Beyond the Korea Discount: How the August 2025 Commercial Code Amendment Addresses (and Overlooks) Chaebol Dominance

Suhana is a third-year undergraduate student at Hidayatullah National Law University, India.

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Introduction

South Korea is home to some of the world’s most influential tech giants, such as Samsung, that have secured their positions as industrial powerhouses. However, this part of the market is largely dominated by Korea’s wealthy elite , commonly referred to as large family-owned business conglomerates, or “chaebols”. Each chaebol consists of a network of affiliated companies operating across diverse sectors, such as electronics, automobiles, construction, and finance. Even if a chaebol does not own a majority stake in each of its affiliated companies, its strong relationship with each relevant sector is marked by decades-long partnerships between big businesses. Recently, the South Korean National Assembly passed an “amended bill” on August 25, 2025, aimed at curbing chaebols’ dominance. This blog post explores whether such a reform was necessary, if it will prove sufficient in the long run, and provides further recommendations based on similar reforms in other legal systems.

Identifying the Problem

At the heart of South Korea’s corporate governance challenge is the chaebol ownership structure wherein they engage in an intricate system of cross-shareholding. This means that within the conglomerates, companies own shares in one another, forming a closed network of internal ownership. This allows founding families to retain control over vast corporate groups despite holding relatively small direct stakes. As a result, these conglomerates effectively function as self-contained corporate empires, shielded from external oversight and minority stakeholder scrutiny. Such structure enhances their concentrated power and weakens corporate accountability, as management decisions often prioritize the controlling family’s interests over those of minority shareholders or the market at large. This internal favouritism can also be manifested in the form of preferential contracts, unfair resource allocation, or governance appointments that serve family control rather than corporate efficiency. It also leads to multiple consequences on the financial side, for instance, opaque transactions and circular financing where funds flow only in a network of affiliated companies through loans or investments without any effort to generate real economic value.

Another issue which rises from the chaebol ownership structure is that of double-accounting, where, for example, Company A owns forty  percent of Company B’s shares, and Company B also owns forty percent of Company A’s shares. When Company A prepares its financial statements, it includes the value of its shares in Company B as an asset. However, since Company B owns shares in Company A, the value of Company A’s shares is indirectly inflated by Company B’s value, which already includes Company A’s shares in it. Thus, the value of cross-held equity shares is first counted during the valuation of the company that issued the shares, and is counted again when valuing the assets of the other company, which cross-holds those equity shares. This ultimately leads to a volatile market that discourages foreign investors from entering it.

The collective dominance of chaebols in South Korea creates a web of mutual ownership that undermines the rights of minority shareholders by giving families disproportionate influence over the nation’s economy. Such practices produce serious economic distortions by obscuring firms’ true financial conditions and interlinking their fortunes, ultimately increasing systemic risk and discouraging foreign investment. It is pertinent to consider these consequences more broadly: South Korean companies’ stocks trade at lower valuations as compared to their global competitors and are undervalued relative to their earnings and assets. These dynamics which collectively contribute to the low valuation of Korean companies, are commonly referred to as the “Korea Discount”.

The Amendment

In response to the persistent Korea Discount and long-standing concerns about chaebol-dominated governance, the National Assembly passed major reforms to the Korean Commercial Code (KCC) on July 3, 2025, followed by a presidential proclamation on July 22, 2025. These amendments, namely provisions related to the voting system and outside auditing, mark significant corporate governance updates, aiming to strengthen transparency, enhance shareholder protections, and rebuild investor confidence. But the amendments didn’t stop here, as the National Assembly also passed a bill in August 2025 to amend the KCC to further protect the interests of minority shareholders. The amendment seeks to strengthen corporate governance and enhance investor confidence by expanding directors’ fiduciary duties to improve corporate valuations of companies under Article 382-3. Now, along with the previous provision of “performance of duties in good faith in the interest of the company,” directors also need to protect the interests of the shareholders as a whole and treat the same equitably. Specifically, the bill introduces two major changes. First, under Article 542-7, “listed companies with assets greater than 2 trillion won will be required to introduce a cumulative voting system under enabling minority shareholders to concentrate their votes on specific board candidates during proxy fights.” In chaebols, the founding families hold enough shares to dominate board appointments and other related decisions, meaning that minority shareholders often lack the voting power to elect directors despite collectively owning many shares. With the cumulative voting system, minority shareholders can pool their votes for one or a few candidates during proxy fights where different shareholder groups campaign for their own nominees to the board. Second, under Article 542-12, “listed companies will also be required to increase the number of audit members to at least two, who are to be elected separately from the board of directors.”

Possible Implications

The most immediate impact of the recent amendments is that minority shareholders will hold meaningful influence over corporate governance. The introduction of mandatory cumulative voting and independent audit committee members lessens chaebol dominance and provides more balanced representation. These changes have the potential to bring in more domestic and foreign activist investors while holding firms that were previously shielded from external scrutiny more accountable. Further, South Korea’s opaque governance has long been criticized by global investors for limiting the fair valuation of companies. The amendments signal a more transparent and equitable environment, which can foster market and investor confidence. Additionally, there may be a shift in corporate behaviour wherein boards become more cautious while balancing company-related decisions against the risk of minority opposition. However, shareholders who were previously excluded from influence may attempt to push the limits of these amendments through litigation. With new rights comes the likelihood of greater disputes. Hence, companies could face increased compliance costs and uncertainty as to how courts interpret the new amendments.

Will the amendments suffice in the long run?

