1.

Current Legal Framework

Article 382-3 of the Korea Commercial Code mandates that directors perform their duties in good faith for the interest of the company, in accordance with applicable statutes and the articles of incorporation. This provision, which currently omits consideration of shareholders, has been a point of contention among shareholder activists. In particular, there is growing concern that omission of the interests of shareholders disproportionately favors major shareholders in terms of financial remuneration and control, often to the detriment of minority shareholders. This perceived imbalance is frequently cited as a contributing factor to the so-called “Korea discount,” which is the undervaluation of Korean stocks attributed to idiosyncratic factors of the Korean market.

At the same time, unique to Korea is the imposition of criminal penalties for certain acts in breach of fiduciary duties, including breach of trust, which might not have such consequences in other jurisdictions. Article 355 (2) of the Korea Criminal Code stipulates that an occupational breach of trust occurs when an individual, tasked with administering another’s business, obtains pecuniary gains or causes a third party to obtain the same in violation of his/her duty and thereby causes loss. In the event of a “breach in relation to occupational duty” or occupational breach of trust, Article 356 of the Korea Criminal Code prescribes punishment by imprisonment for up to ten years or a fine up to KRW 30 million. However, in more aggravated cases of breach, Article 3 of the Act on the Aggravated Punishment of Specific Economic Crimes prescribes more severe penalties. These include (i) imprisonment for a minimum term of three years if the amount involved is at least KRW 500 million, or (ii) imprisonment of at least five years and up to a life sentence if the amount involved is at least KRW 5 billion. A fine equivalent up to the amount of profit may also be concurrently imposed.

In one high-profile case involving fiduciary duties (i.e., occupational breach of trust), the CEO of a technology company was criminally charged following a controversial merger, which the prosecutors alleged was used to gain corporate control. The CEO faced accusations of occupational breach of trust, among other crimes, with prosecutors demanding a five-year prison sentence and a fine of KRW 500 million. After protracted litigation spanning several years, the CEO was eventually acquitted. Nonetheless, this case underscores the substantial negative impact on a company, in terms of reputational risk, time and resources, that can result from allegations of criminal occupational breach of trust against its management.
 

2.

Stakeholder Perspectives

The newly proposed bill to expand directors’ fiduciary duties to include shareholders’ interests has elicited varied responses from different stakeholders.

Corporate entities have expressed strong opposition, raising apprehension that the bill could precipitate a rise in shareholder-driven lawsuits and criminal actions for occupational breach of trust. They argue that extending directors’ obligations to individual shareholders may hinder investment initiatives addressing long-term risk, inhibit entrepreneurial ventures, and curtail management autonomy, ultimately working against the best interests of shareholders.

Conversely, financial regulators have shown support for the proposed bill. They contend that it promotes greater accountability among directors regarding corporation decisions and enhances legal protection for minority shareholders. Notably, Governor Bok-Hyun Lee of the Financial Supervisory Service has publicly advocated for the proposed amendment stating, “Corporate governance reforms are essential to ensure equitable treatment for all shareholders… Resolving the Korea discount hinges on equally protecting the interests of controlling shareholders and minority shareholders.”

In response to concerns about increased penalization of directors for occupational breach of trust, Governor Lee also suggested the potential abolition of criminal penalties for such breaches noting, “In Korea, the level of criminal punishment for occupational breach of trust is too high… If we have to decide whether to maintain or abolish the crime of occupational breach of trust, which currently targets even minor offenses, it would be better to abolish it.”
 

3.

Going Forward

In summary, the proposed bill to expand directors’ fiduciary duties to include shareholders’ interests remains a contentious issue. Given the exact scope and direction of the bill are still unclear, continued monitoring of developments is warranted. The proposed legislation, if adopted, would represent a pivotal moment in Korean corporate governance, with far-reaching implications for directors, shareholders, and the broader business environment.