KCCI "Expansion of Directors' Duty of Loyalty Causes Market Confusion"

Amid multiple proposed amendments to the Commercial Act aimed at expanding directors' duty of loyalty as part of a corporate value enhancement (value-up) program, concerns have been raised that increasing the scope of directors' duty of loyalty could cause confusion in the market.

The Korea Employers Federation (KEF) raised such concerns in a report on June 15 titled "A Study on the Amendment of the Commercial Act Related to the Expansion of Directors' Duty of Loyalty."

Professor Choi Joon-sun, an emeritus professor at Sungkyunkwan University School of Law who conducted the study, stated in the report, "The recent calls to expand the scope of directors' duty of loyalty stem from misunderstandings of the legal concept," adding, "If such amendments to the Commercial Act are enacted, there are concerns about an increase in lawsuits and intensified conflicts among shareholders."

Under the current Commercial Act, the duty of loyalty of directors is defined as being owed to the "company." However, recently, a bill was proposed to include shareholders within the scope.

If the amendment passes, it is expected that corporate boards will be explicitly required to consider the interests of all shareholders, including minority shareholders, when deciding on important management matters such as mergers and acquisitions (M&A) or corporate splits.

Regarding this, Professor Choi first argued, "The duty of loyalty of directors does not mean that directors have a duty to be loyal to the company in a general sense, but rather a legal obligation to prioritize the company's interests when there is a conflict of interest between the director and the company."

He continued, "Expanding the duty of loyalty to include shareholders would mean that when there is a conflict of interest between directors and shareholders, the shareholders' interests must be prioritized," adding, "Since directors execute the resolutions of the shareholders' meeting, the premise that there is a conflict of interest between directors and shareholders is structurally untenable."

Professor Choi also predicted, "The proposal to explicitly add a duty of loyalty for the proportional interests of shareholders could instead become an attempt to guarantee 'disproportionate benefits' to minority shareholders, resulting in a violation of the principle of shareholder equality."

Furthermore, based on an analysis of laws in six countries including the United States, Japan, and France, Professor Choi noted that there are no provisions including shareholders within the scope of directors' duty of loyalty.

He suggested, "If the Commercial Act is amended, it is highly likely that corporate management confusion will worsen due to increased lawsuits and intensified conflicts among shareholders. It is preferable to resolve special situations in the market through existing laws and precedents rather than generalizing them into law."

Ha Sang-woo, head of KEF, also explained, "Expanding directors' duty of loyalty, which does not align with global standards, will only lead to a decline in corporate competitiveness by stifling proactive management activities."