[Invest&Law] "Shareholders Must Be Specified in Directors' Duty of Loyalty under Commercial Act"

Korean Financial Law Association, Financial Supervisory Service, and National Assembly Legislative Research Office
Hold Seminar on Amendments to the Commercial Act and the Capital Markets Act

In the course of corporate control disputes involving companies such as Korea Zinc, there has been a call to amend the Commercial Act to explicitly include "shareholders" in the directors' duty of loyalty provisions to prevent minority shareholders from suffering losses for the benefit of major shareholders. However, there are counterarguments that it would be difficult to hold directors accountable when the interests of the company and shareholders conflict.

The Korean Financial Law Association (President Kim Hak-seok), the Financial Supervisory Service (Governor Lee Bok-hyun), and the National Assembly Legislative Research Office (Director Lee Kwan-hoo) held a special seminar titled "Asking the Direction of Amendments to the Commercial Act and the Capital Markets Act" on the 12th at the Bulls Hall of the Korea Financial Investment Association in Yeouido-dong, Yeongdeungpo-gu, Seoul.

The seminar was organized to discuss directions for amendments to the Commercial Act and the Capital Markets Act aimed at improving corporate governance, protecting general shareholders, and establishing a fair and transparent market order.

In his congratulatory remarks, Lee Bok-hyun, Governor of the Financial Supervisory Service, said, "Despite recent changes in the domestic and international economic and financial environment, we must not miss the opportunity for capital market reform, and it is time to bring various improvement proposals to the discussion table to reach constructive consensus. The advancement of the capital market and strengthening shareholder protection should no longer remain at the level of discourse or rhetoric but must move into the stage of implementation."

Lee Kwan-hoo, Director of the National Assembly Legislative Research Office, stated, "I hope today's seminar will serve as an opportunity to prepare effective alternatives that protect general shareholders without violating the principle of shareholder equality, which is an essential element of the stock company system, considering the ownership structure characteristics of large domestic listed companies where conflicts of interest between controlling shareholders and general shareholders are significant."

Kim Hak-seok, President of the Korean Financial Law Association, emphasized in his opening remarks, "I hope today's discussion will become a meaningful milestone in setting the direction for amendments to the Commercial Act and the Capital Markets Act."

Professor Kim Hong-gi of Yonsei University Law School, who presented on "The Necessity of Shareholder Protection in Corporate Restructuring Transactions and Amendments to the Capital Markets Act?Focusing on Recent Discussions on Strengthening Directors' Duty of Loyalty," said, "We must not forget that discussions on amending the directors' duty of loyalty provisions in the Commercial Act were triggered by 'the harm suffered by minority shareholders' during corporate restructuring transactions."

Professor Kim cited the "attempted rights offering by Korea Zinc" as an example of conflicts of interest between major and minority shareholders during corporate restructuring transactions such as mergers, acquisitions, and spin-offs.

He explained, "Korea Zinc's rights offering plan includes allocating about 20% of the newly issued shares to a friendly employee stock ownership association to dilute Youngpoong's shareholding. This is intended to form a new shareholding structure through the issuance of new shares while Youngpoong exercises influence as Korea Zinc's largest shareholder."

He continued, "Article 382-3 of the current Commercial Act stipulates that 'directors shall faithfully perform their duties for the company in accordance with laws and the articles of incorporation,' but many criticize that this wording alone is insufficient to protect minority shareholders during corporate restructuring processes such as mergers, acquisitions, and spin-offs. I believe the fundamental cause is a lack of understanding and awareness of directors' duty of loyalty rather than the legal wording itself, but if it helps protect shareholders, amending the provision is possible."

However, he pointed out, "Phrases such as 'proportional interests of shareholders' or 'interests of controlling shareholders' excessively highlight conflicts of interest between controlling and minority shareholders and may raise additional controversies during interpretation. They may also deny an appropriate level of control premiums, potentially distorting the corporate restructuring market and corporate reorganization transactions."

Therefore, he proposed, "When amending the Commercial Act, a principled phrase such as 'directors shall faithfully perform their duties for the company and shareholders in accordance with laws and the articles of incorporation' would be appropriate."

Kang Seok-gu, Head of the Research Department at the Korea Chamber of Commerce and Industry, countered, "Including 'shareholders' in the directors' duty of loyalty provisions in the Commercial Act is ultimately quite difficult to accept," citing immediate issues arising from differing interests between the company and shareholders. He added, "Problems arise regarding what stance directors should take when some shareholders seek short-term gains. There is considerable concern that the board of directors could become politicized rather than a consensus body if taken to extremes."

The overall moderation of the event was handled by Professor Kim Tae-jin of Korea University Law School (Secretary General of the Korean Financial Law Association). Professor Lee Cheol-song, Chair Professor at Konkuk University Law School, presented on "The Legal System of Listed Company Governance Law and Evaluation of Minority Shareholder Protection Measures."

The discussion was chaired by Professor Kim Yong-jae of Korea University Law School, with participants including Professor Kim Byung-yeon of Konkuk University Law School, Professor Song Ok-ryeol of Seoul National University Law School, Professor Ahn Soo-hyun of Hankuk University of Foreign Studies Law School, Professor Jung Dae-ik of Kyungpook National University Law School, Head Kang, Legislative Researcher Lee Yoon-ah of the National Assembly Legislative Research Office, and Legal Director Choi Jeong-hwan of the Financial Supervisory Service.

Reporter Lim Hyun-kyung, Law Times

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