The government and the Democratic Party of Korea (the “DPK”) continue to promote amendments to the Korean Commercial Code (the “KCC”). Following the mandatory cancellation of treasury shares, they are now considering amendments to the criminal liability framework concerning duty of care and other fiduciary duties of directors and management, namely the abolishment of breach of trust under the Criminal Code.

As discussed in a previous newsletter (Link), the first and second amendments to the KCC have been legislated and implemented to protect shareholders’ interests by strengthening directors’ fiduciary duties and to enhance minority shareholders’ rights.

Following the first and second amendments to the KCC, a third amendment is under discussion to mandate the cancellation of treasury shares. Gi-Hyeong Oh, the Chairman of the DPK’s KOSPI 5000 Special Committee, proposed a comprehensive bill to amend the KCC to mandate such cancellation of treasury shares on November 25, 2025. The bill clearly stipulates the principle that a company’s treasury shares should not be deemed its assets and should instead be deemed unissued shares. Accordingly, treasury shares in general are to be cancelled within one year from their acquisition by the company (while an additional six-month grace period will be accommodated in the case of existing treasury shares). Only in exceptional cases, such as for employee compensation, treasury shares may be retained and disposed of with an approval from the general shareholders’ meeting. Provided that, for such disposals of treasury shares, procedures similar to those for new share issuance must be followed to ensure that all existing shareholders are given the opportunity to participate in any such disposals on a pro rata basis.

In addition to the expansion of directors’ and management’s fiduciary responsibilities and the strengthening of minority shareholder rights pursuant to the prior KCC amendments, the government and the DPK have been reviewing potential improvements to the criminal liability framework concerning duty of care and other fiduciary duties of directors and management as well, specifically regarding special breach of trust under the KCC and breach of trust under the Criminal Code. Unlike other advanced legal systems that primarily provide redress through a civil lawsuit, Korea has broadly recognized criminal liability in addition to civil liability for breach of trust charges, despite concerns that criminal liability is excessive and hinders management autonomy and creativity.

Following the review by a task force for the rationalization of criminal penalties for economic crimes, the government and the DPK held a government-party consultation meeting on September 30, 2025.  Thereafter, they announced their “Initial Proposal to Rationalize Criminal Penalties for Economic Crimes” (the “Initial Proposal”), which primarily includes the abolition of criminal penalties for breach of trust as a key component. The Initial Proposal may be summarized as follows:
 

• Protect good-faith business operators by abolishing liability under the Criminal Code for breach of trust
   

• Abolish criminal liability, but increase monetary penalty
   

• Administrative action with corrective orders to precede criminal penalty
   

 If, in accordance with the announced government policy, both (i) breach of trust violations under the Criminal Code, and (ii) special breach of trust violations under the KCC are abolished, the scope of criminal liability of individual directors and management may be significantly reduced. Still, civil liability remedies such as shareholder derivative lawsuits or direct shareholder lawsuits under Article 403 of the KCC would remain available to address damages incurred by a company or its shareholders due to breaches of fiduciary duties by directors or management (including by major shareholders or others directing business operations). Nonetheless, while civil liability will persist, the reduced criminal liability is expected to considerably lessen the burden of preemptive risk assessment and post-event liability defense for business operators in Korea. Absent criminal liability, concerns related to criminal investigative procedures, such as seizures, searches, witness and reference investigations, and detentions, would also be largely alleviated. Additionally, if criminal liability for breach of trust is actually abolished, pending criminal trials on breach of trust charges may be subject to dismissal pursuant to Article 326 (4) of the Criminal Procedure Act while ongoing investigations may be closed without prosecution.

Conversely, the limitations to criminal recourse as a means of accountability may lead to an upsurge in civil lawsuits, such as shareholder derivative actions, thereby heightening the need for supplementary commercial risk management solutions, such as directors and officers (“D&O”) liability insurance. Afterall, with the announced introduction of punitive damages, the scope of civil damages liability may be expanded.

Furthermore, the substitute legislation that the government intends to prepare with expert consultation, aimed at clarifying the elements of a breach of trust violation and narrowing its scope of punishment, may turn out to be a mere revision of the breach of trust crime with more limited conditions, rather than a complete abolishment. All in all, it will be necessary to monitor further legislative developments.

In addition, following the first and second amendments to the KCC, the third amendment proposing the mandatory cancellation of treasury shares held by companies is expected to bring about significant changes to corporate governance practices. Listed companies have much to consider as they manage investor relations and communications, treasury share acquisition and shareholder dividends, responses to minority shareholder proposals and proceedings with respect to general meetings of shareholders, as well as the operational and decision-making processes of their boards of directors and board committees.

[Korean Version]