[Opinion] Such Abstract and Declarative Amendments to the Commercial Act

The amendment to the Commercial Act has become a hot issue. The amendment, led by the Democratic Party of Korea, passed the National Assembly on the 13th. The core of the controversy lies in the scope of directors' duty of loyalty.

#.Commercial Act Amendment Article 382-3①: Directors shall faithfully perform their duties for the company and shareholders in accordance with laws and the articles of incorporation (the duty of loyalty scope expanded from 'company' to 'company and shareholders').

#.Commercial Act Amendment Article 382-3②: Directors, in performing their duties, shall protect the interests of the majority shareholders and treat all shareholders fairly (newly established).

The business community is strongly opposing due to the increased burden. They are greatly concerned about management stagnation and a surge in lawsuits. They are anxiously waiting for the veto by Choi Sang-mok, Acting Prime Minister and Minister of Economy and Finance.

The amendment clearly has problems. It is abstract, declarative, and comprehensive.

First, 'abstract.' Article 382-3 of the amendment uses three terms: 'shareholders,' 'majority shareholders,' and 'all shareholders.' It is unclear whether these terms mean the same or different groups.

To illustrate, a bus driver (director) must drive the bus (company) well to safely deliver passengers (shareholders) to their destination (profit generation). During the trip, some passengers ask to turn on the air conditioning because they are hot. Others say it is just right now, and some ask to turn on the heater because they are cold. Whose request should the driver follow? The perplexed driver inevitably maintains the status quo. Now, a law is enacted: "The bus driver must be loyal to the passengers, protect the majority of passengers, and treat all passengers fairly." Some passengers then claim that they were not protected or treated fairly and sue the disloyal driver for damages. They even accuse the driver of breach of trust ('earring if hung on the ear, nose ring if hung on the nose' style) for being arrogant. Can the driver still drive properly?

Second, 'declarative.' There is a 'what' but no 'how.' The parties involved can only be confused. This issue was well pointed out recently by Lee Bok-hyun, Governor of the Financial Supervisory Service, at a forum. "The Commercial Act only declares the principle of shareholder protection duty but overlooks various issues that may arise in actual amendments. To prevent excessive criminal judgment on business decisions, it is necessary to abolish the special breach of trust crime or provide guidelines to enhance clarity and predictability." For example, detailed procedures for shareholder protection under the Capital Markets Act and appropriate safeguards for rational decision-making by the board of directors are needed.

Third, 'comprehensive.' The Commercial Act has a broad scope of application. It applies to all companies, so the impact is significant. In contrast, the Capital Markets Act applies to about 2,800 listed companies. This is why the government pursued amendments to the Capital Markets Act instead of the Commercial Act to protect minority shareholders. Last week, Governor Lee appeared before the National Assembly's Political Affairs Committee and explained, "Within the government, both the Commercial Act amendment and the Capital Markets Act amendment were reviewed, and the more likely option was closer to the Commercial Act amendment. Because the government had to consider corporate concerns to some extent, the opinion was revised to the Capital Markets Act amendment even if it meant going back."

In any case, despite these issues, the Commercial Act amendment has passed the critical point. The business community’s earnest desire for veto is well understood. However, there must also be a Plan B. We cannot face the worst-case scenario of the bus frequently stopping or veering off the road unprepared and bare-handed.