One limitation of the amendments is their narrow focus, as the provisions will do little to dismantle the deeply embedded dominance of chaebol families in almost all spheres of life. The driving force behind these amendments was the Korea Discount, rooted in the cross-shareholding practices of chaebol families. Yet, this issue is left largely unaddressed. Further, the amendments provide no guidance for how directors should resolve the conflict between short-term shareholder demands and long-term corporate strategy. The amendments also ignore other affiliated issues surrounding minority protection, such as binding say-on-pay rights, which allow shareholders to vote on the compensation and remuneration packages of top executives. Similarly, mandatory disclosure of related-party transactions under which companies must publicly reveal any financial dealings or contracts they have with “related” parties like directors and shareholders, remains outside the scope of the reforms. This is important to ensure that profits are not being diverted to family members or losses are not being inflated or hidden. While the amendments reflect a commitment to increase transparency and shareholder activism, they fail to address the core reasons for the Korea Discount's structural form. Korea's undervaluation primarily stems from its opaque ownership structures, cross-shareholdings, as well as concentrated control held by chaebol families as discussed above. The amendments, although progressive as they extend fiduciary duties and increase minority representation, fail to significantly erase such ingrained governance structures. Without restriction of intra-group shareholding, stronger enforcement of disclosure regulations, or family control reductions in boards, such reforms do little to bring real change in how chaebols are controlled or managed.

Suggestions

The current amendments are certainly a step in the right direction, but they should not be implemented in isolation. What is required instead is a comprehensive, multi-fold legal framework that addresses the issue in its entirety. For this, South Korea can take inspiration from the EU Directive 2017/828  and inculcate a three-prong disclosure system: (i)  shareholders should have a say-on-pay policy allowing them to know how much the directors are being paid and thus create a stronger link between the pay and performance expected; (ii) companies should reveal all material related-party transactions that have the potential of creating risks for minority shareholders by submitting them for approval by the board; and (iii) asset managers and institutional investors should disclose how are they investing and engaging with the company while encouraging long-term goals in investment strategies relating to environmental and social issues. These measures will give investors slight leverage over managerial incentives and reduce the risk of self-dealing, two of the most persistent problems in governance by chaebols. Similar recommendations can be taken from the Sarbanes–Oxley Act. Under Section 302, senior executives are personally required to certify the accuracy and completeness of financial statements, thereby ensuring disclosure integrity, along with penalties prescribed under Section 802 for the destruction or alteration of financial records. Section 404 mandates an Internal Control Report with external auditors independently attesting to their effectiveness. Finally, Section 806 deals with whistleblower protection and encourages “the disclosure of corporate fraud by protecting employees of publicly traded companies or their subsidiaries who report illegal activities.” Introducing such protections in South Korea would foster a culture of transparency and early detection of misconduct. Such amendments should thus be coupled with similar provisions in the realm of the broader ambit of corporate strategy.

For smoother administration of these provisions, South Korea can also adopt other reforms like the “Comply or Explain” model, under which, if a company does not comply with regulations and instead aligns with other bespoke governance arrangements, they must explain how the latter is more suitable for better standards of efficiency. This model exists in multiple jurisdictions, such as the UK, as described in the Report on the Financial Aspects of Corporate Governance, and Singapore, as described in Singapore’s Code of Corporate Governance. South Korea’s current uniform approach does not suit all companies in the country due to multiple factors like ownership, geography, size, and complexity. This is because such a one-size-fits-all approach, which mandates similar compliance for all firms, ensures consistency but often ignores the operational realities of companies that differ in structure and capacity. A similar method can be establishing safe harbours in the form of legal provisions that protect directors from liability when decisions undertaken are based on some reasonable business judgement, even if they prove disadvantageous to shareholders in the short run. Additionally, requiring separate voting for audit committee members, which empowers minority shareholders to participate more actively in shaping corporate insights, should be made more autonomous, like in the United States. For example, the Sarbanes-Oxley Act mandates all audit committee members in listed companies to be fully independent of management under Section 301. A more ambitious reform would be to permit complete independence of audit committees, ensuring that oversight of financial reporting and internal controls is beyond the reach of controlling shareholders. Further, to tackle the problem of excessive litigation as identified before, South Korea can adopt litigation filters or specialized commercial courts, which balance accountability with the protection of management from trivial lawsuits.

Lastly, South Korea can attempt to disrupt the chaebol foundation using a two-pronged approach. First, regulatory authorities could mandate the slow unwinding of the already existing cross-shareholding arrangements by giving a timeline to prevent market shock, to make sure that ownership and control are actually separated. Second, it could impose stricter caps on voting rights derived from indirect holdings. This will ensure that the family ownership through circular chains does not give control beyond fair economic stakes. For instance, a one-share, one-vote principle can help align shareholding influence with financial risk. Circular ownership in this context refers to situations where companies within the same conglomerate hold shares in each other and thereby create a loop that leads to chaebol families controlling much more than they actually own, similar to cross-shareholding.

Conclusion

The August 2025 amendment to the KCC is a significant step toward redefining corporate governance by expanding shareholder rights and strengthening board accountability. It is an earnest effort to counter the Korea Discount and increase investor confidence. This analysis reveals that the reform is still in its infancy, addressing certain governance concerns but not entirely dismantling long-standing chaebol dominance based on opaque cross-shareholding and circular ownership arrangements. Without supplementary measures like stricter independence requirements for audit committees, litigation filters, stronger disclosure standards, and structural restraints on chaebol control, the amendment could end up being a cosmetic rather than a revolutionary reform.