[Momentum Gaining for Commercial Act Amendment] ② Due to Concerns Over Flood of Lawsuits... Possibility of Easing Criteria for Exemption Reasons

Business circles worry about board conservatism and lawsuits
Opposition says directors' duty of loyalty should not be misinterpreted
Possibility of package revision easing principles of business judgment

The Ministry of Justice and the business community are concerned that if the phrase 'faithful to shareholder interests' is included in the director's duty of loyalty clause, minority shareholders could claim damages against individual directors for breach of the duty of loyalty. However, experts point out that the expansion of the director's duty of loyalty to cover all shareholders should not be interpreted to mean that minority shareholders can hold individual directors legally responsible in situations where the interests of controlling shareholders and minority shareholders conflict. If the duty of loyalty is misunderstood as meaning that a board decision causing a stock price drop is a breach, it could lead to negative side effects such as boards becoming overly conservative. Some suggest that to persuade the business community and the Ministry of Justice, a package revision might be pursued that relaxes the exemption from liability under the business judgment rule to block potential lawsuits.

Business Community Expresses Concerns That Amendments to the Commercial Act Could Hinder Decision-Making and Lead to Excessive Litigation

Currently, Article 382-3 of the Commercial Act (Duty of Loyalty of Directors) stipulates that "directors shall faithfully perform their duties for the company in accordance with laws and the articles of incorporation," but there is no provision for a director's duty of loyalty 'to shareholders.' Even if the board approves a personnel split unfavorable to minority shareholders or issues convertible bonds to increase the controlling family's stake, directors are not legally liable. In response, Democratic Party lawmakers Lee Yong-woo and Park Joo-min each submitted bills in 2022 to include shareholder interests as a subject of the duty of loyalty. The rationale is that by amending the Commercial Act to expand the director's duty of loyalty to all shareholders, it would be possible to check artificial stock price suppression by the controlling family and personnel or physical splits that damage shareholder value. Both bills are currently pending before the National Assembly's Legislation and Judiciary Committee.

When discussions on amending the Commercial Act began in the 21st National Assembly, companies expressed cautious views, warning that amendments could make decision-making difficult and lead to excessive litigation. While the proposed amendments seem ideally desirable, it is practically impossible for directors to consider the interests and benefits of all shareholders.

Lee Hyung-wan, Senior Researcher at the Korea Listed Companies Association, said, "'The duty of loyalty of directors' is one of the most important and fundamental provisions derived from civil law, and while many side effects are expected from the amendment, the likelihood of substantial shareholder protection is low," citing the merger case of Dongwon Industries and Dongwon Enterprise.

He pointed out that after the 2022 merger announcement between Dongwon Industries and Dongwon Enterprise, the merger ratio was adjusted due to opposition from Dongwon Industries' minority shareholders, but the minority shareholders' stake in Dongwon ENT decreased. As a result, the minority shareholders' stake in Dongwon ENT was lowered, making it practically difficult for everyone to benefit. Reflecting the interests of certain shareholders can lead to conflicts with other shareholders, raising concerns about excessive litigation among minority shareholders.

He added, "For example, when a director must choose between short-term shareholder value (dividends) and long-term shareholder value (ESG), the criteria become unclear," and explained, "Because value judgments arise, realistic discussions are needed on which parts of the business judgment rule can be strengthened or which parts of director liability can be relaxed." He noted that in the U.S. (Delaware law) and U.K. company law, shareholders bear the burden of proof for damages and directors are granted broad business judgment discretion.

He continued, "The fundamental cause that united minority shareholders' voices was the undervaluation of shares and lack of communication," emphasizing, "For genuine enhancement of shareholder value, voluntary communication efforts through 'dialogue with shareholders,' as included in recent value-up programs, are appropriate."

The Duty of Loyalty Should Not Be Misinterpreted... Is Relaxation of the Business Judgment Rule Being Considered?

There is also opposition to the interpretation that expanding the director's duty of loyalty to all shareholders means minority shareholders can claim damages against individual directors for breach of duty. Professor Kim Yoo-sung of Yonsei University Law School said, "If understood this way, there is concern that directors might pursue only short-term profits," adding, "For example, in the course of a company's long-term project, losses may accumulate and stock prices may fall, but if minority shareholders can claim damages against individual directors for the stock price decline, this misunderstanding of the duty of loyalty could undermine the company's long-term growth and the development of the capital market."

Lee Nam-woo, Chairman of the Korea Corporate Governance Forum, said, "The duty of loyalty is to the 'whole' shareholders, not each individual shareholder, and even if a duty of loyalty to shareholders is introduced, the board and management can continue to manage the company in good faith for the company's benefit under the duty of care." The company's interests align with those of the shareholders.

However, he suggested that the duty of loyalty should be considered only when there is a conflict of interests among shareholders. Lee Nam-woo explained, "Cases where the duty of loyalty applies to shareholders, such as mergers, splits, or internal transactions among affiliates, are few and very clear," adding, "In such cases, decisions should not favor specific shareholders, and if unavoidable, appropriate compensation for harmed shareholders should be considered."

To alleviate concerns that boards might become overly conservative and make only safe decisions due to fear of lawsuits, there is an opinion that the business judgment rule could be relaxed to make damage claims against board decisions impossible. To persuade the Ministry of Justice and the business community, an exemption clause could be explicitly included in the business judgment rule to prevent lawsuits based on stock price declines.

A financial investment industry official said, "Considering the capital market atmosphere that interprets the business judgment rule strictly, there has been a proposal to revise the exemption system or reduce liability," adding, "This proposal will be discussed at a symposium to be held in June."