[Q&A] Lee Bok-hyun: "The 'Commercial Act Amendment and Abolition of Breach of Trust Crime' Must Be Considered Together"

Financial Supervisory Service Chief's Briefing on the Amendment of the Commercial Act on the 14th
Excessive Criminal Punishment for Breach of Fiduciary Duty... Concerns Since Prosecutor Days
Opposition to the Phrase 'Proportional Interests of Shareholders' in the Amendment

Financial Supervisory Service Governor Lee Bok-hyun is briefing on issues including the amendment of the Commercial Act at the Financial Supervisory Service in Yeouido, Yeongdeungpo-gu, Seoul, on the morning of the 14th.
[Image source=Yonhap News]

On the 14th, Lee Bok-hyun, Governor of the Financial Supervisory Service (FSS), stated, "The crime of breach of trust does not exist in any major advanced country worldwide," arguing that the abolition of the breach of trust crime should be considered together with the amendment of the Commercial Act related to the 'duty of loyalty of directors.'

Governor Lee held a briefing on the 'Commercial Act amendment issues' at the FSS headquarters in Yeouido that morning, saying, "The crime of breach of trust hinders healthy discussions and interpretations in the realm of corporate law. If asked whether to 'maintain' or 'abolish' it, I believe abolition is necessary."

The business community has opposed the addition of shareholders as subjects of the duty of loyalty of directors, arguing that it could lead to excessive litigation and restrict managerial activities. Furthermore, concerns have been raised domestically because breach of trust can lead to both civil lawsuits and criminal penalties. The crime of breach of trust is stipulated in Article 355 of the Criminal Act, and Article 356 defines the crime of breach of trust in business. There is also a special provision for breach of trust under the Commercial Act as a special breach of trust crime under criminal law.

Governor Lee added, "If abolition of the breach of trust crime is not possible, we can reduce it by clarifying the conditions for its application, so that it only applies in truly malicious cases such as pursuing private goals, or by clearly defining the breach of duty through principles like the business judgment rule."

- There are claims that there are few overseas legislative examples. What is the background for pushing the duty of loyalty of directors excessively?

▲ There are various approaches: some countries incorporate it legislatively, some rely on court interpretations, and some do not have formal regulations but follow it as a practice. It is not about quantitatively considering all shareholders' interests equally or increasing one party's interest by one unit and compensating another by one unit. While it is easy to judge conflicts of interest in ordinary profit and loss transactions, in cases of advisory transactions or unusual types of transactions, if there is a significant adverse effect on a specific interest group or shareholder, a fair judgment must be made for them. If an unavoidable decision must be made, the idea is to provide other forms of compensation, not to compare all shareholders' interests on a one-to-one basis. Some proposed bills use the term 'proportional interests of shareholders,' but we oppose the use of 'proportional.' Interests should be judged based on fairness, not proportionally for everyone. When judging appropriateness, that is how it should be considered.

- There are concerns that if the business judgment rule is introduced, controlling shareholders could escape liability by citing normal business judgment reasons.

▲ Domestic courts are also trying to build precedents related to the business judgment rule. In advanced countries, the business judgment rule has been accumulated over a long time. What we are saying is not just to add a declarative sentence. The board of directors must clearly show what procedures and substantive considerations they went through to reach a particular decision. Since the board can make mistakes, when it comes to legal or financial issues, they should seek expert opinions from third parties or do their utmost. However, since some stakeholders' interests may still be neglected, the business judgment rule should be well structured to provide other benefits. If the board has done its best, I believe they should be exempt from both civil liability and criminal punishment.

- There are criticisms that applying the duty of loyalty to all managerial activities makes management impossible.

▲ Profit and loss transactions and capital transactions can be distinguished. For example, buying ten desks or changing aggregates by various companies. There can be various decisions, but in terms of the importance of decisions or the extent of interest infringement, there are clear important matters to which the business judgment rule should apply. In typical management activities, it is easy to judge if the company suffers losses or earns less profit. There is no need to delve into complex principles in our business judgment. For capital transactions or abnormal transactions, various factors must be considered together. We are not applying judicial standards to everyday management activities, so I hope there is no misunderstanding.

- You argue that the business judgment rule should be included in the Commercial Act amendment to narrow the scope of breach of trust crime for executives. Could you explain this simply?

