As the South Korean government shows signs of amending the duty of loyalty in corporate law as part of its “Corporate Value-up Program,” the business community is strongly opposing the move. Under current law, corporate directors are required to “perform their duties faithfully for the company,” but the government aims to include a provision to protect general shareholders by requiring directors to also consider the interests of shareholders. The business community is concerned that this could lead to excessive litigation and hinder bold investments for the future.
On June 12, Lee Bok-hyun, chief of the Financial Supervisory Service, attended a seminar on “Corporate Governance for Capital Market Advancement” in Yeouido, Seoul, hosted by the Korea Capital Market Institute and the Korean Securities Association. He said it is time to discuss amending corporate law to include shareholders in the duty of loyalty, noting that there are still frequent cases where only the interests of the company or specific individuals are pursued, such as in split-offs. He also suggested that codifying the “business judgment rule” would not place a significant burden on companies, given Korea’s unique management environment. The business judgment rule stipulates that directors are not liable for damages to the company if they have fulfilled their duty of care.
However, the business community fears that concerns about shareholder lawsuits due to stock price declines will significantly discourage future investments such as mergers and acquisitions. A senior business executive remarked that investments like Hyundai’s robotics venture or Orion’s biotech investment would be impossible under the revised law. Lee Byung-tae, a professor at KAIST, expressed concerns about the formalization of the business judgment rule, noting that determining whether a decision was a legitimate business judgment or a breach of duty would ultimately be decided through litigation, posing a significant risk for those involved.
The seminar primarily featured presentations supporting the need for the proposed corporate law amendments. Professor Kim Woo-jin from Seoul National University highlighted that practices such as funneling business to dominant shareholders’ companies, issuing convertible bonds and bonds with warrants at low prices, and unfair mergers between listed and private companies are results of prioritizing major shareholders’ interests. He argued that fundamental regulations should be established in corporate law to address these issues. Professor Na Hyun-seung from Korea University emphasized that controlling shareholders using their affiliate stakes to exercise absolute control and extract private benefits is a cause of the “Korea discount.” He suggested that it is necessary to specify that directors must act in the proportional interests of shareholders to protect minority shareholders.
Nonetheless, businesses argue that the proposed amendments are overly unrealistic. A senior business executive noted that stock prices can fluctuate with every investment decision, such as mergers and acquisitions, and facing litigation each time would deter anyone from making investment decisions. Long-term investments, like Orion’s biotech venture, would become more challenging. Orion’s announcement in January of acquiring domestic new drug development company LigaChem Biosciences for 548.5 billion won led to a 23% drop in stock price and a 1 trillion won decrease in market capitalization within two days. Despite being a long-term investment aimed at the next decade, the market focused only on the short-term stock price. Under the amended law, directors making such investment decisions could be sued for violating the duty of loyalty to shareholders.
There are also concerns about the difficulty in uniformly addressing the diverse interests of shareholders. Jin Sung-hoon, head of policy research at the KOSDAQ Listed Companies Association, pointed out that 90% of KOSDAQ investors are individual investors, with shareholders changing frequently, making it challenging to protect each shareholder’s interests.
Yoo Jung-joo, head of corporate systems at the Federation of Korean Industries, argued that regulations against private gains by owner families or split-offs are already sufficient. He suggested that solving the Korea discount should involve reducing regulations and supporting confident investments to foster entrepreneurship. Professor Kwon Jae-yeol from Kyung Hee University said Korean corporate law is based on the premise of a contractual relationship between directors and the company. Adding shareholders into this relationship would require a complete overhaul of the corporate law system, which he compared to burning down the entire house to catch a flea.
