[VIEWPOINT]Proposed law lacks balance

The administration and the governing Uri Party announced on Wednesday that they would revise the commercial law within this year to introduce a system under which stockholders of a parent company would be allowed to file damage lawsuits against board directors of its subsidiaries. The new legislation has the risk of being misused by parent company stockholders who may encroach upon the profits of subsidiary company stockholders.
If it is considered that a parent company and its subsidiary companies are under the same umbrella, the system will not be a big problem. But the reality is not that simple.
Under the current commercial law, a parent company in general owns 50 percent or more of the shares of its subsidiaries, and the rest are owned by a third company or individuals. Therefore, the board directors of subsidiary companies have the obligation to work faithfully, not only for the interest of the parent company, but also for the profit of other shareholders.
When the new legislation is introduced, however, if directors of a subsidiary company make profits as a result of their earnest work but cause losses to the parent company, the subsidiary directors can be charged by the shareholders of the parent company. If the commercial law is revised according to the draft prepared by the Ministry of Justice, it can result in a contradictory situation where the directors of subsidiary companies will have to pay more attention to making profits for their parent companies.
In connection with the governance of domestic companies, many people have pointed out that the vertical structure, in which subsidiary companies become subordinate to mother companies and their sacrifice becomes a prerequisite, is the problem. It can be said that the decision made at the recent consultation meeting between the administration and the governing party is in effect tantamount to justifying that vertical structure.
This is the reason why no country guarantees by law the right of parent company shareholders to file a damage lawsuit against directors of its subsidiaries. In the United States, there is a judicial precedent that only if a subsidiary company is actually part of its parent company, the corporate right of the subsidiary is denied temporarily and the shareholders of the parent company are given the right to file a damage lawsuit against directors of the subsidiary. In other words, the parent company shareholders’ right to file a damage lawsuit against directors of its subsidiary is permitted when the following conditions are satisfied: First, the parent company or its shareholders own all of the shares of its subsidiary company. Second, the management of the parent company is also managing the subsidiary company. Third, the chances of fraud or illegal activities persist if the subsidiary continues to exist. Fourth, there is confusion over assets or financial losses between the parent and its subsidiary companies.
Japan once considered a similar legislation in 2001 when side-effects occurred after the country introduced a system that facilitated the exchange and transfer of shares between parent companies and their subsidiaries, but decided to abandon the idea in order to protect stockholders of subsidiary companies.
It is hard to understand that the administration and the governing Uri Party want to introduce this system as a means of increasing directors’ liability. Of course, there are occasional cases in which some parent companies and their majority shareholders invest in their subsidiary companies and then give full support to the subsidiary company at the loss of the parent company.
It is true there is a need to take proper measures for the protection of shareholders and creditors of parent companies. However, revising the law to make directors of large number of subsidiary companies work for the shareholders of parent companies rather than their own, because of the irregularities of a few companies, is an idea that has lost balance. In the end, the introduction of a new system could be compared to a doctor who prescribes amputation of a leg because of a small boil on the toe.
Although our Supreme Court rejected the idea in 2004, the high court once allowed shareholders of a parent company to file a damage lawsuit against directors of its subsidiary. There were judicial precedents ― a high court decision in 1974, two Supreme Court decisions in 1988 and one in 2001 ― that denied the corporate rights of a business firm which its owner made bankrupt and ruled that the owner should personally compensate its creditors and stockholders.
Likewise, there is a lot of room in the existing law for shareholders of parent companies to file lawsuits to protect their profits. If the new legislation is to be introduced despite these shortcomings, I think it is reasonable to stipulate the conditions for parent company shareholders’ rights to file a damage lawsuit against its subsidiary directors, referring to the precedent set by the U.S. court.

* The writer is a professor of commercial law at Soongsil University. Translation by the JoongAng Daily staff.

by Chun Sam-hyun