Governance Forum: "Concerns Over Fiduciary Duty in Commercial Act Amendment Are Excessive"

The Korea Corporate Governance Forum stated on the 18th that concerns about the amendment to the Commercial Act expanding directors' duty of loyalty are excessive.

In a commentary released that day, the forum pointed out, "The amendment to the Commercial Act, which expands the scope of directors' duty of loyalty from 'the company' to 'the company and shareholders,' passed the National Assembly plenary session on the 13th. The business community has repeatedly made the same claims as before, such as concerns about frivolous lawsuits, contraction of corporate management, and attacks by foreign capital, following the manual."

It added, "Some economic organizations are even creating nearly fictitious stories that 'an environment has been created where shareholders can file lawsuits just because the stock price has fallen.'"

At the same time, the forum criticized the recent remarks by Sohn Kyung-shik, chairman of the Korea Employers Federation, who said in a media interview that "since this is a ‘bad law’ that undermines corporate competitiveness, we will request the government to exercise the right to demand reconsideration (veto)."

The forum said, "In the interview, Chairman Sohn argued, 'Who would run a business if they are sued just for investing? If management decisions such as large-scale facility investments, entry into new businesses, or mergers and acquisitions (M&A) become subject to lawsuits, what manager would demonstrate entrepreneurial spirit?' However, Sohn’s claim that management decisions such as facility investments becoming subject to lawsuits would be troublesome is false."

The forum explained, citing Samsung SDI's rights offering as an example, that even if the amendment to the Commercial Act is finalized, proposals made 'for purely business purposes' are not subject to directors' duty of loyalty.

The forum emphasized, "Capital allocation policies such as facility investments, research and development (R&D), (non-affiliated) M&A, and shareholder returns are major responsibilities of the board of directors, and all such board decisions involve shareholders sharing profits or losses, so there is no conflict of interest. Even if the amendment to the Commercial Act is finalized, the current Samsung SDI rights offering proposal 'for purely business purposes' is not subject to directors' duty of loyalty."

Large-scale rights offerings for business purposes fundamentally do not involve conflicts of interest among shareholders, so they are not matters of shareholder loyalty duty. However, in cases like the recent Korea Zinc rights offering, where there is a purpose to defend management rights by benefiting certain shareholders and diluting other shareholders' stakes, it can be considered a matter of shareholder loyalty duty.

The forum stated, "On the other hand, if it ends with the point that it is not subject to the duty of loyalty, there may be questions about whether such actions are entirely unproblematic. For such large-scale rights offerings, under the current Commercial Act, directors' duty of care of a good manager should be interpreted to include an 'explanation duty' to shareholders, who are direct parties."

It continued, "The same content is also stated in the Tokyo Stock Exchange Governance Code in Japan. Providing complete information disclosure by detailing the scale of necessary funds, methods of procurement, and reviewing advantages and disadvantages for the company and shareholders in the securities report and explaining it to all shareholders is compliance with this explanation duty," it emphasized.

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