Assembly passes bill to expand corporate board’s fiduciary duty to shareholders

The National Assembly on Thursday passed a bill to hold company directors accountable for causing harm to general shareholders through their decision-making in the boardroom, despite strong opposition from the ruling conservative party and business groups.

The amendment to the Commercial Act was approved with 184 votes in favor, 91 against, and four abstentions, with 279 lawmakers of the 300-seat Assembly present during the plenary session.

The gist of the amendment to the Commercial Act is to expand the scope of directors' fiduciary duties from solely serving the "company" to both "the company and its shareholders." It specifies that directors must act in the interests of "all shareholders," rather than favoring specific individuals, which could include founding families of chaebol groups that exert significant control over South Korea's economy.

It also required listed companies to hold electronic general shareholders meetings along with offline meetings to facilitate minority investors’ easier access to vote on important matters related to the firms.

The main opposition Democratic Party of Korea expects that revising the Commercial Act to better align shareholder and corporate interests will help address the "Korea discount," the persistent undervaluation of the country's equity market.

“Company directors must make decisions for the benefit of the company and all shareholders, and if they act wrongly, they must take responsibility for it. This is a declaration of those basic principles,” said Rep. Oh Gi-hyoung of the Democratic Party of Korea.

Minority shareholders and civic groups have argued that mismanagement and corporate risk could be reduced if management acts responsibly under shareholder supervision.

Lawmakers of the ruling People Power Party, who locked horns with the liberal main opposition until the last minute of voting, contended that the amendment would delay corporate decision-making and exacerbate legal risks.

The People Power Party leadership plans to suggest that acting President Choi Sang-mok exercise his veto power.

With the passage of the revision, business groups immediately expressed regrets.

"If the scope of the duty of loyalty of directors is expanded to include shareholders, mergers and acquisitions, large-scale investments, etc. will be hindered due to an excessive number of lawsuits by shareholders claiming disadvantages in the management decision-making process, which will inevitably hinder the long-term development of companies,” the Federation of Korean Industries said in a statement.

The business lobby group argued that the amendment will bring about activist funds' excessive dividend demands and management intervention, and that short-term profit-seeking behaviors will become more frequent.

The Korea Chamber of Commerce and Industry expressed concerns of the amendment creating a harsh regulatory environment, potentially discouraging global companies from investing in the country.

“We hope that the National Assembly will once again have an opportunity to carefully reconsider the impact of the amendment to the Commercial Act on the national economy,” it said.

Prior to voting on the bill, Lee Bok-hyun, head of Financial Supervisory Service, emphasized the importance of enhancing clarity and predictability regarding potential revisions to the Commercial Act to prevent excessive criminal liability for corporate management decisions.

“(The revision of) the Commercial Act is limited to a declaration of principled shareholder protection obligations. It is necessary to examine whether it overlooks various problems that may arise during actual revision,” he said.

Lee reaffirmed his position that the passage of the amendment could result in an influx of lawsuits against companies. He called for the abolition of the “special breach of trust” provision under the Commercial Act, which imposes penalties of up to 10 years in prison or fines of up to 30 million won ($20,600) when a director, executive officer or member of the auditing committee causes harm to the company by obtaining personal profit or benefiting a third party.

Analysts welcomed the passage, expecting the move to address shareholder losses caused by the prioritization of controlling shareholders' interests.

“It is expected that the amendment will sufficiently consider the rights of general shareholders in the decision-making process of directors and increase the transparency and reliability of the stock market as a whole,” commented Lee Kyung-yeon, an analyst at Daishin Securities.

“In the long term, it will be an important starting point for the Korean capital market to advance to a global level.”