Korea sees sharp rise in management disputes, SMEs most affected

South Korea has been witnessing a rise in management control battles, with the number of disputes reaching the highest in five years last year, according to a report released Monday by the Korea Chamber of Commerce and Industry.

In 2024, 87 publicly traded companies filed a total of 315 cases related to corporate control lawsuits, according to the KCCI’s report, which analyzed regulatory filings from the Financial Supervisory Service’s electronic disclosure system. This figure marks an 18.4 percent increase from 2023, when 266 cases were reported by 93 companies, and also represents the highest number in five years.

The report showed that small-sized companies were especially vulnerable to disputes, with 59 of the 87 companies, or 67.8 percent, involved in lawsuits classified as small-sized. Mid-sized firms accounted for 25.3 percent of cases, followed by large companies representing just 6.9 percent of the total.

A KCCI official noted small and mid-sized enterprises, which make up around 35.3 percent of all listed firms in Korea, accounted for a staggering 93.1 percent of governance disputes, highlighting their vulnerability.

“SMEs can be targeted with a relatively small amount of capital, making management intervention easier when the corporate governance structure is simple. They also typically lack the workforce and financial resources to handle disputes, making them a target for hostile takeovers,” the official said.

The report identified the relatively low stakes held by controlling shareholders as a major reason behind these disputes. The average stake of the largest shareholder and affiliated parties in the 87 companies facing management disputes stood at just 26.1 percent in 2024. The rate was well below the market average of 29.6 percent, as reported by the Korea Capital Market Institute. Of the 87 firms that disclosed governance disputes last year, 73 companies had ownership structures below the average.

Small companies were found to be particularly vulnerable, with an average controlling stake of just 22.7 percent of the firm, compared to 29.9 percent for large companies and 34.5 percent for mid-sized enterprises. The report indicated that the lower these controlling stakes, the firms are more liable to shareholder activism and hostile takeovers.

KCCI raised concerns that due to South Korea’s high inheritance tax, which can reach up to 60 percent –- one of the highest rates among OECD nations -- could further weaken major shareholders' ownership stakes overtime, aggravating governance instability.

In addition, the KCCI expressed alarm over the main opposition Democratic Party of Korea’s push to amend the Commercial Act to expand corporate directors’ duties to include duties to shareholders. The organization warned that such a revision could leave Korean companies vulnerable to attempts of foreign activist funds attacks, seeking short-term stock gains at the expense of corporate stability long term.

“The meaning of the director’s duty to protect shareholders’ interests in the amendment is unclear. This could increase management instability by increasing disputes with shareholders, and decrease legal predictability for business,” the KCCI said. “Companies, particularly SMEs, may be forced to divert resources away from investment R&D to defend against governance challenges.”

For these reasons, the KCCI called to halt the discussions on the revision of the Commercial Act, suggesting for more targeted and specific amendments to be introducted, instead of general, abstract rules.