Remove the ambiguity of the revision first

Shareholders can be protected only when companies play their due role.

Eight business-interest groups, including the Federation of Korean Industries and the Korea Chamber of Commerce and Industry (KCCI), submitted joint petitions to the government and the National Assembly to oppose an amendment in the Commercial Code to expand board directors’ duty of loyalty to shareholders. They claimed the move can undermine the Commercial Code framework, contradict with the global standard and infringe on everyday management activities.

Article 382-3 of the Commercial Act defines the fiduciary duty of a board directors as performing “in good faith for the interest of the company.” The government wants to add “shareholders” to the statement as part of its “value-up program” to correct the undervaluation of Korean stocks and better protect the rights of minority shareholders. Board directors avoided accountability when general shareholders’ interests were hurt by unwanted mergers, stock splits and business decisions favoring the owner’s family or largest shareholders.

Business associations fear that companies could become cautious in risk-taking ventures and investments. Since an investment’s purpose and the expectations for returns differ by shareholders, they can find fault with management decisions, such as investments and restructuring, under the name of propping up corporate value, stocks and convertible bond issuances for fundraising, treasury stock disposals and retained earnings. This would make board directors fret over a breach in their “loyalty” duty and become easy targets for activist funds.

If a company is exposed to frequent lawsuits, its competitiveness and business management could be harmed. It can become passive in mergers and acquisitions (M&A) in fear of judiciary risks. According a survey on 152 listed companies by the KCCI, more than half answered that they would withdraw or reconsider their M&A plans if the revision passes.

Business lobbies claim that shareholders can be protected under existing laws. Regardless, companies have acted contradictory to general shareholders’ interests. Still, the concerns of the business community should not be neglected. The government and legislature must thoroughly study potential side effects and balance protecting the rights of shareholders and companies. The principles of business decisions and exemptions on loyalty duty must be defined. The clause addition must not be exchanged for the abolishment of the crime of a breach of trust, as they are separate issues.

An overly comprehensive, ambiguous duty to shareholders only adds uncertainty and harms shareholders’ interests. The government must find a solution to enhancing shareholders’ rights without causing harm to enterprises. Shareholders can be protected only when companies play their due role.