[Stronger Amended Commercial Act] ① Directors' Duty of Loyalty Expanded to Shareholders: How Should Companies Respond? [Choi Seokjin's Law & Biz]

Expansion of the Scope of Criminal Breach of Trust
Increase Expected in Shareholder Derivative Suits and Direct Lawsuits Against Directors
Evidence Needed for 'Carefully Considered Decision-Making'

Editor's NoteOn July 4, the day after the amendment to the Commercial Act passed the National Assembly, Law Firm Sejong became the first domestic law firm to hold a related seminar. Based on the presentations at the seminar, this series will examine the key points of the amended Commercial Act and corporate response strategies in two parts.

With the passage of the amendment to the Commercial Act, which expands directors' duty of loyalty to shareholders, companies are on high alert. As companies face institutional changes that could increase management burdens?such as electronic general meetings of shareholders, strengthened requirements for independent director ratios, and stricter application of the '3% rule' for the appointment and dismissal of audit committee members?competition among law firms serving corporate clients has begun in earnest.

Expansion of Directors' Duty of Loyalty to Shareholders... New Obligation to Protect the Interests of All Shareholders

The most notable change is the provision on directors' duty of loyalty. Unlike other amended provisions, this takes effect immediately upon promulgation. The amended law changes the previous requirement that "a director shall faithfully perform his or her duties for the company" to "for the company and its shareholders."

It also introduces a new provision stating, "A director shall, in performing his or her duties, protect the interests of all shareholders and treat the interests of all shareholders fairly." This means directors must protect the collective interests of the entire group of shareholders, not just individual shareholders, and must ensure that the rights and interests of specific shareholders are not unfairly infringed upon.

Jung Junhyuk, a professor at Seoul National University Law School, stated, "This does not mean that each individual shareholder must be treated with mechanical equality," adding, "The four Supreme Court precedents on the principle of shareholder equality issued in July 2023 will serve as reference points when interpreting the meaning of 'fairness.'"

The Supreme Court has ruled, "Even when a company grants superior rights or benefits to certain shareholders and treats them differently from others, such treatment is permissible if it follows legally prescribed procedures and methods or if there are special circumstances that justify the differential treatment."

Shareholders as 'Business Managers'... Expanded Scope of Criminal Breach of Trust

The greatest concern in the business community is that management actions that currently do not incur penalties?because there is no harm to the company even if some shareholders suffer losses?could now be subject to criminal breach of trust. Experts agree that "the scope of criminal breach of trust has definitely expanded." Until now, the courts have maintained that directors are business managers for the company under an agency agreement, not for the shareholders, but with the amended law, it is increasingly likely that directors will also be seen as business managers for shareholders.

Experts predict that outcomes may differ in cases where courts have previously denied the establishment of criminal breach of trust in relation to shareholders, such as: ▲ issuance of new shares through sham capital contributions, ▲ mergers at unfair ratios, and ▲ issuance of low-priced convertible bonds to third parties.

In these cases, courts have not punished directors for breach of trust even when the value of existing shares held by shareholders decreased. In particular, in merger cases, the courts have held that "matters concerning mergers are 'company business,' and shareholders are merely interested parties; the 'entire body of shareholders' is an abstract concept and cannot easily be regarded as a specific victim." This stance may change.

Additionally, in cases such as the so-called "split-off listing," where a listed company physically divides a core business segment to establish a subsidiary and then lists it, there may be no harm to the company but harm to shareholders, which could also now be considered breach of trust.

Increase Expected in Shareholder Derivative Suits and Direct Lawsuits Against Directors

The amendment is expected to lead to a surge in shareholder derivative suits in which minority shareholders hold directors accountable. This is because decisions made by directors in consideration of controlling shareholders' interests could be seen as violations of the duty of loyalty to shareholders or the obligation to protect the interests of all shareholders. Recently, the Supreme Court has shown flexibility toward derivative suits, ruling that procedural defects in some representative lawsuits may be remedied in special cases.

There is also expected to be an increase in cases where shareholders directly seek damages from directors. Previously, the courts interpreted "third party" in Article 401 of the Commercial Act?which holds directors jointly liable for damages to third parties if they neglect their duties willfully or through gross negligence?to include "shareholders," but recognized directors' liability only when shareholders suffered direct damages.

About 100 corporate officials attentively listening at a seminar on the amendment of the Commercial Act held by Law Firm Sejong on the 23rd floor seminar room of D Tower, Jung-gu, Seoul, on the 4th. Law Firm Sejong

Corporate Response Strategies... Shifting Mindsets and Securing Evidence

Law firms have suggested the following response strategies for companies in light of the amended Commercial Act: ▲ considering shareholder interests in major decision-making, ▲ securing and disclosing the basis for decisions, ▲ ensuring procedural fairness through the establishment of independent committees, and ▲ proactive IR and communication with shareholders.

Lee Donggeon, an attorney at Law Firm Sejong, stated, "There needs to be a shift in perception so that shareholder interests are seen as company interests, and shareholder losses are seen as company losses," adding, "While it is impossible to make decisions that satisfy all shareholders, the point is to make decisions with the interests of all shareholders in mind, rather than those of specific shareholders."

Lee further explained, "It is necessary to have grounds showing that decisions were made carefully with sufficient information, considering the interests of all shareholders," and added, "In practice, it is important to conduct substantive board meetings and to secure and appropriately disclose evidence such as board materials and transcripts."

He also emphasized, "Procedural fairness should be ensured by measures such as establishing an 'independent committee' composed solely of independent directors who are not influenced by controlling shareholders. In a situation where the likelihood of litigation has increased, it is desirable to preemptively prevent disputes through proactive IR and transparent communication with shareholders."