The Korea Herald


Are company directors responsible to shareholders?

Bill rekindles debate over shareholder protection vs. managerial autonomy

By Park Han-na

Published : June 12, 2024 - 15:44

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The National Assembly building in Yeouido, Seoul (Newsis) The National Assembly building in Yeouido, Seoul (Newsis)

Debate over a bill expanding the responsibilities a company director not only to the interest of the firm but also to the interest of the shareholders has been rekindled, with business groups showing strong resistance, arguing it could invite damage claims from individual shareholders.

Rep. Jeong Jun-ho of the main opposition Democratic Party of Korea proposed on June 5 an amendment to an article of the Commercial Act tied to the "Duty of Loyalty by Directors," after a similar bill was abandoned when the 21st National Assembly's term expired in May.

The lawmaker from the liberal party argues in his bill that the current law stipulating that “directors shall perform their duties in good faith for the interest of the company” should be altered to include the “proportional interests of shareholders" as well.

The bill aims at holding board of directors more responsible for their decisions regarding a company’s capital transactions, such as physical divisions, as the current law doesn’t protect shareholders even if they suffer a personal loss due to such corporate decisions.

“By adding the proportional interests of shareholders to the object of a director's duty of loyalty, it is to impose a duty on directors to protect shareholders in cases where the value of general shareholders is damaged even if the company is not affected,” he said.

The initial discussions on the amendment to the Commercial Act date back to 2021 when LG Energy Solution was physically spun off from LG Chem.

When LG Chem's stock price sharply dropped after the spin-off, minority shareholders protested, claiming their interests had been violated.

As a director's duty of loyalty is limited to the company under current law, minority shareholders were not able to hold directors legally responsible.

Business lobbying groups displayed their displeasure with the proposed amendment.

Companies are concerned that shareholders unsatisfied with directors’ management decisions could file suits against them for breach of trust, and claim that this would hamper their pursuit of aggressive investing strategies.

According to a survey conducted by the Korea Chamber of Commerce Industry of 153 listed companies, 61.3 percent projected that the law revision would lead to an “increase in shareholder-led lawsuits and punishment on directors for breach of trust.”

“With the current standards for breach of trust under the current criminal law are ambiguous, if directors' obligations are expanded, they may become reluctant to make long-term risk investments, which may actually hinder the corporate value boost,” the group said.

According to the KCCI, some 44 percent said they would reconsider their plans for mergers and acquisitions, while 9 percent said they would withdraw their plans if the amendment bill clears the parliamentary hurdle.

The Federation of Korean Industries, representing Korea's major conglomerates and associated members, claimed that directors only have responsibility to the company and do not assume obligations to individual shareholders in some major economies.

It also argued that if the law is revised, entrepreneurship and management autonomy would be diminished, ultimately reducing the interests of all shareholders.

Top financial authorities appear to have turned supportive of the law amendment, on the back of the initiation of the country’s ongoing Corporate Value-up Program, aimed at increasing shareholder returns to boost Korea's undervalued stock market.

"There is talk of introducing a director's duty of loyalty to shareholders in relation to corporate governance," Finance Minister Choi Sang-mok said at a press conference in late May. He added that the Finance Ministry, the Financial Services Commission and the Ministry of Justice will collect opinions through public hearings in June and July for a concrete decision.

Lee Bok-hyun, head of the Financial Supervisory Service, also mentioned the need for a safety net that would protect small investors from management decisions only beneficial for companies and large shareholders.

“There have been repeated cases of corporate decisions that go against investor interests, such as split listings, but it has been pointed out that trust in the capital market is being undermined due to the lack of legal protection measures for minority shareholders.”