[EDITORIALS]Draft Class Action Law With Care

Last weekend, the Ministry of Justice and the Ministry of Finance and Economy unveiled the first draft of legislation approving class action lawsuits for securities-related infractions. The initiative is gaining momentum coincident with the scandal involving Lee Yong-ho, the president of G&G, a corporate restructuring corporation, who was charged with stock manipulation. But if the introduction of law providing for class action is intended to enhance transparency in corporate management, protect investors and prevent abuse of the law, the government must review the law and the scope of its application.

The first draft stipulates that large corporations with more than 2 trillion won ($1.54 billion) in assets are subject to class action lawsuits if they are found guilty of false financial disclosures or book rigging. In the case of stock price manipulation, all companies are potential targets of class action as long as they are listed on the stock market.

If book manipulation is subject to class action lawsuits starting from next year, few companies will survive intact since the practice is still prevalent among corporations. When the Kim Young-sam administration introduced the law that bans using pseudonyms in making financial transactions, a two-year grace period was added to cushion the impact. Similar complementary measures are necessary for the introduction of class action lawsuits.

The regulations for stock price manipulation, by nature, will target mostly companies based on new technologies. In this case, companies that are vital for the economic future of Korea, such as information technology firms or biotechnology companies, could be hit hard.

Before introducing class action lawsuits, the government must stipulate the boundaries of application and conditions. The government should collect various opinions and use them to to put together a final draft.