ESG Setback, Broader Breach of Trust?..."Misunderstandings About the Amended Commercial Act"

There has been an argument that the amended Commercial Act, which stipulates the duty of directors to act in the best interests of shareholders, should be seen not as the creation of a new obligation, but rather as a legal confirmation of a duty that already existed. Claims that the amended law will broaden the scope of criminal breach of trust for directors and throw the market into confusion are said to be misunderstandings.

The Seoul National University Financial Law Center held a seminar titled "Practical Issues Following the Introduction of the Duty of Loyalty for Directors" at the Seoul National University Law School Centennial Memorial Hall on July 29. The seminar was conducted in a format where discussants freely debated key issues of the amended Commercial Act without any formal presentations.

Seminar on 'Practical Issues Arising from the Introduction of the Duty of Loyalty of Directors' held on the 29th at the Centennial Memorial Hall of Seoul National University Law School. Photo by Legal Newspaper.

Kim Jooyoung (61, 18th class of the Judicial Research and Training Institute), Managing Partner at Hannuri Law, who participated as a discussant, stated, "Regarding whether the duty of loyalty to shareholders is 'creative' or 'confirmatory,' I believe it is confirmatory." He explained that even before the amendment, the interests of shareholders naturally had to be protected, but this was simply not fully recognized.

Attorney Kim argued that concerns that the amended Commercial Act proclaims a form of 'shareholder capitalism' that maximizes shareholder interests to the point of undermining a company's finances are therefore unfounded. He pointed out that, on the contrary, the ESG trend will only become stronger in the future.

He said, "So far, the courts have almost absolutely regarded the corporate entity as a real person," adding, "Because of this, the phenomenon of power being concentrated in the hands of directors, who are the actual decision-makers hidden behind the corporate veil, has been justified." He further commented, "If the amendment to the Commercial Act is considered a victory for anyone, it is not a victory for shareholders, but rather a victory for all stakeholders against the corporate entity."

Kim Jipyung (48, 33rd class), attorney at Kim & Chang, also said, "When explaining the amended Commercial Act to corporate boards, more than three people actually asked whether ESG management would constitute a violation of the law," adding, "I was surprised at the level of distrust, disparagement, and fear that lacked any basis." Jung Junhyuk (48, 33rd class), professor at Seoul National University Law School, also stated, "Even though the duty of loyalty to shareholders has emerged, the duty of loyalty to the company remains, so nothing has fundamentally changed."

The concern among companies that the scope of criminal breach of trust will be expanded is also seen as a misunderstanding. Breach of trust is only established in a relationship where there is a delegation of duties, and the stipulation of the duty of loyalty to shareholders does not mean that a fiduciary relationship is formed between shareholders and directors. Chun Junbeom (48, 35th class), CEO of Wise Forest, said, "Directors only need to protect the interests of shareholders; the role of directors has not changed to managing the property of shareholders." Directors are only entrusted with management duties by the corporate entity.

Chun Kyunghoon (54, 35th class), professor at Seoul National University Law School, also said, "Just as a professor works for students or a driver for passengers, this does not constitute criminal breach of trust," adding, "From the perspective of the principle of legality, the scope of criminal breach of trust is not expanded by the amendment to the Commercial Act."

The discussants agreed that the essential relationships of rights and obligations among companies, directors, shareholders, and other stakeholders have not fundamentally changed, but the possibility for stakeholders to raise legal issues against directors has increased. Practices such as tunneling, including internal transactions between affiliates in large business groups and 'favoring certain affiliates' with work, were already considered breaches of duty to the company, but the amendment to the Commercial Act does make directors' responsibilities heavier.

Professor Jung Junhyuk said, "Internal transactions between affiliates were already problematic, but companies simply did not perceive them as such," adding, "Regardless of whether it constitutes criminal breach of trust, the duty of care required of directors is now higher than before." He emphasized, "Directors must always accompany any decision-making process with a review of how it will affect shareholders. This is the most important message of the amended Commercial Act."

Park Seongdong, Legal Times Reporter

※This article is based on content supplied by Law Times.