"Business Law Amendments Hinder Innovation... Introduction of Director Liability Compensation Contracts and Defendant Litigation Participation System"

Hankyung Association, Listing Association, and KOSDAQ Association Hold 'Governance Improvement Seminar for Corporate Value-Up'
"Improve Director Liability, Management Rights Defense Measures, and Corporate Succession Systems to Suit Business Environment"

A proposal has emerged to establish a system to respond to the expansion of directors' fiduciary duties to 'shareholders,' a core element of the Yoon Seok-yeol administration's value-up (corporate value enhancement) program. It is suggested that the company introduce a director liability compensation contract system and a defendant-side litigation participation system.

The reason is that if the Commercial Act (Article 382-3) is amended to extend directors' fiduciary duties not only to the company but also to shareholders, directors may find it difficult to pursue innovative management due to excessive civil liability.

On the 26th, Professor Kwon Jae-yeol of Kyung Hee University Law School made this claim at the 'Governance Improvement Seminar for Corporate Value-Up,' jointly hosted by the Korea Employers Federation, the Korea Listed Companies Association, and the KOSDAQ Association at the Listed Companies Hall in Mapo-gu, Seoul.

Professor Kwon pointed out, "With over 14 million domestic stock investors and diverse purposes for stock ownership, it is practically impossible for directors to serve the proportional interests of all shareholders." He added, "It is evident that excessive civil liability will make it difficult to expect directors to engage in innovative management activities," and emphasized, "There is a need to codify the business judgment rule, introduce a director liability compensation contract system, and implement a defendant-side litigation participation system."

Jung Cheol, Chief Research Officer of the Korea Employers Federation and President of the Korea Economic Research Institute, also expressed concerns, saying, "There is a growing voice of concern that this amendment to the Commercial Act may hinder long-term corporate development and cause confusion in management." He added, "It will become difficult for companies to make swift business judgments, and the board of directors may face numerous lawsuits and judicial risks regarding normal decision-making."

There was also a call to strengthen measures to defend management rights. Lawyer Kim Ji-pyeong of Kim & Chang Law Firm said, "Unconditionally rejecting more direct and efficient measures such as poison pills or dual-class voting rights out of fear of abuse of (management rights defense) systems could run counter to advanced corporate governance policies."

Concerns were raised that excessively high inheritance and gift tax rates negatively affect corporate succession and flexible management. Professor Oh Moon-sung of Hanyang Women's University Department of Tax Accounting stated, "Among the tax items influencing the current Korea discount (undervaluation), the most powerful are inheritance and gift taxes." He criticized, "Due to high tax rates, majority shareholder premiums, and unreasonable factors in the business succession deduction system, uncertainties remain in corporate succession, and fundamentally, the lack of capital gains tax leads to inefficiency."

Professor Oh argued, "The scope of the business succession deduction system should be expanded, taxation deferred until the disposal of inherited property, and options for payment methods such as installment payment periods should be allowed."

During the discussion following the keynote presentations, issues to consider in the process of amending the Commercial Act and tax system improvements were also discussed.

Professor Jung Jun-hyuk of Seoul National University Law School said, "Given the widespread perception among foreign and individual investors that protection for general shareholders in Korea is insufficient, discussions on revising directors' duties are necessary to improve awareness." However, he pointed out, "Since the fiduciary duty provision is a general rule, it is difficult to precisely predict how courts will rule on specific cases." He added, "Opinions should be gathered based on a thorough review of what changes the amendment to the Commercial Act will bring in different situations."

Lee Sang-ho, Head of the Economic and Industrial Headquarters at the Korea Employers Federation, said, "Excessive inheritance tax in Korea acts as a 'management succession prohibition law' that induces downsizing or sale of businesses, hindering corporate maintenance and development." He stressed, "To facilitate corporate succession and encourage entrepreneurial spirit, reform of the current inheritance tax system is urgent." He emphasized, "Especially, the tax rate rises to as high as 60% when applying majority shareholder stock premiums, which is excessively high compared to major foreign countries, so the tax rate should be lowered." He added, "The tax system should be overhauled, including abolishing uniform stock premium taxation."

There was also an opinion that proper protection mechanisms for minority shareholders should be established. Hwang Hyun-young, a research fellow at the Korea Capital Market Institute, said, "In areas where shareholders' interests may conflict, such as mergers and acquisitions (M&A), legislative discussions are needed to clarify directors' duties and responsibilities to protect minority shareholders."