Controversial 'Expansion of Director's Duty of Loyalty'... Active Legislation on Commercial Act Amendment Bill

"Concerns Over Economic Activity Contraction" Business Community Backlash
Rep. Kim Hyunjung's Office Proposes Amendment Including 'Fairness Obligation'

As the business community opposes the expansion of directors' duty of loyalty from 'the company' to 'shareholders' citing concerns over weakened management rights, a supplementary amendment to the Commercial Act is expected to be proposed.

According to political circles on the 5th, Democratic Party lawmaker Kim Hyun-jung will propose an amendment to the Commercial Act that adds a 'duty of fairness' instead of expanding the directors' duty of loyalty.

The core of the Commercial Act amendment is to prevent large corporations' boards of directors from making management decisions that favor major shareholders but disadvantage ordinary shareholders, thereby damaging shareholder value. A representative case is Doosan Group, which recently announced a governance restructuring plan including the merger of stable cash cow Doosan Bobcat and loss-making company Doosan Robotics.

The business community has opposed the amendment, arguing that it would impose excessive burdens on directors, potentially stifling routine management activities, and that distinguishing between the interests of the company and shareholders is impossible. Accordingly, the amendment related to directors' duty of loyalty was not included in the government's 'Dynamic Economy Roadmap' for the second half of the year announced last month. The Ministry of Economy and Finance stated that the issue is still under public discussion but refrained from specifying a concrete announcement date.

Lawmaker Kim Hyun-jung's proposal is structured to partially alleviate the business community's opposition and concerns. First, it retains the current wording of Article 382-3 of the Commercial Act, which defines the duty of loyalty of directors as owed to the company, as paragraph 1, and adds a new paragraph 2 stating, "A director shall have a duty to treat shareholders fairly while performing their duties." In this case, questions such as whether directors should forgo the 'company's interests,' for example, large-scale facility investments or research and development (R&D) plans, to pay dividends for the 'shareholders' benefit' no longer arise. For instance, if Company A plans to build a factory in Gyeonggi Province, this benefits not only the major shareholder but also ordinary shareholders without discrimination, so it does not constitute a violation of the director's duty of fairness.

Additionally, Kim Hyun-jung's proposal adds paragraph 3 to Article 382-3, stating, "In cases where the major shareholder and their related parties do not exercise voting rights at the shareholders' meeting, and resolutions are passed only by minority shareholders, the director shall be deemed to have fulfilled the duty under paragraph 2. However, sufficient information must be provided to enable minority shareholders to make an informed decision." This means that for capital transactions or matters with potential conflicts of interest?such as spin-offs, mergers, business transfers, or stock exchanges?where the interests of major and ordinary shareholders conflict or are ambiguous, voting rights of the major shareholder and related parties will be restricted, and the agenda will pass only with minority shareholder approval, thereby relieving directors from liability under the duty of fairness.

Furthermore, the amendment includes provisions that if a director violates the duty of fairness, the major shareholder (as the instructing party) will also be regarded as a director and held jointly liable for damages along with the director.

Kim Hyun-jung, Member of the Democratic Party of Korea

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