[Controversy over the Commercial Act Amendment] ① Unexpected Government 'Support' for Opposition's Bill on 'Shareholder Loss Litigation'... Foreseeing Major Changes in the Capital Market

Expanding the Duty of Loyalty of Directors to 'Shareholders'
Rising Shareholder Activism Increases Conflicts Between Companies and Minority Shareholders
Political Circles Seek to Win Ant Investor Votes Ahead of Next Year's General Election
Financial Investment Industry Welcomes, Business Community Strongly Opposes

#1. Lee Jae-myung, leader of the Democratic Party of Korea, promised on the 18th to push forward a revision of the Commercial Act that includes provisions to protect minority shareholders. This was during a 'General Shareholders-Democratic Party Meeting for the Protection of the Rights and Interests of 14 Million Angel Ant Investors' held in the afternoon at a cafe in Yeongdeungpo-gu, Seoul, attended by Jeong Eui-jeong, head of the Korea Stock Investors Association, and Kim Go-eun, leader of the Alteogen Minority Shareholders Solidarity. Leader Lee criticized, "Because company directors mainly focus on major shareholders in the process of formation, roles, and final responsibility, minority shareholders are excluded from company decision-making and business execution."

#2. On the 5th, during a government inspection session at the National Assembly, Minister of Justice Han Dong-hoon responded unexpectedly when Representative Lee Yong-woo asked, "What do you think about the purpose and meaning of the Commercial Act revision?" saying, "I think it is a groundbreaking bill that introduces a new concept to protect 'proportional interests of shareholders' in the law." He especially expressed support by saying, "I agree with the direction of the revision, and the Ministry of Justice is currently preparing amendments to the enforcement ordinance of the Commercial Act, including reforms related to physical division, through the special Commercial Act committee." However, Minister Han added, "While we share the intention to protect minority shareholders, we will constructively prepare how to handle it legally."

Will the discussion on the Commercial Act revision, dormant for over a year, gain momentum?

Attention is focused on whether discussions on the Commercial Act revision, which centers on including 'proportional interests of shareholders' along with the company's interests in the 'duty of loyalty of directors' (Article 382-3), will accelerate. Minister Han Dong-hoon expressed agreement with the purpose of the revision at the ministry level, and Leader Lee Jae-myung publicly supported the legislation. Throughout this year's shareholder meeting season, shareholder activism surged strongly, and with next year's general election approaching, it is interpreted as a strategy to capture the votes of retail investors.

Minister of Justice Han Dong-hoon is responding to a lawmaker's question during the 3rd plenary session of the 405th National Assembly (extraordinary session) on education, social, and cultural issues held at the National Assembly on the 5th. Photo by Kim Hyun-min kimhyun81@

According to the National Assembly's legislative information system on the 20th, two bills to amend Article 382 of the Commercial Act, which stipulates the duty of loyalty of directors, have been proposed. These are bills by Representatives Lee Yong-woo and Park Ju-min, both members of the Democratic Party of Korea. Both have been pending in the National Assembly's Legislation and Judiciary Committee for over a year. The core of Representative Lee's bill is to change the duty of loyalty's target from 'company' to 'proportional interests of shareholders and company,' while Representative Park's bill changes it to 'company and majority shareholders.' Both bills contain the intention that directors on the board should consider not only the company but also shareholder interests when making managerial decisions.

Lawsuits possible if shareholder interests are harmed even without company damage

If the revision passes the National Assembly as is, significant repercussions are expected. Above all, if shareholders suffer losses due to managerial decisions by the board, shareholders will be able to sue directors. In all capital transactions such as issuance of bonds with warrants (BW), convertible bonds (CB), mergers, splits, holding company conversions, treasury stock trading, and public tender offers, even if the company suffers no damage, if it is concluded that shareholder interests were exploited, it can be contested in court.

Physical division listings could also be considered illegal acts. Physical division refers to separating legal entities from an existing company to create a new company. A representative case is LG Chem splitting off its battery business to create LG Energy Solution, which it owns 100% of the shares. The characteristic is that the existing company holds shares of the newly established company.

Article 418 of the Commercial Act stipulates that existing shareholders should proportionally subscribe to new shares according to their shareholding. Current law does not consider physical divisions that do not violate subscription rights or harm the company as problematic. However, if the revision passes, the situation changes. Physical division could be seen as an act infringing on shareholders' proportional interests.

Supreme Court: "Directors have no duty to protect shareholders"

Currently, even if shareholders suffer losses, punishment is impossible due to the principle of legality in criminal law. Punishment requires a crime to be defined in the law. The current Commercial Act defines the duty of loyalty of directors as owed to the 'company.' This means it is difficult for shareholders to litigate even if they suffer damage from board decisions.

