I took a breather when the crime of breach of trust was abolished... When companies prepare for ‘civil risk’

Recently, the government announced the 'First Plan to Rationalize Economic Punishment' and formalized the abolition of breach of trust in the criminal law. As the breach of trust regulations, which had failed to pass the threshold despite several discussions in the past, are being abolished for the first time in 70 years, the business community is rejoicing, while all attention is focused on the direction of future alternative legislation.

Until now, the crime of breach of trust has been considered the biggest fetter on corporate management due to the ambiguity of the requirements such as 'violation of duty' and 'property damage'. In fact, according to a study by the Korea Chamber of Commerce and Industry, the acquittal rate for breach of trust and embezzlement was 6.7%, which is more than twice the average for all criminal offenses (3.2%), which shows the uncertainty of legal principles that make it difficult for even prosecutions to guarantee results.

This uncertainty has acted as a fear that even good-intentioned management judgments may be subject to criminal punishment, which has discouraged management and solidified the 'judicialization of management' that prevents companies from pursuing new businesses or making bold investments such as M&As. This is in contrast to the cases of major developed countries such as the United States and Germany, which mostly prioritize civil resolution procedures.

So what should companies prepare for after the abolition of breach of trust? It is expected that the alternative legislative direction to be pursued within the year will be to severely punish malicious crimes such as embezzlement through the Act on the Aggravated Punishment of Private Benefits, etc., but leave responsibility for general management judgment to civil relief procedures such as shareholder representative lawsuits.

Accordingly, companies first need to thoroughly prepare for civil risks that will intensify, such as shareholder representative lawsuits. If the criminal complaint/indictment card disappears, shareholders will more actively use shareholder representative lawsuits to hold directors accountable. Therefore, in the decision-making process of the board of directors, companies must secure procedural legitimacy by recording and managing in detail not only the final conclusion, but also the information on which the judgment was based, the contents of the review, and opposing opinions. If you have sought advice from an external expert, it is important to clearly state the details.

Second, the importance of D&O Insurance will increase. To prepare for the possibility that the frequency and scale of civil lawsuits will increase after the abolition of breach of trust, companies should reexamine the limits and scope of coverage of existing insurance. This can be the most practical safety measure to protect individual executives from potential litigation risks and help them focus on their business activities with confidence. There is a need to pay attention to new products that will appear in the market in the future, such as special provisions related to shareholder representative lawsuits.

Lastly, the compliance monitoring and internal control system must be upgraded to the next level. Beyond simply formal procedures, we must institutionalize a prior review process that simulates legal risks that may arise when making major investments or M&A decisions in advance and transparently reports them to the board of directors. Through regular board education, we must not only make directors clearly aware of their fiduciary duties and scope of responsibility, but also actively inform shareholders of these efforts to advance corporate governance and secure long-term trust.
 

Small Business Team

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I took a breather about the abolition of the crime of breach of trust... When companies prepare for ‘civil risk’ (Shortcut)