[CON] Prepare first, then apply the rule

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[CON] Prepare first, then apply the rule

* Misappropriation charge should not apply to big business

In the name of “economic democratization,” the latest buzzword, there have been calls for stricter punishment of embezzlement and misfeasance. Some claim that the application of misappropriation charges would unduly restrain corporate management and investment. In academic circles, some call for a legal clause to exclude legitimate business judgments from misfeasance charges.

The business judgment rule is a legal principle developed in the United States according to case law. In Korea, while the rule not stipulated in text, some judicial precedents have at least partially applied it. According to those who want to introduce a business judgment rule in cases where misfeasance is charged, the misfeasance crime in commercial law suggests that a civil case adjudicated according to criminal law could violate the “no penalty without a law” principle. However, this reasoning risks exempting the illegal activities of conglomerates as well.

Before introducing the business judgment rule, the following preconditions must be considered. In order to understand the business judgment rule, it is first necessary to understand the accountability of corporate boards of directors. An individual entrusted with another person’s assets has the duty of trust, or fiduciary duty.

This responsibility includes the duty of care and duty of loyalty. The two duties are distinguished based on whether the person who has made the decision has any conflicts of interest. Here, the area protected by the business judgment rule violates the duty of care, which does not involve conflicts of interest. At the same time, violations of duty of loyalty are not protected by the business judgment rule.

If the individual who has participated in the decision-making process of the company made a decision in good faith with no conflict of interest, the court cannot hold the person accountable under the business judgment rule, even if the decision resulted in a loss to the company. However, if that person has any personal interests in any form, the court would perceive the decision to be influenced by self-interest and review not just the outcome of the decision, but also the decision-making process. The legal term is “entire fairness.” In other words, if there is any conflict of interest, the business judgment rule is not applied from the beginning.

How is misfeasance on duty treated in Korea? Few executives and directors charged with misfeasance are free from conflicts of interest.

In other words, most misfeasance cases in Korea are violations of duty of loyalty caused by prioritizing personal interests over the interests of the company or shareholders. Therefore, it is a dangerous idea to grant protection of the business judgment rule without an accurate understanding of the distinction between duty of care and duty of loyalty.

If the business judgment rule must be introduced in the commercial law, there needs to be a few preconditions. Most importantly, procedural obstacles should be removed. Multiple derivative suits or shareholders’ derivative suits based on the exclusive right of stockholders should be recognized.

Also, in duty of loyalty violations, procedures should be revised so the responsibility of proof is shifted from the plaintiff to the defendant. If the plaintiff is responsible for proving the violation and protected by the business judgment rule, the defendant would be at a great disadvantage.

Once legal measures are prepared for those at loss to file for sufficient and fair legal remedy to the responsible individual, the introduction of the business judgment rule can be discussed. Inciting citizens without proper understanding of the legal principles is hardly desirable.

* The author is an attorney and a member of the Solidarity for Economic Reform.
By Lee Ji-su
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