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Compromise clears way to class-action suits in ’04

June 03,2003
The controversial proposal to legalize class-action financial lawsuits moved closer to legislative approval yesterday when the Roh administration and the ruling Millennium Democratic Party agreed to a major legislative condition demanded by the opposition Grand National Party, which controls Korea’s legislature.
Conservative and champions of Korea’s business community, the opposition had demanded that the implementation of such suits be postponed for at least one year after the legislation is approved.
There have been several compromises by both sides of the issue. The business community has abhorred the idea of class-action suits, but the conservative opposition, with memories of the reform fever that swept Roh Moo-hyun into office last December still fresh, eventually agreed to the concept of holding businesses financially accountable to stockholders for financial crimes.
The administration and its legislative allies conceded the political necessity of a delay in the implementation date, but also agreed to scrap a provision that would limit the system’s application to only the biggest firms in the country. The latest agreement, which involved some dramatic changes in position over the history of the politically-charged issue, would apply to all companies listed on the country’s stock exchanges.
“By limiting targeted companies to those with 2 trillion won [$1.7 billion] or more in assets, the proposed law posed problems in fairness,” Yim Tae-hee, a senior Grand National Party lawmaker, said yesterday after a meeting where the compromise was hammered out. His party had dropped its insistence on a ceiling in April, and the ruling party, which had originally suggested the ceiling as a way to defuse opposition to the overall plan, went along.
Kim Hyo-seuk, a ruling-party lawmaker who chairs an economic committee in the Assembly, said the price for a deferral was to apply the law to all publicly traded firms. He suggested that the party could even accept a deferral of more than one year; further negotiations on the grace period would be necessary, he said.
The business community has conceded that the legislation will pass in some form, but wants as long a delay in implementation as possible.
“At least two years of grace before implementing class-action lawsuits on charges of accounting fraud would be appropriate,” said Yang Se-young, a deputy director of the Federation of Korean Industries, a business advocacy group that defends the interests of Korea’s conglomerates. “Companies, the courts and the financial authorities need time to prepare.”
Earlier, Mr. Kim of the ruling party had ruled out any grace period. “It would be impossible to correct accounting manipulation in one or two years,” he had said recently. “Setting a grace period for accounting fraud would have the same effect as overlooking new accounting manipulations.”
If all publicly traded companies on the Korea Stock Exchange and the secondary Kosdaq exchange are fair game, the scope of the new legislation would be much broader than earlier proposals.
Only two of the 91 companies investigated or indicted for stock-price manipulation by prosecutors between January 1998 and August 2001 had more than 2 trillion won of assets, according to People’s Solidarity for Participatory Democracy. The civic group has championed the lawsuits.
“Few companies that have 2 trillion won or more in assets are involved in stock-price manipulation,” said Kim Joo-young, an attorney at Hannuri, a law firm. “It takes a large number of shares and enormous costs to manipulate stock prices.”
The 2-trillion-won limit would have also barred the door to most suits to counter bookkeeping manipulation. From January 1998 to August 2001, only 16 of 185 companies that were punished by the Financial Supervisory Service for accounting fraud met that asset test, and only 11 of those 16 were publicly-traded firms, the civic group said.
The same is true of another basis for class-action suits, failing to disclose required information, or making misleading disclosures. According to the Financial Supervisory Service, only three companies out of 92 investigated by the financial watchdog in the past three years had 2 trillion won in assets.
“Accounting manipulation can be a leading cause of damage to shareholders, and it also affects the creditworthiness of the Korean economy,” Mr. Kim of Hannuri said. He cited SK Global Co.’s massive accounting fraud that sent shock waves through the economy.
Although both parties and the administration have agreed to postpone the effective date of the proposed law, many contentious issues remain.
The opposition party has proposed that plaintiffs in class-action suits be required to deposit a bond of up to 50 million won. The intent, they say, is to deter false or malicious accusations. The government wants those deposits limited to a token 200,000 won.
The opposition proposal requires the lead plaintiff to send a series of notices to all shareholders at an estimated cost of 1 million won for each mailing. It also wants minimum limits set on the share holdings of plaintiffs who seek to file such suits.
“Owning a certain amount of shares should be a precondition for filing a class-action lawsuit,” said Mr. Yang of the Federation of Korean Businesses. “Holding a single share or 50 shareholders owning 50 shares is not enough to file a lawsuit to seek compensation.”
Mr. Yang declined to name a figure that he would consider an acceptable minimum holding.
The business community fears that the impact of class-action suits would be devastating. Even though the class-action system would not be applied retroactively, tricky bookkeeping has been a long-established practice here. Indeed, even Shin Jong-ik, a senior official at the Federation of Korean Businesses, recently estimated that between half and 70 percent of Korean firms have been involved in accounting fraud.
Kim Joo-young of Hannuri added, “Companies are afraid that class-action lawsuits would eventually be applied in other areas,” not just in accounting fraud, disclosure and stock manipulation.
Unraveling murky accounting practices in a short period of time would be difficult, many accountants concede, and businesses worry that irate shareholders could spot such attempts to clean up a firm’s books.
Some legal professionals, however, are skeptical about the impact of such suits even if they are allowed by legislation. Mr. Kim at the Hannuri law firm predicts that cases will drag out for years until a legal decision is handed down, threatening to bankrupt or discourage shareholders from following their legal actions through to the bitter end.
“In the United States, most class-action cases are concluded by legal settlement between shareholders and companies. They rarely proceed until the court reaches a verdict,” Mr. Kim said. He added that tenacious Koreans could force legal costs of several hundred million won and take up to five years to conclude.
In Korea, he said, lawyers usually receive only 5 or 10 percent of a settlement if they handle a case on contingency, and they get paid only if their clients win their suit.
“In Korea, a relatively lower share of damage lawsuits are resolved with settlements than is the case in other countries,” said Kim Sun-woong, an attorney at the Center for Good Corporate Governance.
Mr. Kim added that plaintiffs here tend to try to recoup all their losses rather than settle a case through an out-of-court settlement. He predicted that small shareholders would be most interested in such suits because most major shareholders in Korean companies have personal or business ties, including creditor-borrower relationships, and would be leery of punishing companies they have an interest in.
“Most institutional investors have done nothing to improve corporate governance,” Mr. Kim said. “If companies have problems, the institutional investors just sell their stakes in those companies.”


by Limb Jae-un


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