"Amendment to Commercial Act 'Kills Corporate Innovation DNA'... Growing Concerns Among Companies"

Increased Risk of Breach of Fiduciary Duty Lawsuits
The Most Serious Issue Is the Board's Hesitation in Business Judgment

As the possibility of introducing an amendment to the Commercial Act that includes shareholders as subjects of directors' fiduciary duties (both inside and outside directors) increases, companies have expressed concerns that this could significantly hinder the management activities of the board. There are even remarks that it is a law that kills the 'innovation DNA.' The argument is that as directors face greater risks of being embroiled in breach of trust lawsuits, they may find it difficult to make rational decisions regarding large-scale facility investments and research and development (R&D) investments.

Lee Bok-hyun, Governor of the Financial Supervisory Service, is delivering a congratulatory speech at the "Corporate Governance Seminar for the Advancement of the Capital Market" held at the Korea Financial Investment Association in Yeongdeungpo-gu, Seoul, on the morning of the 12th.
[Photo by Yonhap News]

According to the business community on the 13th, companies view the risk of directors facing civil and criminal sanctions under the amended Commercial Act as less serious than the possibility of being caught up in numerous shareholder lawsuits. Even if indemnity measures are prepared, if directors and the company become involved in shareholder lawsuits, the company's stock price, credibility, and brand value could decline. A survey of 153 listed companies in Korea conducted by the Korea Chamber of Commerce and Industry (KCCI) released the previous day showed that 61.3% expected an expansion of shareholder derivative suits and breach of trust punishments if the amendment is introduced. Companies worry that shareholders may have increased grounds to take legal action on the basis that stock price declines, investment performance, and dividend payments go against shareholder interests.

In the worst case, the board could be pressured not only by shareholders but also by the company itself. Just as shareholders might protest that directors neglected their fiduciary duties due to dividends or stock prices, management could question whether directors are focusing on shareholder interests rather than company interests in matters such as investments and mergers and acquisitions (M&A). Yoo Jeong-ju, head of the Corporate System Team at the Korea Economic Association, said, "If the amendment to the Commercial Act is introduced, directors could face breach of trust lawsuits not only from shareholders but also from the company. Whether it is the fiduciary duty to shareholders or to the company, if there is a problem on either side, directors could become significantly restrained in their decision-making."

There are also voices suggesting that the indemnity provisions proposed by Director Lee may not be very effective. Director Lee suggested institutionalizing a system where directors who face shareholder protests can be exempted from civil and criminal liability if their management decisions are recognized as reasonable. This means legally codifying the 'business judgment rule.' However, in cases of breach of trust lawsuits brought by unspecified small shareholders or short-term investors based on short-term stock prices or dividend payments, this does not fundamentally reduce the number of lawsuits by limiting them. Unlike the United States, where many companies have parent controlling shareholders (major shareholders) owning 100% of shares, Korea tends to have lower major shareholder or holding company stakes. This structure makes conflicts of interest between major shareholders, holding companies, and shareholders more likely. Song Seung-hyuk, head of the Financial Industry Team at KCCI, said, "In a management environment where major shareholder and holding company shareholdings are low, if a shareholder-friendly amendment to the Commercial Act passes, there could be growing public opinion among shareholders to attempt lawsuits even if they lose in court."

The biggest problem is that if such an amendment to the Commercial Act passes, directors will find it difficult to make bold decisions. It will also be difficult to create a virtuous cycle that fosters a business-friendly environment, raises stock prices, and increases employment and investment. Not only shareholders but also foreign hedge funds, corporate raiders, and the National Pension Service could pressure the board under the pretext that they are neglecting shareholder interests. During the legislative discussion, ideas have emerged to restrict the voting rights of major shareholders in listed companies that have not adopted cumulative voting, which could lead to issues related to defending management rights in the worst case. Song said, "For example, if shareholders argue that the company should not make new investments due to high debt, the company could fall into a dilemma of inefficient management by delaying investment timing compared to competitors. Korea’s policies for long-term corporate investment incentives are already insufficient, such as not providing semiconductor subsidies, and if directors face shareholder pressure as well, it will become difficult for them to make bold facility investments and R&D activities that enhance the company’s medium- to long-term growth drivers."

Yoo said, "If companies become accustomed to raising stock prices through short-term stock price boosting measures rather than fundamentals, their 'innovation DNA' inevitably deteriorates. This is because non-owner directors only need to appear to be managing well to shareholders through financial performance and increased dividends rather than taking risks." He pointed out, "In such cases, companies could be like people who have worked out hard and improved their physique but whose internal organs have weakened and lost health. The government should not artificially hold back the growth of companies."

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