"Korean-Style Discovery System Needed for Normalization of Corporate Governance"

There has been a call for the introduction of a Korean-style "discovery system" to address issues where companies or directors infringe upon shareholders' rights.

The discovery system is a legal procedure that allows parties in a civil lawsuit to forcibly request and obtain necessary evidence from the opposing party or a third party before the trial begins.

Even when shareholders file civil lawsuits against directors, the majority of evidence needed to prove wrongdoing is typically held by the company, raising concerns about an imbalance in the litigation process.

On May 15, the Korea Corporate Governance Forum held a seminar at the Korea Employers Federation in Yeouido, Seoul, under the theme "The Necessity and Effect of Introducing a Litigation Discovery System for the Normalization of Corporate Governance."

In his opening remarks, Lee Namwoo, President of the Governance Forum, stated, "The business community and economic organizations argue that if the amendment to the Commercial Act passes, excessive lawsuits against directors will hinder management activities, and they are requesting a significant relaxation of the breach of trust offense. However, before abolishing the breach of trust offense under corporate law, the discovery system must be introduced first."

At the seminar, Lee Yongwoo, head of the Economy Plus Research Institute and former member of the National Assembly for the Democratic Party of Korea, delivered the keynote presentation. He explained, "The aspect that corporate managers in Korea fear most is that breach of trust is treated as a criminal offense. When handled as a criminal matter, it leads to lengthy proceedings, increased criminal risk, excessive punishment, and a contraction of corporate activities."

However, he emphasized that introducing the discovery system is a prerequisite for abolishing the breach of trust offense, because when shareholders sue companies, an information imbalance emerges.

He stressed, "In civil lawsuits, the plaintiff must prove the breach of trust, but the key evidence is held by the company. This creates a severe imbalance in the burden of proof, as it is extremely difficult to secure internal information."

The subsequent panel discussion featured Kim Kihong, judge at the Seoul Southern District Court; Han Minseok, partner at a U.S.-based litigation law firm; and Kim Jooyoung, managing attorney at Hannuri Law Firm and former director of the Korean Bar Association's Legislative Research Institute.

The panelists also agreed on the need to introduce the discovery system. Kim Jooyoung, for example, cited the "iPhone Battery Gate" case to illustrate this necessity.

Kim Jooyoung explained, "Due to the U.S. court's discovery process, Apple was required to disclose more than 7.6 million documents to the plaintiffs across 25 occasions by the end of 2019. As a result, the plaintiffs obtained sufficient information, leading Apple to agree to a settlement of up to $500 million."

He further emphasized, "A similar lawsuit was filed in Korea, but Apple demanded that over 60,000 plaintiffs provide proof of device model, serial number, purchase date, battery replacement status, and repair history, along with the methods of verification."

Judge Kim Kihong stated, "To ensure the effectiveness of a Korean-style discovery system, parties should be granted the right to request sanctions against those who violate their obligations. The types and severity of sanctions should also be diversified."

However, he also explained that the discovery system does not offer only advantages. Judge Kim Kihong said, "The discovery system clearly has both pros and cons. Issues such as increased costs, delays in dispute resolution, infringement of trade secrets and privacy, and potential abuse have been pointed out." He added, "It is necessary for courts to weigh the benefits and infringements resulting from disclosure, with the assistance of specialized attorneys, during the review process."

Attorney Han Minseok explained that the main burden of the discovery system is cost. He said, "The scope of electronic information subject to preservation obligations continues to expand, and the costs involved in document preservation, collection, and review are significant. In the United States, lawsuits are sometimes avoided altogether due to the high costs of discovery."

He also stressed the need for safeguards to prevent abuse of the discovery system. He explained, "There is a procedure called a motion to dismiss, where the court decides whether discovery is necessary. The court can also issue protective orders after determining whether discovery costs are unreasonable."