Newsletter | December 2014, Issue 4
	Litigation
	CEO found innocent of charges of breach of fiduciary duty based on a defense of reasonable business judgment, despite substantially lower fees charged to a subsidiary
	Recently, the Korean court dismissed charges brought against a CEO of a company who had been indicted for (i) criminal breach of fiduciary duty and (ii) violation of the Monopoly Regulation and Fair Trade Act (the “FTA”), for deciding to apply substantially lower sales commission rates in certain sale and purchase agreements between the company and its affiliates.
	The charges were based on the alleged fact that the accused CEO had caused his company to suffer losses while allowing affiliates to enjoy gains by setting substantially lower sales commission rates to those affiliates, which in turn was an unlawful support of such affiliated companies that was “likely to impede the fair transaction in market” in violation of the FTA.
	The Korean courts have developed and applied established legal principles regarding the elements required for the finding of breach of fiduciary duty where the business judgment of management resulted in substantial damages to the relevant company.  The Korean courts consider the totality of the circumstances, including circumstances and motivations leading to the business judgment at issue, the nature of the business, economic conditions faced by the company, and probability of damages and gains.  The court’s finding of guilt or innocence would depend on the degree with which defense was able to explain and persuade the court of the reasonable nature of the business determination at issue, within such framework, and defendants generally faced an uphill battle in trying to convince the court of the reasonableness of his/her business decision where the company at issue had incurred actual damages.
	In this case, the court dismissed the charge of breach of fiduciary duty based on: (i) the unique circumstances regarding the sale and purchase agreements in question, in that they were for products targeted to attract customers to the overall brand, at very low profit margins; (ii) contrary to the assertions of the prosecution, there was no established level of minimum sales commission rate at the time (which the company in question had allegedly failed to charge vis-a-vis its affiliates); (iii) there were other instances where the company had offered discounts regarding certain products to attract customers, even at the risk of suffering losses; and (iv) there were also instances where other rival companies set very low sales commission rates in order to allow stores to offer a diverse range of products to the customers.
	As for the charges of violation under the FTA, this charge was also dismissed on grounds that the prosecution failed to show that there existed “normal/prevailing” sales commission rates, which would have been the basis for determining that the company had rendered unlawful support to its affiliates in violation of the FTA.
	Kim & Chang successfully defended the accused CEO by engaging in in-depth analysis of the market conditions and prevailing commission rates, and was able to persuade the court that the rates charged to its affiliates was based on a reasonable business judgment.  This case is expected to serve as an important precedent in future cases regarding the applicability of the business judgment rule.
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