Business lobbies decry gov't push to revise corporate good faith law

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Business lobbies decry gov't push to revise corporate good faith law

Published: 24 Jun. 2024, 17:54

SHIN HA-NEE
shin.hanee@joongang.co.kr

Financial Supervisory Service Gov. Lee Bok-hyun speaks during a seminar on corporate governance structure held in western Seoul on June 12. [YONHAP]

Korea’s business lobbies issued a joint statement on Monday opposing the government’s latest drive to expand the scope of responsibility for corporate board directors, warning that it could increase legal risks posed by shareholder activists.

The proposed revision of the Commercial Act aiming to extend “the duty of loyalty” imposed on board directors to protect shareholders is part of the government-led value-up initiative designed to resolve the chronic undervaluation of domestic stocks, a phenomenon known as the Korea discount.

Monday's statement was put forward by eight business lobby groups including the Federation of Korean Industries, the Korea Chamber of Commerce and Industry, the Korea Enterprises Federation and the Korea Listed Companies Association.

The revision proposed by the government will “undermine the current legal structure, contradict the global standard, significantly increase legal risks involving a criminal breach of trust, and cause huge confusion in daily business operations such as financing or decision-making,” the business lobbies said in the statement.

“Moreover, even if the revision is enacted, it is doubtful whether the revised law would be able to offer better protection for minority shareholders.”

Under the current law, board directors are subject to a duty of loyalty to the company, compelling them to prioritize corporate well-being over personal gains in decision-making. The government aims to expand the clause to obligate directors to serve the interests of not only the company but also all shareholders in a bid to prevent the owners of major stakes — such as a company's owning family — from sacrificing gains for minor shareholders for their own financial benefit.

Such a scenario played out when LG Energy Solution’s split-off from LG Chem and subsequent initial public offering in 2022 brought down the parent company’s share prices, resulting in a conflict-of-interest situation between the retail shareholders of LG Chem and the company. The LG Energy Solution-LG Chem outcome, as a result, spurred discussions surrounding the revision of the Commercial Act.

The lobby groups argued that the revision would slow down the decision-making process and further expose companies to attacks from activist shareholder funds. Moreover, it may enable minor shareholders to file criminal complaints against board directors alleging a breach of trust.

They also claimed that there is no global precedent in which the interests of a company and its shareholders are classified separately.

On the other hand, Financial Supervisory Service Gov. Lee Bok-hyun has been a strong advocate of the revision, even floating the idea of abolishing a criminal breach of trust clause in exchange.

“There are frequent cases where [corporate decision-makers] prioritize the interests of the company or specific individuals rather than all shareholders, such as with a split-off and consequent listing of a subsidiary,” said Lee in his remarks during a seminar earlier this month, adding that “we have reached a point where we need to begin discussing measures to extend directors’ duty of loyalty to both the company and shareholders.”

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]