Essential Restrictions to Verify Before Appointing Directors
Surprising Fact: Those Prohibited from Concurrent Positions Can Still Be Appointed as Directors
One of the most misunderstood aspects among corporate executives is the issue of concurrent position restrictions.
Individuals subject to profit-making business and concurrent position prohibitions under Article 64 of the State Public Officials Act, or those prohibited from serving as directors of other companies under company employment regulations, are not necessarily barred from being appointed as directors.
From a legal perspective, even if someone is prohibited from holding concurrent positions, their appointment as a director of another company remains legally valid.
However, it's important to distinguish between legal validity and potential sanctions.
While the appointment itself carries legal effect, separate sanctions may exist for violating relevant laws or employment regulations.
However, if the affiliated organization or current employer consents, these issues do not arise.
This is crucial in practice—candidates who are civil servants or employed at other companies need not be automatically excluded.
Rather, first examine whether they can legally obtain permission for concurrent positions from their organization or company.
Commercial Agents Face Even Stricter Concurrent Position Restrictions
Concurrent position restrictions for commercial agents are applied much more strictly than general prohibitions.
Commercial agents are those who engage in external activities representing the company in matters concerning its business.
Therefore, general employees or directors who only engage in internal administrative work do not fall under this category.
Commercial agents with representative authority, such as managers or branch managers who can perform all judicial and non-judicial acts concerning the business, cannot become directors of other companies without their employer's permission.
Importantly, "other companies" need not necessarily be in the same line of business.
Director positions at all other companies are restricted regardless of industry.
If a commercial agent violates the prohibition and serves as a director of another company, the appointment itself remains valid.
However, the employer can claim damages from the commercial agent, which is a legal liability separate from contractual damages.
Non-Competition Obligations When Existing Directors Are Present
According to Article 397 of the Commercial Act, directors cannot become unlimited liability partners or directors of other companies engaged in the same type of business without board approval.
This is called the director's non-competition obligation.
The key point is the scope of "other companies engaged in the same type of business."
They need not actually be conducting business; even companies at the pre-opening stage fall under the prohibition if their articles of incorporation list the same type of business.
When a director violates the non-competition obligation by becoming a director of another company in the same business, the appointment itself is valid but carries important legal consequences.
First, the director becomes liable for damages to the existing company.
Second, this constitutes legitimate grounds for director dismissal.
Therefore, when appointing directors, you must verify whether candidates currently serve as directors at other companies and whether those companies are in the same business.
Auditors Have Relatively More Freedom for Concurrent Positions
Unlike directors, auditors have no non-competition obligations.
This is because directors execute business while auditors only perform the function of auditing directors' business execution.
Therefore, when serving concurrently as an auditor at another company, there's no legal issue even if appointed as an auditor at another company in the same business.
However, under Article 414 of the Commercial Act, auditors cannot concurrently serve as directors, managers, or other employees of the company and its subsidiaries.
In other words, one cannot simultaneously serve as both auditor and director within the same company, so if an auditor is appointed as a director of that company, they must resign from the auditor position.
From Outside Directors to Independent Directors: Changed Requirements
Enhanced Independence Requirements Along with Name Change
With the Commercial Act amendment passing the National Assembly in July 2025, listed companies' outside director system has been renamed to "independent directors."
This is not merely a name change but reflects legislative intent to further emphasize independence from inside directors and major shareholders.
As the minimum appointment ratio of independent directors for listed companies increases from 1/4 to 1/3 of total directors, listed companies must appoint more independent directors going forward.
Notably, outside directors serving at the time of law implementation are deemed independent directors, and companies must meet the requirement of having at least 1/3 of total directors as independent directors within one year of implementation.
Outside Director Appointment Requirements by Company Size
General companies under the Commercial Act are not required to appoint outside directors.
The outside director concept itself is based on the Financial Investment Services and Capital Markets Act, not the Commercial Act.
Listed corporations on KOSPI and KOSDAQ must appoint outside directors for at least one-quarter of total directors.
For example, a company with 8 directors must have at least 2 outside directors.
