Governance Forum Warns "Hasty Abolition of Breach of Trust Crime Risks Infringing Shareholder Rights"

The Korea Corporate Governance Forum stated on the 13th, "Before the government hastily abolishes the crime of breach of trust, it must first propose alternative measures," adding, "Without presenting alternatives, there is a risk of encouraging managers to pursue personal interests and seriously infringing on shareholder rights."

In a statement released that day, the Forum addressed the government's recent announcement of plans to rationalize economic criminal penalties, saying, "If the means to regulate managers' acts of breach of trust disappear, we must keep in mind that this could become a cause for a deeper Korea Discount, let alone achieving a KOSPI 5000." The Governance Forum, a non-profit incorporated association composed of over 120 domestic and international members including financiers, legal professionals, and academics, aims to advance the capital market through improvements in corporate governance.

The Forum particularly highlighted that the government intends to abolish not only the special breach of trust crime under the Commercial Act but also the breach of trust crime under the Criminal Act. While criminal punishment for breach of trust has served as an important control mechanism against managers' pursuit of personal interests and acts that infringe on shareholder rights, abolishing it would exempt all such acts from punishment.

The Forum pointed out, "The government claims that the crime of breach of trust restricts private sector creative economic activities, but even now, managers acting in good faith are not punished for breach of trust," adding, "This is because the courts have already clearly established the 'business judgment rule,' resulting in acquittals in many breach of trust prosecution cases."

The Forum further stated, "The current breach of trust provisions have served as a means to protect companies and shareholders by punishing illegal acts that society cannot tolerate," adding, "If the crime of breach of trust is abolished now, the only remaining regulatory measure will be civil liability for damages. However, under the current system, it is virtually impossible to prevent breach of trust through civil liability alone." The Forum also pointed out that the derivative suit system, which is a representative safeguard against breach of trust, is effectively meaningless in practice.

Accordingly, the Forum argued that if the crime of breach of trust is to be abolished, institutional improvements are needed to prevent such acts through civil liability at the very least. They explained that the requirements for filing a derivative suit should be eased by lowering the required shareholding ratio, that companies should bear litigation costs so that minority shareholders can file derivative suits without financial burden, and that the U.S.-style discovery system should be introduced so that shareholders can present company-held evidence in lawsuits. They also emphasized the need to introduce a punitive damages system for breach of trust, and to grant shareholders who file lawsuits the authority to investigate whether assets are held under borrowed names, in order to prevent evasion of civil enforcement by hiding assets under false names.

The Forum stated, "In Taiwan, there is a quasi-public institution called the Securities and Futures Investors Protection Center (SFIPC), which files derivative suits, director dismissal suits, and damages suits on behalf of general investors," adding, "We should study such cases thoroughly, and if the SFIPC model is difficult to adopt, we could also consider introducing litigation funds in the U.S. style."

They continued, "Criminal punishment for breach of trust is not something that can be traded off against the protection of minority shareholders in joint-stock companies," criticizing, "A hasty announcement of the abolition of the crime of breach of trust, without sufficient and effective alternative measures in place, would grant amnesty to past offenders and encourage future ones."

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