[Insight & Opinion] Swift Discussion Needed on Commercial Act Amendment, Addressing Both Shareholder Interests and Business Community Concerns

Preventing Directors from Infringing on Shareholder Interests Is Essential
Concerns in the Business Community Over Excessive Burdens on Companies
Referencing the U.S. Model Business Corporation Act

Samsung Electronics, which suffered the humiliation of falling below 40,000 won per share, has decided to repurchase 10 trillion won worth of its own shares. Of this, 3 trillion won will be canceled after repurchase, and the post-processing direction for the remaining 7 trillion won will be discussed. This is a desirable decision as it alleviates concerns about the stock price decline amid a shortage of funds in the domestic stock market.

In a situation where the domestic stock market remains undervalued (Korea discount), President Yoon Suk-yeol introduced the card of abolishing the financial investment income tax at the beginning of the year, and Representative Lee Jae-myung agreed. I believe this has helped to some extent in easing market anxiety. The president also expressed his intention to amend the Commercial Act to ensure that the board of directors responsibly reflects the interests of minority shareholders. It seems most important that the ruling and opposition parties actively discuss and reach an agreement for the development of the capital market.

The business community opposes the amendment of the Commercial Act, and the ruling party is also concerned about hedge funds infringing on management rights. Most of our investors prefer the amendment to the Commercial Act that includes the duty of loyalty of directors to all shareholders. The government and the ruling party also agree that it is necessary to correct parts that could harm shareholders. However, there is disagreement on whether the duty of loyalty to shareholders for all companies would impose excessive burdens on companies or become a source of conflict among shareholders.

Currently, the Commercial Act only stipulates that directors must faithfully perform their duties for the company in accordance with laws and the articles of incorporation. In our capital market, there have been frequent cases where directors of stock companies made decisions against the interests of shareholders, the owners of the company, without any legal responsibility. So, how should the amendment provisions be formulated? What is the precedent of our Supreme Court on this? The Supreme Court has held that directors of stock companies are in a position to manage company affairs but are not in a position to manage the affairs of individual shareholders. This reveals a gap between reality and ideal.

The government also agrees that the exercise of shareholder rights should be protected and promoted, and a corporate governance structure that guarantees fair treatment to all shareholders should be established. The business community argues that if directors are loyal to shareholder interests, aggressive and long-term investments become difficult. They claim this could weaken corporate competitiveness and lead to unnecessary or malicious lawsuits against directors.

It is unacceptable for shareholders to unconditionally oppose normal investment decisions or to file lawsuits to harass company directors. However, it should not be the role of directors to be loyal to company decisions that infringe on shareholder interests. The 'duty of loyalty of directors to shareholders' is taken for granted in advanced capital markets like the United States. However, this does not mean there are no problems. There will inevitably be conflicts over whether companies should abandon large-scale facility investments or research and development (R&D) plans and pay dividends for shareholder benefit.

The Model Business Corporation Act in the U.S. stipulates that directors have a duty to treat shareholders fairly, and a way to ensure fairness is to limit the voting rights of majority shareholders. Section 8.30 of the U.S. Model Business Corporation Act states that "a director shall perform their duties in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the director reasonably believes to be in the best interests of the corporation." The U.S. also limits the duty of loyalty of directors to the company under the Model Business Corporation Act. However, case law interprets this provision as including a duty of loyalty to shareholders. This is a difference from our system.

The important thing is to establish mechanisms to properly block company decisions that have repeatedly infringed on shareholder interests under the guise of company interests. It might be worth considering amending the Commercial Act by referring to U.S. law and moving toward preventing shareholder interest infringement through precedents and other means.

Wonkyung Cho, Professor at UNIST and Director of the Global Industry-Academic Cooperation Center