“Expansion of ‘Directors’ Duty of Loyalty’ Could Lead to Major Confusion”
The Korea Enterprises Federation (Korea’s equivalent of employers’ federation) has expressed concerns that expanding the duty of loyalty owed by directors from the company to shareholders under the Commercial Act could lead to widespread litigation, similar to what has been observed in the United States, causing a decline in corporate value.
In exchange for agreeing to the abolition of the financial investment income tax, the Democratic Party of Korea plans to propose an amendment to the Commercial Act that shifts the directors’ duty of loyalty from being owed to the company to also include shareholders. The party intends to leverage this proposal as a bargaining tool against the government’s plans to ease the top rates of inheritance tax and abolish the surcharge system for major shareholders.
During a Supreme Council meeting on the 4th, Lee Jae-myung, the leader of the Democratic Party, expressed support for abolishing the financial investment income tax and emphasized the need to amend the Commercial Act during the year-end regular session of the National Assembly. He stated that the Democratic Party would exert all efforts in legislation and stock market advancement policies to restore the normalcy of the stock market and secure it as a means for corporate fundraising and public investment.
The amendment to the Commercial Act, which the Democratic Party has persistently advocated as a measure to address the “Korea discount” (undervaluation of the domestic stock market), aims to expand the directors’ duty of loyalty from the company to the company and its shareholders. This legislative effort is strong, with eight related bills already proposed in the 22nd National Assembly. The party’s policy committee is also preparing to introduce a separate bill. A Democratic Party official mentioned that the handling of the amendment was initially conditional on the delay or abolition of the financial investment income tax.
Business circles are strongly opposing this move. The Korea Enterprises Federation predicts that importing the duty of loyalty similar to the Anglo-American law system into Korean commercial law could lead to rampant lawsuits, similar to the U.S., thereby decreasing corporate value. According to their analysis, from 2009 to 2018, 71% to 94% of merger and acquisition transactions over 100 million USD (approximately 138 billion KRW) involving U.S. listed companies were subject to shareholder lawsuits each year.
The federation further noted that, in the U.S., the “business judgment rule” provides directors with considerable defense during litigation. However, in Korea, it is deemed impractical, as directors would require unanimous shareholder consent to apply any director liability exemption, which is significantly challenging. There are also concerns about a potential increase in shareholder derivative suits and accusations of breach of trust in Korea.