[Aftermath of the Commercial Act Amendment] Expansion of loyalty obligations for directors, remaining tasks amid expectations of shareholder protection

We examine the impact of the Commercial Act amendments on corporate management.

As the Commercial Act Amendment Bill, which expands the scope of directors' loyalty obligations from companies to shareholders, has passed the National Assembly, voices of both welcome and concern are emerging in the legal community. Although there are expectations that a legal mechanism has been established to protect the interests of shareholders, there are also opinions that lawsuits demanding liability may increase rapidly if directors are judged to have violated their duties. Accordingly, it is pointed out that countermeasures should be prepared, such as strengthening the company's decision-making process and objectifying and documenting it.

According to the legal community on the 15th, one of the key points of the commercial law amendment bill passed on the 3rd of this month is the revision of Article 382-3 (directors' duty of loyalty). Previously, it was only stipulated that 'directors must faithfully perform their duties for the company in accordance with the provisions of the law and articles of incorporation', but the revised bill requires directors to have a duty of loyalty not only to the company but also to shareholders. In addition, a new provision was established stating that 'Directors must protect the interests of all shareholders while performing their duties and treat the interests of all shareholders fairly.'

There is a positive evaluation in the legal community that this will make directors more cautious in their decision-making and have the effect of increasing the value of shareholders and the company. Previously, the company's interests were the top priority, but in the future, the board of directors will have an obligation to deal fairly with the interests of shareholders.

In particular, analysis suggests that it is meaningful in that it clarifies the duties and responsibilities of directors. Attorney Lim Dong-han of Dongin Law Firm explained, "The 'director's duty of loyalty under commercial law', which was discussed in existing precedents, was mainly interpreted with a focus on the company, and as a result, criticism has continuously been raised that the interests of general shareholders may be infringed in situations where there is a conflict between the interests of the controlling shareholder and the company." He added, "As shareholders have been specified as the target of directors' loyalty duty, directors have a legal obligation to protect the interests of 'all shareholders' and treat them fairly."

Seok-Hyeon Yoo, an attorney at the law firm Mission, said, “It is not simply a matter of adding a few words to the law, but a clear declaration of the direction of commercial law regarding the duties of directors. This could result in shaking up the entire foundation of a director’s company management practice,” adding, “This will bring about changes that will further strengthen the protection of shareholder rights and improve the transparency of corporate governance.”

Seunggyu Byun, an attorney at law firm Seum, said, “We expect that a trend will form that does not disregard the interests of not only major shareholders but also minority shareholders.”

Observations were also made that it would have a positive impact on environmental, social, and governance (ESG) management. Kim Ji-ho, an attorney at Lin Law Firm (Limited), said, "The company is likely to operate institutional mechanisms to fulfill its duty of loyalty, such as a director recommendation committee and director remuneration committee to strengthen the independence and transparency of the board of directors." He added, "Corporate governance can be improved, and there is room for further efforts in ESG management to protect shareholder interests in the long term."

How do you judge ‘decisions for shareholders’? Possibility of increased litigation

However, it is pointed out that it may not be easy in the management field to judge that the decision was made for shareholders, given that the contents of the amendment, such as 'interests of all shareholders' and 'equal treatment of the interests of all shareholders', are abstract.

Lee Young-joo, an attorney at One Law Firm, said, "Take the physical division, which is a major issue, as an example, the divided subsidiary is an independent corporation whose growth potential is immediately recognized and focuses on core capabilities, creating a structure that is good for investment, but minority shareholders of the parent company are unable to exercise influence over the subsidiary, and the value of the stocks they hold declines due to the separation of the core business of the parent company." “It may be difficult to determine whether it is a good choice,” he pointed out.

When it is determined that a director's decision conflicts with the interests of some shareholders or violates the duty to protect shareholders' interests, lawsuits demanding legal liability may increase rapidly. In criminal terms, there is a possibility that the scope of application for breach of trust will be expanded.

Attorney Kim said, "Previously, the attitude of precedent was that directors did not have the status of 'those who handle the affairs' of individual shareholders, but with this revision, directors can become shareholders' affairs handlers, so if a violation of loyalty duty leads to damage to shareholders (damage to stock value), the possibility of being recognized as a breach of trust has increased."

The problem is that as the possibility of directors becoming embroiled in lawsuits increases, active decision-making may become difficult. Shin Jong-soo, a lawyer at Daeryun Law Firm, explained, "It is pointed out that the possibility of ex post facto liability increases in directors' decision-making, which may lead to passive management." Attorney Byun also emphasized, "There is a risk that management problems may arise where the director's avoidance of responsibility is given priority over the company's interests."

It is also expected that minority shareholders may claim excessive rights. Attorney Byun said, "It seems likely that the management rights of a company where the majority shareholder does not have a large shareholding will become unstable or spark a dispute, and if some minority shareholders make excessive demands, there is also some concern that a case may occur that is detrimental to the company and all shareholders."

Attorney Yoo predicted, “Since the provisions of the Commercial Act cannot help but be interpreted abstractly until the standards for judgment are established, controversy over the revised Commercial Act, especially regarding company operation practices, will continue for some time.”

There is a need to document the decision-making process and establish an internal audit system.

Accordingly, companies need to prepare response measures, such as reorganizing their internal control system and continuing active communication with shareholders. This is because it must be proven that the director's decision-making was for the benefit of shareholders and the process of management judgment must be shown objectively and transparently.

Attorney Shin advised, “When making decisions, management must secure the legitimacy of responsible management by documenting procedures such as collecting sufficient information, reviewing alternatives, and reviewing whether there is a conflict of interest between management and shareholders.”

Attorney Lee explained, “We need to strengthen shareholder disclosure and clearly prepare the background for discussion and basis for judgment when making board resolutions,” and “When dealing with management or major shareholders, there is a need to secure procedural transparency by applying the most conservative standards possible and receiving external objective reviews.”

Maintenance of the audit system should not be overlooked. Attorney Yoo pointed out, “An internal audit system must be established in relation to all issues where interests between shareholders may conflict.”

Attorney Lim emphasized, “It is desirable to utilize the opinions of external experts,” and “Efforts are also needed to strengthen the corporate information session (IR) function and provide sufficient opportunities for minority shareholders to express their opinions at the general shareholders’ meeting.”

In addition, signing up for executive liability insurance was also suggested as a countermeasure. Attorney Kim said, "Subscribing to executive liability insurance to prepare for claims for damages from minority shareholders can also be a kind of safety device. However, in this case, you must check whether the grounds for exemption are overly broad and whether there are special terms and conditions under which shareholder-filed lawsuits can be included in the scope of compensation."

It is also important to accumulate practical cases that can be referenced. Attorney Byun said, “To establish the specific meaning and scope of a director’s duty of loyalty to shareholders, future practice and accumulation of precedents are necessary.”

Reporter Park Seon-woo (closely@bloter.net)

[View full article]
[Aftermath of the Commercial Act Amendment] Expansion of directors' duty of loyalty, remaining tasks amid expectations of shareholder protection (Go)