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A risky overreach in corporate law

Published: 06 Mar. 2025, 00:02

Choi Joon-sun

The author is a honorary professor at Sungkyunkwan University Law School.

An amendment to the Commercial Act, which sought to expand the fiduciary duty of directors from companies to shareholders, has been put on hold after a heated debate. The Democratic Party (DP), holding a parliamentary majority, attempted to push it through the National Assembly on Feb. 27, but Speaker Woo Won-shik intervened.

The DP’s insistence on this problematic bill stems from a fundamental misunderstanding of fiduciary duty. Korean corporate law textbooks uniformly define a director’s fiduciary duty as a prohibition against misappropriating company assets for personal gain. It does not mean that directors must show allegiance to the company, nor is it primarily about protecting minority shareholders. After all, directors and shareholders have no contractual relationship. This definition aligns with global standards.

Yet, proponents of the amendment are attempting to create a uniquely “Korean interpretation” of fiduciary duty. They seek to apply it to nearly all board resolutions, including mergers, spinoffs, business transfers, dual listings, new share issuances, convertible bond issuances, delistings, comprehensive stock swaps, treasury stock acquisitions, dividend distributions, new business ventures, affiliate support and executive compensation.

The DP argues that the Commercial Act should be revised to ensure that all shareholders’ interests are protected and that directors should be subject to lawsuits if even a subset of shareholders suffer losses. Currently, approximately 69 types of board resolutions require approval under the Commercial Act. The proposed amendment would mandate that directors consider shareholder interests in every decision — a sweeping expansion of fiduciary duty unseen anywhere else in corporate law.

A corporation is, by definition, an association of individuals. In a joint-stock company, those individuals are shareholders. Thus, working for the company inherently means working for shareholders as a collective entity. Legal scholars worldwide understand fiduciary duty in this manner, making an explicit reference to shareholders unnecessary.

Even if the amendment were passed, it would not grant new rights or protections to general shareholders — they already enjoy these safeguards under existing law. However, the revision would create the illusion that minority shareholders could now file lawsuits against directors, leading to unnecessary litigation. In reality, retail investors are unlikely to engage in such lawsuits due to the high costs and uncertain outcomes. Instead, activist investors would weaponize the law, turning these lawsuits into a battleground between corporate management and shareholder activists rather than between controlling and minority shareholders.

If a shareholder sues management, accusing them of legal violations, corporate funds cannot be used for the director’s legal defense, as company resources cannot be spent on personal misconduct. However, as case law accumulates, it will become evident that the fiduciary duty of directors toward shareholders remains largely abstract and declarative, rather than granting shareholders direct claims. Directors who faithfully execute board and shareholder resolutions will ultimately win such lawsuits, but not before enduring four to five years of significant financial, emotional and time costs.

Political banners hung up in front of the National Assembly complex in Yeouido, western Seoul on Feb. 18. [JEONG EUN-HYE]

The underlying issue stems from unfair practices during corporate restructuring within conglomerates, particularly regarding merger ratios. Recognizing this, Financial Services Commission Chairman Kim Byoung-hwan proposed an amendment to the Capital Markets Act last year. Given that merger ratios are regulated under the Capital Markets Act, the proposed revision sought to calculate them based on “fair value” rather than market price alone.

Japan, for instance, mandates that merger prices be determined based on “fair value.” Amending the Capital Markets Act in this way would provide a concrete and effective means of protecting minority shareholders — far more so than the ill-conceived revisions to the Commercial Act. The reckless push to amend the Commercial Act should be abandoned immediately.

Translated using generative AI and edited by Korea JoongAng Daily staff.