Korea’s legal landscape: Strategic window for Japanese investors

South Korea’s regulatory and capital market environment has undergone a profound transformation in the past two years. For Japanese investors and corporations that have traditionally approached the market with a degree of caution, this presents a timely and compelling opportunity to reassess that position.

The reforms currently reshaping the legal landscape are neither superficial nor incremental. They are structural, far-reaching and at times complex. Yet complexity alone should not be mistaken for deterrence. When viewed through the lens of a long-term partnership between two highly developed, structurally complementary economies, South Korea’s evolving framework is better understood as an invitation, not a barrier, to deeper engagement.

South Korea reforms boost equity appeal

South Korea’s equity market has recently demonstrated renewed strength, with the KOSPI reflecting increased investor confidence driven by expectations of corporate governance reform and sustained performance in key industries such as semiconductors and advanced manufacturing.

For decades, foreign investors have cited the so-called “Korea discount” – the persistent undervaluation of its equities relative to global peers – as a primary concern. While its causes are multi-faceted, core factors have been consistently identified as governance opacity, dominance of controlling shareholders and limited minority shareholder protection.

The government has now taken explicit and sustained measures to address these concerns. The Corporate Value-Up Programme, together with successive amendments to the Commercial Code, signal a clear policy commitment to narrowing this valuation gap.

For Japanese investors, the direction of reform will feel familiar. Much like Japan’s own corporate governance transformation following the introduction of the Corporate Governance Code and Stewardship Code, South Korea is recalibrating towards transparency, accountability and shareholder value. The trajectory is not only recognisable but also converging.

South Korea commercial code governance overhaul

The most consequential legal development in recent years is comprehensive reform of the corporate governance framework under South Korea’s Commercial Code.

The first round of amendments, enacted in July 2025, clarified directors’ fiduciary duties, requiring them to act in the interests of the company and all shareholders. At the same time, governance standards for large-scale listed companies – typically KOSPI-listed with assets of KRW2 trillion (USD1.38 billion) or more – were strengthened, including the stringent requirement that at least one-third of board members are independent directors.

Equally significant is the reform of audit committee elections. Separate election procedures, combined with a stricter 3% voting cap for controlling shareholders, represent a meaningful attempt to rebalance power within corporate decision-making structures.

Subsequent amendments in September 2025 introduced mandatory cumulative voting for large-scale listed companies and expanded separate election of audit committee members.

The most recent March 2026 amendment further overhauled the treasury stock regime, requiring cancellation of treasury shares within one year of acquisition and confirming that such shares carry neither voting rights nor dividend entitlements.

Taken together, these measures reflect a structural shift towards enhanced minority shareholder protection, improved board independence and greater transparency, ultimately reinforcing the principle of capital integrity.

For Japanese institutional investors and strategic partners, this reform trajectory closely mirrors Japan’s own experience. Importantly, both jurisdictions share a civil law foundation while adapting to global governance standards, making South Korea’s evolving framework both familiar and operationally accessible.

South Korea’s yellow envelope reforms

Among recent legislative developments, the amendment to the Trade Union and Labor Relations Adjustment Act – commonly referred to as the “yellow envelope law” – has attracted significant attention.

The law expands the definition of “employer” to include entities that exercise substantive control over working conditions. As a result, parent companies may, in certain circumstances, face collective bargaining obligations vis-a-vis workers employed by subcontractors.

The scope of legitimate labour disputes has also broadened, with limitations placed on damage claims arising from industrial action.

At first glance these changes may appear to introduce heightened legal exposure. But they are better viewed as part of a broader global trend towards redefining employer responsibility in increasingly complex supply chain structures.

Japan has long grappled with similar issues in the context of multi-layered subcontracting and indirect employment. The South Korean approach is broadly consistent with the framework developed in Japanese case law, including the 1995 Supreme Court decision in the Asahi Broadcasting case, which recognised that an entity may be treated as an employer for collective bargaining purposes where it exercises realistic and concrete control over fundamental working conditions, even absent a direct contractual relationship.

For Japanese companies with established labour governance frameworks and robust compliance systems, this is not unfamiliar terrain, reflecting convergence towards internationally recognised standards.

South Korea tightens core technology

Another key area of reform is the strengthened regulatory regime governing national core technologies.

The amended Act on Prevention of Divulgence and Protection of Industrial Technology, effective since July 2025, enhances government oversight of technologies deemed critical to national security. Authorities are empowered to designate national core technologies, requiring registration and regulatory supervision.

Administrative and criminal penalties are significantly increased, with fines of up to KRW6.5 billion in serious cases. In addition, failure to comply with corrective orders following unlawful cross-border transactions may result in ongoing penalties.

For Japanese investors, this framework necessitates careful due diligence, particularly in technology-driven M&A. However, the regulatory logic is familiar. Japan’s own economic security and export control frameworks have evolved in a comparable direction.

Importantly, South Korean regulators have consistently distinguished between adversarial transactions and trusted partnerships. Legitimate joint ventures, collaborative R&D and transparent technology sharing arrangements are not the targets of restrictive enforcement. Rather, they are encouraged.

In this sense, the regulatory framework functions less as a barrier and more as a filter – prioritising long-term, transparent and mutually beneficial collaboration.

South Korea’s renewed appeal for Japan

Against this backdrop, South Korea continues to offer a compelling investment proposition for Japanese companies.

The structural complementarity between the two economies remains a defining strength. South Korea’s global leadership in semiconductors, batteries, displays and advanced manufacturing aligns closely with Japan’s industrial needs and technological capabilities.

At the same time, both countries share a strategic interest in building resilient supply chains, particularly in the context of intensifying global competition in AI and advanced technologies.

South Korea’s workforce is also highly skilled, with one of the highest levels of tertiary education attainment among OECD countries. Its commitment to research and development is equally notable, with R&D expenditure consistently ranking among the highest globally as a percentage of GDP.

Crucially, recent governance reforms now directly address historical concerns that have deterred foreign investment. Improved transparency, stronger minority shareholder protection and enhanced board independence collectively reduce informational asymmetries and investment risk.

For Japanese investors, this translates into a more predictable and investable market environment.

Complexity signals stronger investor protection

The central question is not whether South Korea has become more complex – it has. The more relevant question is whether that complexity reflects a system moving towards international standards and stronger investor protection. The answer is clearly affirmative.

Japanese companies that approach South Korea with a long-term strategic perspective – investing in local partnerships, engaging in joint innovation and aligning governance practices with evolving legal standards – are likely to be well positioned.

At a broader level, Japan and South Korea are experiencing renewed engagement across economic, cultural and institutional dimensions. Their legal systems, while distinct, are evolving in parallel.

For those willing to engage with nuance and invest in understanding the regulatory landscape, South Korea offers not only opportunity but a platform for sustained strategic growth. The opportunity is clear and the timing is right.

Lee & Ko
Seoul
Hanjin Building
63 Namdaemun-ro, Jung-gu
Seoul Korea – 04532
Tel: +82 2 772 4000
Email: mail@leeko.com
www.leeko.com