[Commercial Law Amendment Solution] ② Specify 'Shareholders' but Also Codify the 'Business Judgment Rule'

Specification of 'Shareholders' as Subjects of Directors' Duty of Loyalty
Potential Conflicts of Interest Between Company and Shareholders
Remaining Issues Regarding Subjects of Board of Directors' Duty of Loyalty
Codification of 'Business Judgment Rule' Reduces Possibility of Breach of Fiduciary Duty

Discussions on the revision of the Commercial Act are intensifying, centered around the National Assembly. The government is also joining in, strongly expressing its intention to amend the Commercial Act. Photo by Hyunmin Kim kimhyun81@

In recent years, a major issue that has emerged in the domestic capital market is the conflict of interest between major shareholders and minority shareholders. Representative cases include LG Energy Solution's physical spin-off listing and the rejection of Hyundai Department Store's demerger (conversion to a holding company). The commonality is that the board of directors made management decisions prioritizing the company's interests in situations where the interests of the company (or major shareholders) and minority shareholders conflicted. As a result, the amendment of Article 382-3 of the Commercial Act (Duty of Loyalty of Directors) has received strong support, especially from activist funds.

The government and the financial investment industry are actively voicing their opinions on the amendment of the Commercial Act in this context. With the significant increase in individual investors, they have judged that amending the Commercial Act is an indispensable issue for the advancement of the capital market. The problem is that if a director violates the duty of loyalty, the likelihood of being charged with breach of trust increases. The government is considering adding exemption conditions (business judgment rule) specified in the Trust Act, which is the superior law of company law, to the amendment of the Commercial Act.

If 'shareholders' are included in the duty of loyalty, it is also possible to explicitly state it

Currently, the academic community in commercial law argues against the amendment of the Commercial Act on the grounds that "the duty of loyalty of directors already includes shareholders along with the company." Therefore, they argue that legal amendment is unnecessary.

In response, a government official pointed out, "If shareholders are indeed included in the duty of loyalty of directors as the academic community claims, there is no problem in explicitly stating this in the legal text," adding, "The opposition to the amendment of the Commercial Act is contradictory." There is sufficient justification for amending the Commercial Act, and considering the increasing cases of conflicts of interest between major and minority shareholders, there is no reason to delay the amendment.

They emphasize that explicitly stating 'shareholders' in the Commercial Act (Article 382-3) is not merely declarative. It is explained as a legal device that induces the board of directors to go through sufficient judgment and procedural processes to avoid infringing on shareholders' interests.

[Image source=Yonhap News]

A recent representative case is the Delaware court ruling in the United States regarding Elon Musk's performance-based compensation. The lawsuit was initiated by Tesla shareholders. Previously, Tesla's board of directors decided on stock options worth $56 billion (approximately 77 trillion KRW) for Elon Musk, Tesla's CEO. Subsequently, an individual shareholder filed a lawsuit in 2022 against the board, claiming that important information was not disclosed to shareholders during the approval process of the performance-based compensation.

The court ruled that the board's decision was inappropriate and that the compensation plan was excessive. A financial regulatory official said, "The noteworthy point is that the court pointed out that the board was not independent from Musk," adding, "This is significant in that the court interpreted that even if the board complied with legal procedures, if it did not substantively consider shareholders' interests, the board's decision is problematic."

It is explained that if 'shareholders' are explicitly included in the duty of loyalty of directors, directors will review decisions in a way that minimizes shareholders' losses when conflicts of interest arise between the company (major shareholders) and shareholders during the decision-making process.

A provision excluding application of breach of trust charges should be newly established

However, the government holds the position that discussions on exemption from breach of trust charges should accompany the amendment of the duty of loyalty of directors. This is the biggest difference from the amendment bill submitted to the National Assembly. The financial investment industry and the Financial Supervisory Service say it is necessary to amend Article 382-3 of the Commercial Act and add provisions expanding the authority of the business judgment rule.

A government official explained, "It is reasonable to include 'shareholders' in the duty of loyalty (Article 382-3) and, instead, delete the breach of trust charge," but added, "Since it is practically impossible to delete the breach of trust charge, it is most rational to broadly recognize grounds for exemption from breach of trust charges."

A commercial law expert said, "In precedents, the recognition of criminal intent for breach of trust is judged by the 'business judgment rule,'" adding, "If a new provision is added to the Commercial Act excluding the establishment of breach of trust charges when the business judgment rule is followed, the business community will likely accept it." The expert also said, "If the business community still cannot agree with the direction of the amendment, it is also possible to amend the special breach of trust provisions in the Commercial Act."

There is a reason why the 'business judgment rule' is emphasized as an exemption from breach of trust charges. It is based on the 'fiduciary duty' under company law. Fiduciary duty means "the obligation of a trustee, entrusted with the management and operation of another's property, to act reasonably and prudently for the maximum benefit of the principal or beneficiary." Simply put, it is the duty to act reasonably and carefully for the maximum benefit of the principal (company and shareholders).

The fiduciary duty is largely composed of the 'duty of care' and the 'duty of loyalty.' If a director fulfills the duty of loyalty but the company suffers damage, the director can avoid liability if the 'business judgment rule' was followed. A representative from the Korea Capital Market Institute explained, "If such exemption grounds are specifically stated in the amendment of the Commercial Act, it will provide grounds to expand the interpretation of the business judgment rule," adding, "Through this, the possibility of criminal punishment (breach of trust charges) against directors can be reduced, and the duty of loyalty to shareholders can be strengthened."

Editor's NoteLast year, the amendment of Article 382-3 of the Commercial Act (Duty of Loyalty of Directors), which activist funds had initiated, is gaining attention again. As cases where minority shareholders suffer losses due to decisions by the board of directors have occurred one after another, calls for amending the Commercial Act have grown louder. The main content is to amend the legal provision that directors must make decisions for the 'company' to 'company and shareholders.' The legal and academic communities say that the core of the amendment to the Commercial Act boils down to the 'principal-agent problem' theory. Before amending the Commercial Act, the question of who the principal is, the subject of the duty of loyalty of directors, must be asked. Even if the Commercial Act is amended, cases where the interests of the company and shareholders conflict may continue to occur. Asia Economy examines the pros and cons through the Samsung Everland convertible bond (CB) case, the first legal dispute related to the 'duty of loyalty of directors,' and covers two perspectives on the current amendment of the Commercial Act. Through this, we aim to consider the direction of the amendment of the Commercial Act for our capital market.

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