Large-scale listed corporations and companies subject to intensive review face even stricter requirements.
They must have at least 3 outside directors while simultaneously ensuring outside directors constitute a majority of total directors.
If the board has 6 directors including the CEO, at least 3 must be outside directors, but to meet the majority requirement, at least 4 must be outside directors.
Exceptional Cases Where Outside Director Appointment is Exempted
Outside director appointment obligations are exempted in various exceptional situations.
Non-listed general corporations naturally are not required to appoint outside directors.
Securities investment companies under the Securities Investment Company Act and venture companies under the Special Act on Promotion of Venture Businesses with total assets under 100 billion won at the end of the most recent fiscal year are also exempt from outside director appointment.
Listed companies undergoing rehabilitation procedures or newly listed companies also receive temporary exemption from outside director appointment.
For new listings, exemption lasts until the day before the first regular shareholders' meeting after listing, but this exemption doesn't apply to transfers between KOSDAQ and KOSPI.
Amended Directors' Duty of Loyalty and Changes to the 3% Rule
Impact of Adding Shareholders to Duty of Loyalty
Directors' duty of loyalty now explicitly includes not just "the company" but also "shareholders."
According to newly established Article 382-3 of the Commercial Act, directors must faithfully perform their duties for the company and shareholders according to laws and articles of incorporation, and must protect the interests of all shareholders and treat all shareholders' interests fairly.
This is a very important practical change.
It's expected to halt practices where only major shareholders benefit at the expense of minority shareholders, such as post-physical division subsidiary dual listings and unfair merger ratio calculations that were previously controversial.
Going forward, all management decisions must balance the interests of major and minority shareholders, and decisions favoring only specific shareholder groups may lead to directors' legal liability.
Amendments to the 3% Rule for Audit Committee Member Appointment
The 3% rule has been amended to consistently limit the largest shareholder's influence on audit committee composition and enhance committee independence.
Previously, when the largest shareholder appointed or dismissed audit committee members who were not outside directors, voting rights were restricted for shares exceeding 3% by aggregating the shares of the person and related parties.
However, under the amended regulations, regardless of whether audit committee members are outside directors or not, shares owned by the largest shareholder and related parties will always be aggregated to calculate the excess over 3%.
This change will substantially guarantee audit committee independence and allow minority shareholders' opinions to be better reflected in audit committee member appointments.
The Dawn of the Electronic Shareholders' Meeting Era
Electronic Shareholders' Meetings Becoming Mandatory from 2027
An electronic shareholders' meeting system has been established to allow shareholders to participate in meetings without time and space constraints.
Listed companies can hold electronic shareholders' meetings enabling remote participation alongside in-person meetings through board resolution, unless prohibited by their articles of incorporation.
Particularly for companies with large assets as determined by presidential decree, holding electronic shareholders' meetings in parallel becomes mandatory.
Electronic shareholders' meeting provisions take effect from January 1, 2027, so relevant companies must prepare system construction and operation plans in advance.
Companies must operate systems allowing shareholders to participate in proceedings and resolutions in real-time, and may outsource to professional management organizations for operational fairness and efficiency.
Electronic meeting records must be preserved for 5 years after the meeting ends, and shareholders can request viewing for 3 months.
Response Strategies for Changing Corporate Governance
This Commercial Act amendment demonstrates the government's strong will to modernize Korean corporate governance and protect shareholder rights.
Particularly with shareholders now included in directors' duty of loyalty, an era has begun where all management decisions must consider the interests of all shareholders in a balanced manner.
Companies must prepare for new legal requirements including articles of incorporation amendments, internal regulation maintenance, and electronic shareholders' meeting system introduction.
When appointing directors, thoroughly review concurrent position restrictions and plan board composition changes in advance according to expanded independent director ratios.
Most importantly, recognize that these changes are not simply regulatory strengthening but foundation-laying for companies' long-term value enhancement and sustainable growth.
Use transparent and fair governance as an opportunity to gain investor trust and enhance competitiveness in global markets.