1 out of 10 companies resign midway... Concerns over ‘famine of outside directors’ growing amid push for commercial law revision [Ahn Hyeon-deok’s LawStory]

This year, 119 people left office mid-term.
Leaving office with more than one year left in office
Litigation risk decreases due to revision of commercial law
Small and medium-sized companies do not pay high salaries.
You may be placed in an environment where seniority is difficult.

This year, it was revealed that an outside director at one of the 10 KOSDAQ listed companies resigned mid-term. Most of them resigned from their positions as outside directors with more than one year remaining in their term due to personal reasons. As discussions on amending the Commercial Act to expand the scope of director loyalty obligations from companies to shareholders are in full swing, there are concerns both inside and outside the legal community that a “starvation” of outside directors may occur in the future. If the revision of the Commercial Act becomes a reality, the burden of judicial risk on outside directors will increase, which may lead to people avoiding serving as outside directors.

According to electronic disclosure on the 15th, there are 119 KOSDAQ listed companies where outside directors resigned this year with one year left in their term of office. Considering that there are a total of 1,791 KOSDAQ listed companies, in one out of 10 companies, an outside director resigned from his position without completing his term. In particular, many of them resigned from their positions as outside directors within a month or two of being appointed. According to Article 382 of the Commercial Act, an outside director is a director who is not engaged in the management of the company (a director who handles and executes daily business at a company, etc.). △The largest shareholder, his or her spouse, lineal ascendants, and descendants △Directors, auditors, and executive officers who have been engaged in the company's management within the past two years △Directors, auditors, and executive officers of the company's parent company or subsidiary, etc. cannot be appointed. The purpose is to prevent the arbitrary management and tyranny of the major shareholder in advance by allowing external personnel unrelated to the largest shareholder to participate in the board of directors. Depending on the size of the company's assets, etc., it must be more than one-fourth (three or more) of the total number of directors, but it must be a majority of the total number of directors. If you violate this, you will be subject to a fine of up to 50 million won.

The problem is that, with the number of outside directors retiring during their term of office, especially in KOSDAQ-listed companies, discussions are underway to amend the Commercial Act to expand the scope of directors' loyalty obligations from the company to shareholders. Experts believe that if the commercial law amendment passes the National Assembly, the judicial risk of outside directors may increase. This is because shareholders can file civil and criminal lawsuits against outside directors for matters resolved by the board of directors, including mergers, personal and material divisions, and new stock listings.

Choi Seok-gyu, an attorney at Dongin Law Firm, analyzed, "If the Commercial Act Amendment Bill passes the plenary session of the National Assembly, sound companies will not face a significant burden, but companies with weak financial structures may face the risk of increased lawsuits." He added, “The amendment to the Commercial Act is a structure that allows (shareholders) to file lawsuits directly against internal and external directors,” and added, “As there is no need to increase risk (on one’s own) in a situation where the remuneration is not high, it is unlikely to be easy to find outside directors in the future.” Under commercial law, even if an outside director causes a loss to the company, the liability is reduced by 3 times (6 times for inside directors) the amount of remuneration for the most recent year. However, because the compensation itself is not high, candidates for outside directors may choose not to take on the judicial risk arising from the revision of the Commercial Act rather than bear it. Bang In-tae, an attorney at Daeryun Law Firm, also pointed out, "After the revision of the Commercial Act, even if an (outside) director's work performance does not cause damage to the company, some shareholders may interpret the decline in the stock price itself as a violation of the duty of loyalty." He also pointed out, "The principle of management judgment that reduces directors' liability in determining directors' liability for damages or breach of trust may no longer be possible." He added, "As legal risks increase, directors' decision-making and other work performance may have greater incentives to be conservative and safety-oriented. Not only will it be difficult to find outside directors, but their compensation may also rise further."

Legal reporter Hyeondeok Ahn (always@sedaily.com), Reporter Jonghyun Lim (s4our@sedaily.com)

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1 out of 10 companies resign... Concerns over ‘famine of outside directors’ growing amid push for commercial law revision [Ahn Hyeon-deok’s LawStory] (Shortcut)