▲ The crime of breach of trust does not exist in any major advanced country worldwide. It hinders healthy discussions and interpretations in corporate law. If asked whether to maintain or abolish it, I strongly believe abolition is necessary. However, in reality, the current environment is based on the existence of the breach of trust crime, and stakeholders sometimes seek criminal responsibility for some deficiencies through procedures. If abolition is not possible, clarifying the conditions for application so that it only applies in truly malicious cases such as pursuing private goals, or clarifying the breach of duty through the business judgment rule, can reduce the breach of trust crime. Although the Criminal Act has the breach of trust crime, the Commercial Act also has a special breach of trust provision that imposes excessive criminal penalties inappropriate under criminal law. Our opinion is to introduce the business judgment rule in a clear and predictable way to reduce the burden on the board and clarify what minority shareholders or others can request from the board. If the legal system is somewhat organized through this process, I personally believe the special breach of trust crime should be abolished. Excessive criminal concerns should be somewhat reduced.

- You were indicted for breach of trust in the past Samsung trial. Has your position changed?

▲ My thinking has not changed at all. As a prosecutor enforcing the law, I believe it should be applied after social consideration. Among current and former prosecutors, I am one of the most experienced in considering breach of trust crimes related to illegal corporate decisions. I have concerns. Breach of trust is a crime when a person entrusted with another's duty violates that duty and causes damage. For example, there are rarely such strict conditions for application. Usually, there is an abstract requirement of intent to cause harm. Our breach of trust crime was introduced from the old Japanese system, but it has practically disappeared or is not operated in Japan, while we operate it very broadly. In the past, it applied only when there was intentional purpose, but now it includes even indirect intent, making the scope too broad. I have concerns as a prosecutor. I believe my perspective is persuasive given my extensive experience with breach of trust cases.

- You mentioned abolishing the special breach of trust crime as one option. Since the duty of loyalty of the board would be expanded to shareholders as a general rule, is there a risk that abolishing breach of trust crime would render it ineffective?

▲ Some worry about increased frivolous lawsuits or disputes. Both sides have valid points, but criminalization is currently too severe compared to any other country. There is a general breach of trust crime in the Criminal Act, so having breach of trust crime in the Criminal Act is quite awkward. For example, if the Commercial Act imposes a strong duty of loyalty on the board or procedural rules like the business judgment rule, it can effectively control the issue. Our problem is that before judging the board's decision, the board is already in place, and decisions can be made far away. What we are saying is that even if decisions are made far away, if the board can act as a check to protect stakeholders, the system can operate much more healthily. There is a spectrum of options, including integrating and abolishing the breach of trust crime under the Criminal Act and abolishing the special breach of trust crime. At least, these issues should be discussed in parallel to address distortions in corporate law and criminal law.

- Has there been any recent change in the Ministry of Justice's stance, which previously opposed the Commercial Act amendment?

▲ I think it is better for each party to speak for themselves. The Ministry of Justice is an organization open to healthy discussions. If the government's opinion is unified, I will follow it as the FSS Governor, but I believe various discussions can take place. There was a full amendment of the Commercial Act in the early 2000s. When there is a breach of duty under corporate law, there is no separate criminal violation, so any breach of duty under corporate law leads to automatic criminal punishment. Excessive breach of trust crime is not at all aligned with global standards. These two issues should always be discussed as a package. I guess the Ministry of Justice was concerned that without resolving the breach of trust crime issue, it would be difficult to make decisions within the government. The amendment of corporate law and the issue of excessive criminalization related to breach of trust crime should go together. If the criminalization issue is separated and discussed oddly, I oppose that.

- Was today's announcement coordinated with the economic team, or is it your personal opinion as the head of the institution?

▲ There is no official government position yet. While everyone may be reviewing the matter practically, usually such statements are not made. Since many fragmented opinions are emerging now, I am expressing my opinion as the FSS Governor, accepting criticism. There is no agreed conclusion like F4 or others within the government. Whether through public hearings or discussions, opinions are being gathered. We plan to listen carefully to this open public discourse. If there are factors to consider, we are willing to correct them if pointed out by the media.

- What about your future plans?

▲ Since this is a position with a fixed term, I believe I should fulfill it. When personnel issues surfaced earlier, I felt a public servant's duty to stabilize the situation I had set up, so I am explaining that. Ultimately, it is up to the appointing authority to decide, and I have no intention to say what I will do. Today, I am focused on today's matters.