[Exclusive] Considering Applying 'Duty of Loyalty of Directors' Only to Listed Companies

Lee Bok-hyun Attends Commercial Law Amendment Seminar on 26th
Amendments to Capital Market Act and Special Cases for Listed Corporations Possible
Listed Companies Show Increased Involvement of Common Shareholders

The government is considering expanding the scope of the 'duty of loyalty of directors' starting with listed companies as one of the alternatives for amending the Commercial Act. The plan is to first apply it to listed companies through special provisions in the Capital Markets Act and then extend it to general companies. Considering that before 2009, the legal provisions related to the governance of listed companies were under the Securities and Exchange Act, some opinions suggest there is no issue with this approach.

According to the industry on the 26th, there has been a proposal at the opinion-gathering stage to add a legal clause specifying shareholders as the subject of the 'duty of loyalty of directors' under the special provisions for listed companies in the Capital Markets Act (Chapter 3-2 of the Capital Markets Act).

There are two main reasons for considering the amendment of the Capital Markets Act. First, there is an opinion that it is appropriate to first expand the scope of the 'duty of loyalty of directors' within the Capital Markets Act from a legal system perspective. The Capital Markets Act was newly enacted in 2009 by consolidating six laws including the Securities and Exchange Act, Futures Trading Act, Indirect Investment Asset Management Act, Trust Business Act, Act on Comprehensive Financial Companies, and Securities Exchange Act. In this process, only laws related to company governance such as director appointments were transferred to the Commercial Act.

Professor Sang-Hoon Lee of Kyungpook National University School of Law explained, "Before 2009, provisions related to company governance were under the jurisdiction of the 'Securities and Exchange Act,'" adding, "Since the Capital Markets Act currently contains financial matters such as merger ratios and physical division of listed companies, establishing the principle of the 'duty of loyalty of directors' within the Capital Markets Act can ensure consistency."

The second reason is based on the judgment that the decision-making processes of unlisted and listed companies differ. Unlisted companies often raise funds through institutions or third parties rather than individual investors. Especially in unlisted companies controlled by large conglomerate-affiliated major shareholders, when funding is needed, investors are sought privately. Decision-making is conducted more through shareholder agreements than company law.

On the other hand, in listed companies, conflicts of interest between general shareholders and controlling shareholders are increasing. It is explained that when directors of listed companies make decisions, it is necessary to legally specify procedures to ensure that the potential losses of general shareholders are substantively reviewed. This is the background for considering expanding the scope of the 'duty of loyalty of directors' starting with listed companies. The Capital Markets Act distinguishes between listed and unlisted companies. The regulations related to listed companies are contained in the 'Special Provisions for Listed Corporations (Articles 165-2 to 165-20 of the Capital Markets Act).'

However, there is also significant opposition. The prevailing opinion is that, in principle, it is appropriate to amend the 'duty of loyalty of directors' provisions in the Commercial Act without distinguishing between listed and unlisted companies. There is also concern that amending the special provisions in the Capital Markets Act could lead to a practice of avoiding listing.

Meanwhile, on the same day, Lee Bok-hyun, Governor of the Financial Supervisory Service, is expected to emphasize once again the necessity of amending the Commercial Act at a seminar related to the amendment. This seminar is hosted by the Korea Listed Companies Association, KOSDAQ Association, and Korea Economic Association. Governor Lee’s position is to listen to the views of the business community. Previously, at a governance-related seminar attended by Governor Lee on the 12th, which was mainly composed of members from the Securities Association and capital market stakeholders, the necessity of amending the Commercial Act was strongly emphasized.