FKI: "Courts Are Passive in Recognizing Business Judgment Rule Protecting Entrepreneurs"

[Asia Economy Reporter Kim Jin-ho] An analysis has emerged that courts are reluctant to recognize the 'business judgment rule' which protects business executives from breach of fiduciary duty charges. The business judgment rule means that if a director fulfills the duty of a good manager and acts within the scope of discretion, they are not personally liable even if the company suffers losses.

The Federation of Korean Industries (FKI) disclosed the results of an analysis commissioned to Professor Choi Jun-seon, Emeritus Professor at Sungkyunkwan University School of Law, on Supreme Court rulings related to the business judgment rule over the past 10 years (2011?2021).

The analysis showed that over the 10 years, the Supreme Court dealt with a total of 89 cases (33 civil cases and 56 criminal cases) concerning the business judgment rule. Among these, 34 rulings (38.2%) recognized the business judgment rule, while 55 rulings (61.8%) denied it.

In the 56 criminal cases, 42 cases (75%) resulted in final guilty verdicts by denying the business judgment rule, which was three times more than the 14 cases (25%) where it was recognized (not guilty). Notably, among seven cases dealing with whether directors’ embezzlement or breach of fiduciary duty occurred due to support for affiliates, only one case recognized the business judgment rule.

In civil cases, 20 cases (60.6%) recognized the rule, while 13 cases (39.5%) denied it.

The FKI pointed out that the court’s strict and inconsistent application of the business judgment rule is increasing confusion in the field of management. In fact, courts have sometimes acquitted defendants by recognizing the business judgment rule when guarantees for financially troubled affiliates within a group were questioned as breach of fiduciary duty.

On the other hand, the FKI noted that U.S. courts not only do not recognize breach of fiduciary duty in such cases but also examine the business judgment rule based on clear criteria such as whether the decision was made within the director’s discretion and whether necessary procedures were followed.