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&#91EDITORIALS&#93Beware the frivolous suits

Published: 25 Jul. 2003, 00:36

A bill providing for class action lawsuits has been passed by the subcommittee of the national Assembly’s Legislation and Judiciary Committee. When the bill finally becomes law in July, 2004, there will be a way to fight corporate crimes, such as book-rigging, stock price manipulation and false disclosures. Majority shareholders will no longer be allowed to ride roughshod over small shareholders, who will be protected. Transparency of management will be enhanced and the international credibility of Korean businesses will be boosted. Corporations must prepare for the law.
We have recognized first the positive side of the law. But, as there are shadows where there is light, worries abound over the side effects, such as abusive and frivolous lawsuits. Since a successful lawsuit benefits the entire class of litigants, shareholders will be easily induced to join a class-action suit. Strong measures are needed to check abusive suits. To this end, the assembly inserted a provision limiting representatives and proxies to a lawsuit. But the provision is so loose that any shareholder or law firm can bypass the clause. If someone wants to exploit businesses for personal interest, he can easily abuse the system.
The stock market reacts more sensitively to minor rumors or other outside factors than it does to rational market analysis. If a company is engaged in a class-action lawsuit, its stock price will plummet, financing will become difficult and its survival will be seriously threatened. Even after winning the lawsuit, the company can be left in a shock from which it might not survive. Even in the United States, where the mechanism for class-action suits is well established, the system has gone through several revisions because of the nasty side effects.
In view of such shortcomings, the system should be complemented with a provision that can prevent abusive lawsuits before going into effect. We should not neglect the side effects that are inherent in this law, letting them jeopardize healthy business activities and damage the national economy. An economy is not a subject for an experiment.