"Third-Party Allotment of New Shares: Potential Conflict with 'Interests of All Shareholders' Due to Share Dilution"
"Sale of Management Rights: Directors May Face Pressure for 'Tender Offer at Same Price'"
Last month, an amendment to the Commercial Act introduced a new duty of loyalty for directors toward shareholders. Under the revised law, directors are now required to faithfully perform their duties not only for the company but also for its shareholders in accordance with laws and the articles of incorporation. They must protect the interests of all shareholders and treat the interests of all shareholders equitably. Many experts believe that, due to the ambiguous language of the amendment, the concrete meaning will only be established as court precedents accumulate in the future.
On August 11, at the YK main office in Yeoksam-dong, Gangnam-gu, Seoul, the Korea In-House Counsel Association (President Lee Jaehwan) and YK Law Firm (Managing Partner Kang Kyunghoon) jointly held a seminar on the Commercial Act amendment. At the seminar, YK attorney Kang Jingu (pictured) stated that related issues are likely to arise in third-party allotment paid-in capital increases and controlling shareholder stock sales, adding, "Mergers and acquisitions (M&A) may become more difficult."
"Directors Must Consider Both Company and Shareholder Interests"
The impact of the Commercial Act amendment is already being seen in practice. A recent example is VIP Asset Management raising concerns over Lotte Rental's plan to conduct a third-party allotment paid-in capital increase at a price less than half the price at which the controlling shareholder is selling its management rights. The firm warned the board of directors that this case could become the first to be subject to the amended Commercial Act.
Previously, when existing shareholders filed for an injunction against the issuance of new shares via third-party allotment, courts generally accepted the company's argument of "business necessity." However, with the amendment, directors are now required to protect the "interests of all shareholders," which could lead to more complex cases in the future. This is because the dilution effect resulting from the issuance of new shares via third-party allotment could be interpreted as conflicting with the "interests of all shareholders."
Attorney Kang emphasized, "The company's argument of business necessity, the existing shareholders' preemptive rights, the directors' duty of care toward the company, and their duty of loyalty toward shareholders are now in conflict." He added, "With the amendment, directors must now weigh and compare the interests of both the company and shareholders." He further explained, "Whereas courts used to reflect the interests of the company and shareholders at a ratio of about 9 to 1, they may now judge them closer to 5 to 5," and predicted, "Within two to three years, practical standards for this balancing test will be established."
"General Shareholders May Pressure Directors During Sale of Management Rights"
In the case of a sale of management rights, various complex scenarios may arise. In theory, the sale of management rights involves the controlling shareholder selling their shares to an acquirer, so there is no room for third-party intervention. However, in practice, the board of directors, including the current CEO, must cooperate with the acquirer's due diligence and assist in fulfilling obligations under the stock purchase agreement (SPA).
As a result, a wide range of cases are expected to occur among companies pursuing M&A. Attorney Kang analyzed, "When a controlling shareholder sells shares with a management premium, general shareholders may demand that directors of the target company refuse to cooperate with due diligence and board resolutions unless there are protective measures for general shareholders, such as a tender offer at the same price." He further noted, "General shareholders may go even further by filing for injunctions or actively pressuring directors through lawsuits for damages on the grounds of breach of duty of loyalty."
"Board Operations Also Need Improvement"
Kim Hwajin, a professor at Seoul National University School of Law, commented, "ESG (Environmental, Social, and Governance), shareholder protection, and the Commercial Act amendment are all moving in the right direction, but we must consider whether we are actually capable of implementing them." Referring to the recent reversal of ESG policies by the Trump administration in the United States, he said, "If we were going to implement these measures, we should have done so five to ten years ago. The world is changing rapidly, but we are starting late, which is concerning. It may be more than we can handle."
The amendment to the Commercial Act also calls for the modernization of board roles. Professor Kim pointed out problems such as boards that lack independence, incompetent boards, boards stuck in a rut, passive boards, bureaucratic boards, and overly harmonious boards. He also predicted that the trend toward the separation of ownership and management would become increasingly evident.
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