TheScoop In-depth Investigation: Tracking+
The Core of the Opposition Party’s Commercial Act Amendment
Expansion of Directors’ Fiduciary Duty Targets
Mechanisms to Prevent Shareholders’ Conflict of Interest
Government and Ruling Party Acknowledge Necessity
Limitations of Amending Only the Capital Market Act
Will the Commercial Act Be Amended for Minority Shareholders?
Recent amendments to the Commercial Act face a critical juncture. The Democratic Party of Korea is determined to pass the amendments within this year, but the People Power Party remains steadfast in its opposition. Why does the ruling party vehemently oppose a law endorsed by a significant number of shareholders? How convincing are their arguments against the amendment to the Commercial Act? TheScoop provides a simplified breakdown.
**”We will make every effort to ensure that the stock market stabilizes, becomes a means for corporate fund-raising, and public investment. This includes revising the Commercial Act and advancing stock market policies. We plan to start by amending the fiduciary duty provision of the Commercial Act during this regular session of the National Assembly.”**
On November 4, Lee Jae-myung, the leader of the Democratic Party of Korea, expressed this commitment as he agreed with the government’s and ruling party’s (People Power Party) push to abolish the Financial Investment Income Tax. “If 15 million stock investors want the abolition of the tax, we will no longer insist on its introduction.” He thus promised to pursue amendments to the Commercial Act to further protect shareholder rights. Subsequently, the Democratic Party adopted the Commercial Act amendment as a party-line bill. With a majority in the Assembly, passing the bill seems only a matter of time.
In response, the People Power Party, chaebols, and even government institutions like the Financial Services Commission voiced opposition to the amendment, citing more negative than positive effects. Opponents claim the amendment could harm the country. What does the amendment entail to garner such strong opposition?
The essence of the amendment is to shift directors’ “fiduciary duty,” currently to the “company,” to the “company and shareholders.”
[Note: The amendment also adds clauses specifying what constitutes a “faithful performance of duties” by directors. It requires directors to “protect the interests of all shareholders” and “treat all shareholders equitably” in their duties. The proposal includes introducing cumulative voting to protect minority shareholders’ interests and expanding the separate election of auditors.]
**Consequences of Changing Fiduciary Duty Targets**
If the amendment expands the fiduciary duty of directors to all shareholders, what would happen? Currently, directors are not held liable for decisions that harm some shareholders as long as they are deemed sound business judgments. There’s no legal basis to hold them accountable, but expanding fiduciary duties would allow minority shareholders to sue directors for breaching such duties.
This raises the question, “Can directors make decisions benefiting the company yet harming some shareholders?” Yes, it can happen frequently. Various scenarios, such as transitioning to a holding company, splitting businesses, issuing bonds with warrants, or mergers, yield differing stakeholder interests.
For example, consider the material division and relisting of listed companies. Sometimes, a parent company (Company A) carves out a promising future business segment into a separate entity (Company B), which it maintains as a subsidiary. This is known as a material division.
The issue arises when Company B is later listed. All decisions are made by the board, and Company A suffers no losses as it still controls Company B, often even strengthening the major shareholder’s control. However, ordinary shareholders who supported Company A’s future business investment suffer as A’s stock price may plummet after transferring future business value to Company B.
In fact, after LG Chem and SK Innovation divided and relisted LG Energy Solution and SK On, respectively, their stock prices fell to one-third or half of their peak value around the division. This aligns with Lee Jae-myung’s remark that “it’s unreasonable for the ‘calf’ (future business) to be taken by someone else while the ‘mother cow’ (company) is mine.” With the amendment, existing shareholders could litigate against directors of both companies.
The government and ruling party are aware of this reality. During the 2022 presidential election, President Yoon Suk-yeol proposed granting shareholders new stock purchase rights (preferential allocation rights) when a parent company materially divides and relists a new business, aiming to prevent minority shareholder losses.
Similarly, Han Dong-hoon, a representative of the People Power Party, remarked last April on a similar amendment introduced in the 21st National Assembly during his tenure as Justice Minister, describing it as a “groundbreaking bill introducing a new concept.”
[Note: Although the Financial Services Commission in 2022 mandated that when a listed company decides on a material division in a board meeting, dissenting shareholders should be granted stock appraisal rights (the right to sell shares back to the company), it has been criticized for being ineffective due to pricing based on market, not fair, value.]
Yet, reasons for the People Power Party’s strong opposition to the amendment are manifold. First, they argue the logic is weak. For instance, some align with business sectors to argue, “Globally, there are no cases where directors are bound to represent shareholders’ interests.” However, U.S. instances, such as Delaware, explicitly include “company and shareholders” in fiduciary duties.
While Japan does not legally specify the fiduciary duty of directors, it interprets the law to protect minority shareholders by considering “the company’s interest as maximizing shareholders’ interest,” not as separate.
**Capital Market Act: Inevitability of “Pinpoint Regulation” Limitations**
Second, they claim it could disrupt the market. “Since the Commercial Act applies regardless of whether a company is listed or unlisted, it might cause market confusion. Updating just the Capital Market Act (for listed companies) can still protect minority shareholders.” Special occurrences like mergers or material divisions can impose “pinpoint regulation” to protect minority shareholders from harm.
However, the limits of pinpoint regulation are clear as any deviation renders it ineffective. For instance, it cannot prevent unfair mergers with unlisted companies. Experts advocate for the Commercial Act amendment for this reason.
Ik-Hwan Lee of Seoul National University emphasizes, “The amendment’s core is prohibiting majority shareholders’ exploitation of ordinary shareholders,” insisting that making shareholder protection mandatory would align conflicting interests between majority and minority shareholders.
Contrary to business sectors, many shareholders welcome the amendment. While concerns about “being a playground for speculative capital” merit consideration, this underscores the necessity for public discourse. Will the ruling party support the amendment for 15 million shareholders?