Listed companies A, B and C, belonging to the same company group, are controlled by the group’s chairperson through a circular shareholding structure, where Company A holds shares in Company B, Company B holds shares in Company C, and Company C holds shares in Company A (instead of the chairperson directly having controlling shares in each affiliate).

Between 2006 and 2014, to strengthen its control over Company B, Company A entered into a number of contracts, including derivative contracts, whereby it was agreed that “a counterparty shall hold the shares issued by Company B during the term of the contract and exercise its voting rights acting in concert with Company A, in return for which Company A shall pay a commission to the counterparty.” In addition, the parties agreed to “settle any difference between Company B’s stock price at the time of maturity and the time of execution of the contract” to ensure that the counterparty remains economically neutral for holding Company B’s stock. However, Company A faced a significant risk of incurring losses by executing the aforementioned contracts, as Company B’s business prospects were unfavorable due to a global oversupply. Company B’s stock price declined sharply after it implemented a restructuring plan led by its creditor financial institutions due to its sluggish business and financial difficulties, and as a result, Company A had to pay out huge amounts to cover its counterparty’s losses for holding Company B’s stock, in addition to paying commissions.

On behalf of a global manufacturing company, which is the second largest shareholder of Company A, Kim & Chang filed a derivative lawsuit in 2014 against Company A’s representative director and the company group’s chairperson, who is also a director of Company A, seeking monetary damages on behalf of Company A. By analyzing and researching publicly disclosed materials such as business reports, obtaining orders for document production, and conducting witness examinations, Kim & Chang endeavored to prove that Company A’s representative director and the group’s chairperson had violated their fiduciary duty as directors.

After more than nine years of continued efforts, the Seoul High Court rendered a decision in 2019, finding that the defendants (Company A’s representative director and the group’s chairperson) breached their fiduciary duty and ordered the group’s chairperson to pay KRW 170 billion plus interest for damages incurred by Company A. The decision became final and conclusive on March 30, 2023 when the Supreme Court dismissed all appeals to the Seoul High Court’s decision.

This court decision, which awarded the largest monetary damage for a director’s liability in a derivative action up to date, is a landmark case because it distinguished the interests of the chairperson of a company group and the interests of the company itself, as well as clarified how a company’s directors should act in order to exercise their fiduciary duty based on this distinction.

In this decision, the Supreme Court emphasized that (i) in principle, the benefits that are potentially gained from (and can justify) a director’s business decisions must be specific and realistically attainable, and such benefits must not be based on general or vague expectations that are not commensurate with the costs or risks borne by the company, and (ii) as affiliates in a company group are independent legal entities, directors of such individual companies owe a fiduciary duty to the respective company to which they belong even when conducting matters related to the company group (as a whole) or other affiliates within the company group.

In particular, in the case of a large company group, maintaining the existing owner’s control over the entire company group cannot necessarily be deemed to be directly in the interests of the affiliated companies. The Supreme Court held that such an argument can be recognized only after a strict review process that includes comparing the profits and losses of individual companies under the current controlling structure with those attained when a third party becomes the new controlling shareholder. The analysis in this process also includes the current controlling shareholder’s management strategy, corporate culture, socioeconomic importance of the company’s business, whether the existing business will continue if a third party acquires management control, and whether maintaining the current shareholder’s management control will benefit the company and its common shareholders or if there is a special social need for maintaining the current control structure.

This decision is meaningful in that it sets out key points in the decision-making process for directors of a company belonging to a company group, specifying the criteria for directors’ duty of care and the duty of royalty in deciding whether to invest in an affiliate’s shares. Furthermore, the decision has highlighted the need for a more thorough compliance system and internal control measures when it comes to transactions involving a group owner’s retention of control over a company group or the succession of a family business, such as conducting a prudent analysis of the profits and losses of affiliates based on specific and objective data. This decision will likely encourage companies’ board of directors and individual directors to take a more active role and require directors to show greater accountability in company affairs.