Lower Barriers for Shareholder Derivative Lawsuits... Companies Rethink Response Strategies

Passage of Commercial Act Amendment and Supreme Court Ruling
More Directors Likely to Face Liability
"U.S. Legal Principles May Be Referenced"

After the National Assembly passed a stronger amendment to the Commercial Act on July 3, which expands directors' duty of loyalty from the company to shareholders, concerns have emerged in the business community that this could lead to a surge in shareholder derivative lawsuits. The Supreme Court's recent more flexible interpretation of the requirements for filing such lawsuits has also increased the likelihood that shareholders will utilize this legal tool.

This amendment broadens the scope of directors' duty of loyalty from the company alone to both the company and its shareholders, thereby strengthening the rights of minority shareholders.

Court. Asia Economy DB.

If a director prioritizes the interests of a controlling shareholder in making management decisions, this can be considered a violation of the duty of loyalty to shareholders and the obligation to protect the interests of all shareholders. Minority shareholders can file a shareholder derivative lawsuit to hold the director directly accountable. On July 3, the eight major economic organizations issued a joint statement expressing concern after the amendment passed the National Assembly, stating, "No adequate legal defense measures have been provided for directors, and the strengthened 3% rule increases the likelihood that speculative forces could appoint audit committee members."

According to Article 403 of the Commercial Act, a shareholder who holds at least one percent of the total issued shares (or at least one ten-thousandth for listed companies, continuously for six months) may file a derivative lawsuit to pursue a director's liability. In principle, before filing a derivative lawsuit, the shareholder must first make a demand to the company, and only if the company fails to file a lawsuit within 30 days of receiving the demand can the shareholder proceed with the derivative suit.

On June 12, the Supreme Court ruled that even if a shareholder files a derivative lawsuit without first making a demand to the company, if the company has repeatedly and explicitly refused the shareholder's demands during the litigation process, there are special circumstances that justify the belief that the company will not comply with the shareholder's demand (2024Da216743). In this case, the plaintiff filed a derivative lawsuit first and then made a demand to the company afterward. The company explicitly refused, stating that it could not file a lawsuit against itself. The court determined that if defects in the process cannot be cured even when the company explicitly refuses, shareholders would face the unnecessary burden of having to refile the same lawsuit after dismissal. Previously, courts have maintained that lawsuits filed without prior demand were inadmissible to prevent abuse of litigation by shareholders. However, with this Supreme Court ruling, the court acknowledged that procedural defects may be cured for the sake of litigation efficiency, even if some requirements are not strictly met.

With the amended Commercial Act and the Supreme Court precedent, companies are seeking advice from law firms on how to respond. Choi Jaeung (46, Judicial Research and Training Institute class 38), an attorney at Barun Law LLC, said, "Depending on the company's specific response, procedural defects in the demand process may be cured," and added, "Especially when refusing a shareholder's demand, it is important not to simply ignore or reject the demand on a formal basis, but to clearly state the reasons for refusal after a substantive review, making it clear that the company has reasonable grounds for rejecting the demand." Attorney Choi also noted, "However, the principle that a shareholder derivative lawsuit can only be filed if the company fails to file a lawsuit within 30 days remains valid."

Kim Jipyung (47, class 33), an attorney at Kim & Chang, commented, "Some believe that, in addition to the traditional shareholder derivative lawsuit on behalf of the company, shareholders may now be able to file a direct claim for damages against directors as direct victims." He added, "However, under Article 401 of the Commercial Act and Article 750 of the Civil Act, the requirements are limited, and the burden of proof lies with the plaintiff, so we must await future court decisions." Attorney Kim also said, "There may be an increase in provisional injunction lawsuits under Article 402 of the Commercial Act to prevent the continuation of directors' unlawful acts or to block the execution and effect of certain transactions. In the United States, if a special committee of outside directors makes a fair decision regarding whether to file a derivative suit, the courts tend to respect this, so referring to such practices could be an alternative."

Lee Donggeon (54, class 29), head of the Corporate Governance Strategy Center at Shin & Kim LLC, stated, "Companies need to respond more carefully and thoroughly to shareholders' subsequent demands, and as the likelihood of procedural dismissal decreases, more cases are expected to proceed to substantive judgment." He emphasized, "It is important to ensure diligent management decisions through experts and independent committees, and to hold substantive deliberations and resolutions, rather than merely formal board approvals."

Kim Kyungsoo (38, class 42), an attorney at the Governance Solution Center of Bae, Kim & Lee LLC, also noted, "After the amendment to the Commercial Act, it will be necessary to provide a sufficiently persuasive explanation not only that the decision was made in the company's interest, but also that it was made in the interest of all shareholders and treated the interests of all shareholders equitably."

Seo Hayeon, Legal Times Reporter

※This article is based on content supplied by Law Times.