[Asia Economy Reporter Park So-yeon] The National Pension Service (NPS) is expected to resubmit a revision of the National Pension Trustee Guidelines to the Fund Management Committee as early as next month, which includes unifying shareholder derivative lawsuits under the Stewardship Responsibility Committee (hereinafter referred to as the SRC). Discussions on unifying derivative lawsuits under the SRC have resurfaced following external legal advice confirming that the plan is not illegal.
On the 3rd, Shin Wang-geon, Chairperson of the NPS Fund Management Committee's Stewardship Responsibility Committee, said, "We received legal advice regarding the revision of the National Pension Trustee Guidelines and concluded that unifying derivative lawsuits under the SRC is 'legal.' Based on this result, we can go through the subcommittee again and submit it to the Fund Management Committee around September."
Chairperson Shin explained the background, saying, "A subcommittee was formed regarding derivative lawsuits, but there were some issues such as the resignation of the former chairperson, so legal review was conducted during that period." He added, "Now, with the legal review results, the subcommittee will continue, and if no agreement is reached there, it will have to be submitted to the Fund Management Committee again."
Previously, the Ministry of Health and Welfare and the National Pension Service requested three law firms to review the legality of the 'National Pension Trustee Guidelines revision,' and recently received opinions stating it is 'legal.' This result directly contradicts the business community's claim that granting the SRC the authority to decide on lawsuits lacks legal grounds and procedural legitimacy. The previous administration attempted to revise the guidelines to unify the authority for derivative lawsuits under the SRC, but as controversy grew, the Fund Management Committee's subcommittee requested legal advice in May.
Main contents of the National Pension Trustee Guidelines revision
Considering changes in related laws, the National Pension Service began revising the guidelines last December by submitting an agenda to the Fund Management Committee, the highest decision-making body of the NPS, to adjust guidelines related to derivative lawsuits.
With the passage of the amendment to the Commercial Act in December 2020, which added 'multiple derivative lawsuits' where a parent company's shareholder can sue directors of its subsidiaries, the wording in the guidelines, previously limited to 'shareholder derivative lawsuits,' was changed to 'derivative lawsuits.' The litigation practice is handled by the NPS Fund Management Headquarters, but the decision to initiate lawsuits is unified under the SRC, a committee under the Fund Management Committee.
Currently, in principle, the Fund Management Headquarters (internal Investment Committee) makes decisions, but if it is difficult to judge, it can request the SRC, or if one-third or more of the SRC members request referral, the SRC makes the decision. The SRC is a specialized committee under the Fund Management Committee, composed of nine private experts (including three full-time professional members) recommended by employer (corporate), employee, and regional subscriber organizations, each recommending three experts in finance, economics, asset management, law, and pension systems.
What is the derivative lawsuit the National Pension Service is preparing?
A derivative lawsuit is a useful shareholder right that shareholders can use to enhance corporate value. In countries with developed capitalism such as the United States, about 430 derivative lawsuits are filed annually, indicating active use.
When company executives (directors and those who execute business under the Commercial Act) cause damage to the company through illegal acts or neglect of duty, but the company fails to take remedial action or pursue accountability, shareholders who meet minimum requirements can file a lawsuit on behalf of the company against the executives for damages. Shareholders are plaintiffs, and the executives who committed illegal acts are defendants, but if shareholders win, the company receives compensation for damages.
For example, if a controlling shareholder director embezzles company funds through accounting manipulation for personal gain or engages in price-fixing through prior collusion during bidding, causing damage to the company, the company’s losses can be compensated through a derivative lawsuit. When a company suffers clear and significant damage due to directors' illegal acts and does not take recovery measures, within the scope of laws and related guidelines, the National Pension Service conducts derivative lawsuits on behalf of the company as a last resort to enhance company and shareholder value.
Derivative lawsuits are legitimate minority shareholder rights explicitly stated in the Commercial Act. Article 403 of the Commercial Act stipulates that directors with a 'duty of care' (the obligation of a prudent manager to exercise a certain level of care when performing acts) who cause damage to the company can be held accountable by shareholders. However, derivative lawsuits against listed companies in Korea are sluggish, with an average of only two cases filed per year. This is because it is difficult for small individual shareholders alone to meet the shareholding requirements necessary to file derivative lawsuits without institutional investors stepping forward.
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