Notably, on May 13, 2004, the Supreme Court ruled that "directors do not have a duty of care or loyalty to protect shareholders' interests." This is known as the 'nominal payment' precedent. It is a landmark ruling as it was the first time the Supreme Court declared that directors have no duty to protect shareholders. At that time, Company A issued new shares through a third-party allotment. Upon receiving the capital increase funds, the company immediately withdrew the money and returned it to a person with close ties to the CEO. As a result, only the third party expanded their stake through the capital increase. Although existing shareholders' stakes were diluted and wealth was transferred among shareholders, the company did not suffer asset loss.

Democratic Party of Korea leader Lee Jae-myung is giving opening remarks at the "General Shareholders-Democratic Party of Korea Meeting for the Protection of the Rights of 1.4 Million Angel Retail Investors" held at a cafe in Yeouido, Seoul, on the afternoon of the 18th. Photo by National Assembly Press Photographers Group

Shim Hye-seop, a lawyer at the Korea Governance Forum, said, "In the Samsung C&T merger ruling, the court denied directors' responsibility regarding unfair merger ratios, citing the 2004 'nominal payment' ruling."

As signs of progress in the revision discussions emerge, the business community is pushing back. A representative from the Federation of Korean Industries said, "There is no precedent for legally stipulating directors' duty of loyalty to shareholders," criticizing, "It shakes the Commercial Act system that treats the company and shareholders as separate legal entities." Adding 'proportional interests of shareholders' to the directors' duty of loyalty could be interpreted as equating the company and shareholders.

They also said that while the intention to promote 'proportional interests of shareholders' is good, it is practically difficult to realize. The representative said, "If conflicts arise between the company and shareholders or among minority shareholders, the board cannot make any decision." They added, "A stock company is a physical company, so the higher the shareholding ratio, the greater the interest. It is not right to amend the Commercial Act in favor of minority shareholders just because they are the majority."

U.S. Delaware Corporate Law explicitly protects shareholders... Japan protects shareholders through legal interpretation

The reason the Commercial Act revision, neglected for over a year, gained attention was Minister Han Dong-hoon's remarks during the government inspection session. Minister Han said, "I agree with the direction (of the revision)" and "I share the view to protect minority shareholders."

Some voices emphasize the need to pay attention to the example of Delaware Corporate Law Article 102 mentioned by Minister Han during the session. Article 102(b) of Delaware Corporate Law states that "if a director breaches the duty of loyalty to the company or its shareholders, the director's liability cannot be exculpated."

In the U.S., each state recognizes economic autonomy, so corporate laws differ by state. However, Delaware Corporate Law is favorable for company establishment, so more than half of major U.S. listed companies adopt it as their governing law. Professor Lee Sang-hoon of Kyungpook National University Law School explained, "Delaware Corporate Law mentions both the company and shareholders regarding directors' duty of loyalty," adding, "It clearly states in the law that shareholders are also subjects of duties and responsibilities."

Unlike the U.S., Japan does not explicitly state directors' duty of loyalty to shareholders in the law. Japan shares a strong civil law tradition similar to Korea. However, it is more proactive in protecting shareholders through legal interpretation. Professor Lee said, "As cases where company and shareholder opinions conflict increase, such as mergers, splits, and public tender offers, Japan is strengthening directors' duties by interpreting 'company interests as maximizing shareholder interests'."

The financial investment industry supports the Commercial Act revision, saying that codifying shareholder rights could help resolve the Korea discount. Most shareholder proposals during this shareholder meeting season were for dividend increases, treasury stock cancellations, and election of audit committee members. This means guaranteeing the share of minority shareholders (proportional interests of shareholders) among the profits that should belong to the company as a corporate entity. A senior asset management official emphasized, "Investor protection measures by financial authorities are based on the Capital Markets Act, so they have limitations," adding, "Because the directors' duty of loyalty is limited to the 'company' in the Commercial Act, legal disputes over unfair mergers, human or physical splits, and damages to minority shareholders require Commercial Act revision."

Government and ruling party prefer special provisions by issue over Commercial Act revision

However, it is uncertain whether the Commercial Act revision will pass. The ruling People Power Party has no particular opinion on the revision and takes a more passive stance than the Ministry of Justice. Representative Park Ju-min of the Democratic Party said, "I proposed discussions on the Commercial Act revision to the ruling party but have not yet received a response."

The government and ruling party seem likely to choose creating special provisions for specific issues rather than revising the Commercial Act. After the physical division issue of LG Chem arose in 2020, the Yoon Suk-yeol administration proposed granting shareholders opposing physical division the right to request stock purchase instead of revising the Commercial Act. An asset management official said, "Since the interests of minority shareholders, the financial investment industry, and the business community greatly diverge, revising the Commercial Act will not be easy," but added, "If the revision passes, it will become a new milestone for the domestic capital market."