[Exclusive] Final Confirmation of Government's Commercial Act Proposal to Protect Shareholders' Interests... Inclusion of 'Duty of Effort' Planned

Government Adds 'Duty of Effort' to Directors' Fiduciary Duties
Capital Market Act Amendment Package to Protect Shareholders' Interests
Expected to Accelerate Commercial Act Revision Discussions Upon Submission to National Assembly

The government has finalized a revision to the Commercial Act aimed at 'protecting shareholder interests.' Unlike the opposition party's proposal, which expands directors' fiduciary duties to include ordinary shareholders, the government plan introduces a separate duty of effort clause, serving as a compromise to alleviate concerns from the business community about interference with management rights. Alongside the Commercial Act, amendments to the Capital Markets Act have also been prepared to address issues related to information asymmetry.

According to comprehensive reports from political circles and others on the 15th, the Ministry of Justice and other related government agencies recently finalized a single government proposal for the Commercial Act revision. The most critical aspect of the government's proposed amendment is the addition of Article 382-3, Paragraph 2, which states that "a director must endeavor to protect the legitimate interests of shareholders while performing their duties." There has been controversy among political circles, the business community, and investors regarding the extent to which directors' fiduciary duties should be expanded in the Commercial Act revision. The government plan retains the existing provision that "a director must faithfully perform their duties for the company" but adds a duty of effort to protect shareholder interests.

According to the government proposal, the party to whom the director owes duties remains principally the "company." However, protecting shareholder interests also becomes an obligation to be pursued during the performance of duties. As a result, if a director fulfills their duty of effort to protect the interests of both the company and shareholders in the decision-making process, they can be granted indemnity, enabling rational management activities.

Until now, the business community has expressed difficulties, fearing lawsuits for breach of trust related to the Commercial Act revision. Despite these concerns, the government decided to proceed with the legislative amendment due to the growing necessity for shareholder protection measures, especially amid recent issues such as the mergers between Doosan Bobcat (Bobcat) and Doosan Robotics (Robotics), and SK Innovation (SK Innovation) and SK E&S (E&S).

Additionally, the government proposal also serves as a countermeasure against the opposition party's demands for Commercial Act revision. The opposition parties, including the Democratic Party of Korea, have declared their intention to push for a party-line policy to expand directors' fiduciary duties to include ordinary shareholders as part of their value-up project.

The government plans to revise not only the Commercial Act but also the Capital Markets Act as a package law to protect the interests of ordinary shareholders. This aims to introduce effective protection measures for shareholders who have been at a disadvantage due to information asymmetry and other factors.

Among the government's supplementary measures to the Capital Markets Act is the abolition of the existing stock price-based standard for merger ratios between listed affiliates, replacing it with a reflection of the actual value based on external evaluations. In July of this year, the Doosan Group proposed a merger between Bobcat and Robotics, allocating 0.6317462 shares of Bobcat stock per one share of Robotics stock. While the group maintained that the exchange ratio was set based on recent stock prices and was appropriate, Bobcat shareholders opposed it. They argued that the exchange ratio excluded the intrinsic value of Bobcat, which is a financially sound company with operating profits, asset size, and retained earnings, compared to the deficit company Robotics.

Furthermore, the government package includes measures such as mandating disclosure of corporate valuation results during mergers and allowing a certain percentage of newly issued shares in public offerings after physical spin-offs to be preferentially allocated to the parent company's shareholders. This is interpreted as focusing on preventing ordinary shareholders of the parent group from suffering losses during changes in corporate governance. Additionally, a proposal to expand the scope of the duty to refrain from opportunistic use from directors to controlling shareholders has also been prepared.

Once the government proposal reaches the National Assembly, discussions on the Commercial Act revision in political circles are expected to accelerate. How the business community will assess the government plan is also a point of interest. Compared to the opposition's proposal, the government plan can maintain legal system stability. In terms of content, it may alleviate concerns from the business community, potentially providing more room to persuade them.