As communicated in previous newsletters, two amendments to the Korean Commercial Code (the “KCC”) have been enacted and implemented in succession. The first amendment introduced directors’ fiduciary duty to protect shareholders’ interests (Link), while the second amendment mandated cumulative voting for large listed companies and expanded the separate election of audit committee members (Link). The third amendment to the KCC, which is currently being promoted by the government, seeks to require the cancellation of treasury shares, among other measures.
In response to these amendments, which have expanded the responsibilities of directors and executives and strengthened minority shareholder rights, the government and the Democratic Party of Korea have reviewed reforms to the criminal liability framework for breaches of the duties of care and loyalty by directors and executives in their exercise of business judgment, such as the “special breach of trust” under the KCC and the crime of “breach of trust” under the Korean Criminal Code. Unlike in other advanced jurisdictions where the liability of directors and executives is primarily addressed through civil proceedings, Korea recognizes a broad scope of criminal liability, including for breach of trust, in addition to civil liability. Such an expansive approach has drawn criticism for undermining managerial autonomy and creativity.
Accordingly, following a review by the “Task Force to Rationalize Punishment for Economic Crimes and Civil Liabilities,” the government and the Democratic Party of Korea held a meeting on September 30, 2025 and announced the first phase of the Economic Criminal Penalty Rationalization Plan, which primarily focuses on the abolition of the crime of breach of trust. The main details of the plan are as follows:
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Abolition of the crime of breach of trust under the Korean Criminal Code to protect good-faith business owners
The plan sets out the abolishment of the crime of breach of trust under the Korean Criminal Code, which has long been criticized for its vague requirements and broad application, resulting in the restriction of normal corporate management activities. To prevent any enforcement gaps for serious crimes, the government will, in consultation with expert advisors, move quickly to introduce substitute legislation. The substitute legislation is intended to clarify the elements of the crime and narrow the scope of punishable conduct.
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Easing of criminal punishment and reinforcement of financial liability
Imprisonment or criminal fines for economic crimes under the current law will be replaced by punitive damages or administrative fines, shifting the focus from criminal punishment to financial liability.
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Reclassification of minor violations from “criminal punishment” to “administrative fines”
Criminal penalties for minor violations committed by the general public, such as SMEs and small businesses, in the course of economic activity will be replaced by administrative fines.
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“Administrative measures first, criminal punishment thereafter” approach
When legislative objectives can be achieved through administrative measures, such as correction orders or restoration orders, these measures will be imposed first. Criminal sanctions will only follow after failure to comply with these administrative orders.
The government and the Democratic Party of Korea announced that they will continue their efforts to rationalize the sanctions regime for economic crimes by immediately beginning to identify and discuss further measures following this announcement.
If, in line with the government’s policy, both the crime of breach of trust under the Korean Criminal Code and the special breach of trust offense under the KCC are abolished, the scope of personal criminal liability for directors and management (including major shareholders and “persons who direct the execution of business affairs” under the KCC) for breaches of duty resulting in losses to the company or its shareholders could be significantly reduced. In such cases, civil liability, such as in the context of shareholder derivative actions under Article 403 of the KCC or direct shareholder lawsuits, would largely remain as the available remedy. Consequently, the burden of preemptively assessing risk and defending such cases for directors and executives may be substantially alleviated. Additionally, concerns over the criminal process, including search and seizure, witness or reference questioning, and detention, would also likely be diminished. In practice, if the crime of breach of trust is abolished, ongoing criminal trials related to this offense could be subject to dismissal under Article 326, Subparagraph 4 of the Criminal Procedure Act, and ongoing investigations could be dropped, as well.
However, as avenues for redress through criminal liability would become limited, there may be an increase in civil litigation, including shareholder derivative actions as mentioned above. Accordingly, complementary protections, such as directors’ and officers’ liability insurance, are likely to become more important. In particular, with the government’s concurrent announcement to introduce a punitive damages system, the potential amount of civil damages could also expand.
It should also be noted that the government intends to promptly enact substitute legislation to prevent any gaps in the prosecution of major crimes. The government has stated that such substitute legislation, which will be developed with the input of experts, is expected to clarify the elements of the crime of breach of trust and narrow the scope of punishable conduct. Therefore, rather than a complete abolition, there is a possibility that the law will be revised to limit or specify the elements of the crime, and it will be important to closely monitor these legislative developments.
As outlined above, while moving to abolish the crime of breach of trust as a supplementary measure in response to the expansion of duties of directors and executives under the amended KCC, the government has reiterated its commitment to further amend the KCC to improve corporate governance and protect the rights of minority shareholders. Of particular note is the ongoing issue regarding the cancellation of treasury shares – which, as previously discussed, has remained controversial and has led to a recent precedent-setting court injunction (Link). At the Korea Investment Summit held at the New York Stock Exchange on September 25, 2025, President Lee Jae-myung introduced an additional proposal to amend the KCC. He explained that these amendments would include reforms to the tax system to encourage greater dividend distributions and measures to prevent abusive, self-interested practices, such as the acquisition of treasury shares for management entrenchment. This signals the government’s continued commitment to pursue a KCC amendment mandating the cancellation of treasury shares, and thus, it will be important to closely monitor the progress of these legislative developments.
As noted in our previous newsletter, the scope of listed companies required to disclose the holding status and disposal plans of treasury stock has been significantly broadened through strengthened disclosure requirements. Once the strengthened disclosure requirements are enacted, companies must, following resolution of the board, disclose this information in business reports, with the frequency of disclosures increased to twice annually. As a result, careful oversight of board resolutions and disclosures has become even more critical (Link). Furthermore, if a third amendment to the KCC – including the mandatory cancellation of treasury shares – is enacted, listed companies will need to pay careful attention to a wide range of areas, including investor relations, the disclosure and implementation of shareholder return plans, the conduct of general shareholder meetings, and improvements to board decision-making processes.
We will continue to provide ongoing updates regarding follow-up legislation and market trends related to amendments to the KCC and corporate governance regulations.
