[Policy Pulse] Who Exactly Are "All Shareholders" and the "Entire Body of Shareholders"?

Ambiguous Terms in the Amended Commercial Act Undermine Legal Clarity
A Law That Threatens Corporate Innovation
Implementation Should Be Reconsidered

The recent amendment to the Commercial Act, which expands directors' duty of loyalty to shareholders and establishes a new obligation to protect shareholders' interests, has come into effect. There are numerous cases that prompted this amendment, but if we were to highlight two, they would be the 2020 LG Chem physical division incident and, further back, the issues raised by minority shareholders and foreign capital regarding the merger ratio between Samsung C&T and Cheil Industries. While both conglomerates claimed managerial necessity for their actions, the process thoroughly excluded the interests of minority shareholders.

The sense of 'betrayal' felt by minority shareholders is well understood. There is not the slightest intention to downplay the purpose or significance of this Commercial Act amendment. Nevertheless, from a practical legal perspective, it is questionable whether expanding directors' duty of loyalty is the best way to protect shareholders' interests, and whether such a measure will be effective.

First, the terminology used in the amended Commercial Act is ambiguous and polysemous. The principle of legal clarity cannot be overemphasized. It is essential when imposing legal rights and obligations on subjects and parties, and when assigning civil or criminal liability.

However, the amended Commercial Act does the opposite. It stipulates that directors, in performing their duties, must protect the interests of 'all shareholders' and treat the interests of the 'entire body of shareholders' fairly. Yet, the meanings of 'all shareholders' and 'entire body of shareholders' are not immediately clear.

The motivations for becoming a shareholder in a corporation are extremely diverse. There are major shareholders with controlling stakes, individuals investing for capital gains or dividends, institutional investors, and foreign investors, all with different interests and motivations. Speculative capital that acquires shares to attack corporate governance or seize management rights is also a type of shareholder with unique motivations.

To lump together such a wide range of shareholders as 'all shareholders' or the 'entire body of shareholders' and require directors to make decisions for their collective benefit is tantamount to demanding the impossible.

If, in seeking to benefit one group of shareholders, the interests of another group are harmed, can it be said that the interests of 'all shareholders' have been protected? If a director makes decisions from the perspective of major shareholders to defend against speculative capital, is that truly fair treatment of the 'entire body of shareholders'? These questions and contradictions inevitably lead to an endless chain of dilemmas.

The global corporate environment is rapidly changing, and companies that fail to adapt to these changes struggle to survive. For this reason, swift and bold decision-making by the board of directors is absolutely essential. Yet, the amended Commercial Act is more likely to act as an obstacle, slowing down the decision-making speed that is crucial for corporate innovation and change, rather than facilitating it.

When making decisions, companies will now have to waste considerable time reviewing whether their actions align with the vague interests of 'all shareholders' and the 'entire body of shareholders', in addition to considering the fundamental values of sustainability and growth. Is it possible that the amended Commercial Act is demanding the nearly impossible from companies?

Furthermore, elevating the protection of shareholders' interests to a legal obligation makes it difficult to gauge the extent of judicial risk that directors will face. This is because, in every decision, the possibility of breach of trust charges remains whenever shareholders claim their interests have been harmed. The government has stated its intention to limit breach of trust charges based on business judgment. However, the business judgment rule applies to decisions made for the benefit of the company, not in relation to shareholders. This is a fundamental misunderstanding.

Ultimately, the amended Commercial Act is likely to push directors into an unsolvable maze and act as a factor that delays corporate decision-making due to the pressure of judicial risk. If mishandled, it could hinder innovation and change in Korean companies and risk their elimination from global competition. Lawmakers should not maintain a reckless attitude of "let's implement it first and revise it if problems arise." The saying "locking the stable door after the horse has bolted" is apt in this situation.

Lee Dongyeol, CEO and Managing Attorney at Lawbacks (former Chief Prosecutor of Seoul Western District Prosecutors' Office)