[Controversy over the Commercial Act Amendment]② "Current law cannot control controlling shareholders in cases like treasury stock swaps"… Calls for establishing rules by case

Directors Have Duty to Protect Company Interests... Board Not Responsible for Shareholder Losses
"Must Protect Value Per Share... Special Rules Deny Principle of Shareholder Protection"

'Directors shall faithfully perform their duties for the benefit of the company (and the proportional interests of shareholders) in accordance with laws and the articles of incorporation' (Amendment to Article 382-3 of the Commercial Act by Rep. Lee Yong-woo of the Democratic Party of Korea).

The biggest issue in the amendment to Article 382-3 of the Commercial Act (Duty of Loyalty of Directors) is the perspective on conflicts of interest between the company and shareholders. The division of opinions between the business community and the financial investment sector regarding the amendment stems from the differing emphasis on corporate management (business community) versus shareholder rights (minority shareholders and financial investment sector).

Theory of Corporate Interest Independence vs. Guaranteeing Shareholders' Proportional Value

The core issue of the Commercial Act amendment starts from the theory of corporate interest independence. This theory means that the interests of the corporation and the shareholders differ, as the corporate entity and shareholders are viewed separately.

Under the current Commercial Act, directors are explicitly required to protect the interests of the company. This implies that CEOs or corporate executives (board of directors) are not obligated to protect shareholders' interests. Furthermore, it leads to the interpretation that directors bear no responsibility even if they infringe upon shareholders' interests.

Another disadvantage for shareholders is that the theory of corporate interest independence limits the company's interests to corporate account transactions. Changes in the value of a company's stock are not considered company profits. Therefore, shareholders cannot legally challenge losses caused by management decisions affecting stock value.

In this context, the 2009 Supreme Court precedent regarding Samsung Everland's low-price issuance of convertible bonds (CB) was established. The Supreme Court's full bench stated, "The damages to the company caused by the low-price issuance of new shares and the damages to shareholders should be clearly distinguished," and "The nature and the subject of damages to the company differ from those to shareholders, and the evaluation methods also differ."

Even if Everland issued new shares at a low price causing the existing stock value to decline, it cannot be considered a loss to the company. Especially considering the principle of breach of trust that separates shareholders' interests from the company's interests, the board's decision is interpreted as not guilty.

The business community's opposition to the amendment is based on the above theory of corporate interest independence. A representative from the Federation of Korean Industries pointed out, "If the amendment passes, the board of directors will be unable to make any decisions when the company's interests conflict with shareholders' interests."

Proponents of the amendment argue that the company's interests and shareholders' interests are separate but rarely conflict. Lawyer Shim Hye-seop of the Korea Governance Forum emphasized, "The phrase 'proportional interests of shareholders' means protecting the value per share," adding, "The current Commercial Act only protects the company's interests, so the amendment aims to establish a legal basis to protect shareholders' interests as well."

Conflicts of Interest Between Controlling Shareholders (Owner Family) and Minority Shareholders

Views also differ on conflicts of interest between controlling shareholders (owner family) and minority shareholders. If the theory of corporate interest independence is pursued, it does not matter if controlling shareholders forgo opportunities for stock price increases or damage the proportionality of stock value, as it is unrelated to the company's interests. This means that even if conflicts arise between controlling and minority shareholders in various capital transactions such as spin-offs, mandatory tender offers, and mergers and acquisitions (M&A), there is no legal ground for dispute.

Based on this premise, the business community explains that controlling shareholders and minority shareholders have different perspectives in corporate management. A business community official pointed out, "Controlling shareholders focus on long-term corporate value expansion, while minority shareholders tend to prioritize short-term gains such as dividend increases or stock price rises." He added, "In situations where the controlling shareholder's stake is low and management is difficult, shareholder interests such as dividend increases may be prioritized."

In response, Rep. Lee Yong-woo of the Democratic Party cited examples of Apple and Berkshire Hathaway to counter this. He said, "Warren Buffett tells shareholders demanding dividend increases that the company can increase its value more," and added, "Like Apple and Berkshire Hathaway, companies should communicate with shareholders and narrow differences."

Proponents of the amendment point out that, above all, cases of controlling shareholders exploiting minority shareholders' wealth are increasing. An asset management official stated, "Exchanging treasury stocks to defend management rights, using treasury stock maneuvers to strengthen controlling shareholders' power during holding company conversions, and similar actions are common in the market," adding, "Currently, the Commercial Act does not recognize these as legally unfair, making it impossible to check controlling shareholders' private gain behaviors."

Special Provisions of the Capital Market Act or Principles of the Commercial Act?

Proponents of the amendment emphasize that this is an opportunity to establish shareholder protection as a fundamental principle. The Commercial Act holds constitutional status in economic legal disputes. They argue that amending the Commercial Act to protect shareholder interests will establish principles for investor protection.

Opponents of the amendment argue that shareholder protection can be addressed through special provisions. Most of the current government’s investor protection measures (regulations on spin-offs, the 3% rule, and review of treasury stock purchase regulations) have come from this perspective.

When the controversy over spin-offs intensified, instead of introducing shareholder protection duties, a special provision granting shareholders the right to request stock purchase was created. The same applies to treasury stock issues. When treasury stocks are exchanged (sold) for management rights defense, the regulation aims to resolve this by requiring compliance with new share issuance rules.

Proponents of the amendment argue that creating special provisions only when controversies such as spin-offs or treasury stock purchases arise effectively denies the principle of shareholder protection. They point out that responding with tailored rules for each case presupposes a patronizing perspective.

Professor Lee Sang-hoon of Kyungpook National University School of Law explained, "Especially as financial techniques like M&A develop, it becomes easier to circumvent the wording of regulations," adding, "There is a high possibility that new regulations will be created as after-the-fact remedies whenever unforeseen acts like spin-offs occur."

This content was produced with the assistance of AI translation services.