets of KRW 2 Trillion or more

Lastly, a publicly traded company with total assets of KRW 2 trillion or more cannot appoint an auditor, but rather must establish an Article 542-11 Audit Committee (Article 542-11(1), KCC).

E. Differences between the Article 415-2 Audit Committee and Article 542-11 Audit Committee

With respect to composition and appointment and removal procedures, the KCC applies more stringent rules on the Article 542-11 Audit Committee.

In addition to rules applicable to the composition of the Article 415-2 Audit Committee (e.g., more than three members, 2/3 of which shall be independent directors), at least one member of the Article 542-11 Audit Committee should be an accounting or finance expert.  Also, the role of committee chair must be served by an independent director, and the eligibility requirements applicable to a member of the Article 542-11 Audit Committee are different from those applicable to a member of the 415-2 Audit Committee.

While members of the 415-2 Audit Committee members may be appointed or removed by the resolution of a board of directors, a member of the Article 542-11 Audit Committee is appointed or removed by the resolution of a shareholder’s meeting (explained in more detail in Section 2 below).


2. KCC Amendment to Audit Committee Requirements

The amendment to the KCC enacted on December 29, 2020 (the “KCC Amendment”) further restricts major shareholders’ voting rights with respect to the appointment and removal of audit committee members and changes the voting system for the Article 542-11 Audit Committee.

A. Strengthened Restriction of Voting Rights for Appointment and Removal of Audit Committee Members

The KCC restricts shareholders holding 3% or more of the total issued and outstanding voting shares of a corporation from voting on appointments or removals of the corporation’s audit committee members (the “3% Rule”).

Prior to the KCC Amendment, the KCC applied the 3% Rule selectively, for example, with respect to appointments but not removals of audit committee members who were outside directors.

Under the KCC Amendment, the 3% Rule now applies to appointments and removals of all audit committee members, regardless of whether they are outside directors.  The KCC Amendment also continues to require that for appointments and removals of audit committee members who are not outside directors, the largest shareholder must aggregate its shareholdings with those of its affiliates for purposes of calculating its total shareholdings to determine whether it falls within the 3% Rule.

In addition, special regulations regarding the removal of audit committee members have been newly established.  An audit committee member may be removed by a special resolution at the general meeting of shareholders (by at least 2/3 of the voting rights of the shareholders present at the meeting representing at least 1/3 of the total number of issued and outstanding shares); and in such case, a person who is elected as a director to become an audit committee member pursuant to the separate election method (see Section 2.B. below) will lose the position of audit committee member as well as director.

B. Adoption of Separate Election System of 542-11 Audit Committee Members

Prior to the KCC Amendment, a member of the 542-11 Audit Committee was selected and appointed from among the directors appointed by a shareholders’ meeting.  All directors were thus collectively appointed without distinguishing from those that would be appointed as a member of the 542-11 Audit Committee, and without there being restrictions on the voting rights of shareholders such as the largest shareholder.

The KCC Amendment now requires that at least one director to serve as a member of the 542-11 Audit Committee (unless a corporation’s articles of association require a higher number) should be appointed separately from the other directors (“separate election method”); this means that for the election of at least the one director who will serve as a member of the 542-11 Audit Committee, the voting rights of major shareholders are limited by the 3% Rule.

Following the enactment of the KCC Amendment, candidates nominated by activist shareholders or other shareholders who are not the largest shareholders have been appointed as independent directors to serve as members of the 542-11 Audit Committees of some listed companies in 2021.

With the strengthened 3% Rule and separate election method now in place, we may continue to see acquirers in hostile M&A cases or shareholder activist funds have their nominees elected as directors to serve as members of the 542-11 Audit Committees of publicly traded corporations by allocating their shares among different holding vehicles.