As explained in our November 2021 newsletter (link), the Supreme Court overturned the lower court’s decision that held a representative director not liable for failing to monitor and supervise the acts of a company’s officers and employees in a shareholder derivative lawsuit filed against the representative director for damages incurred resulting from the company being imposed with the Korea Fair Trade Commission’s (“KFTC”) administrative fines for acts of market collusion. In addition, on September 3, 2021, in a separate shareholder derivative lawsuit involving a company that engaged in market bid rigging practices, the Seoul High Court recognized that, besides the company’s representative director, other directors and outside directors were also liable for their breach of duty to monitor, reversing the lower court’s decision that only held the representative director liable for breach of his duty to monitor and supervise.
 
In each of the above decisions, the court noted that companies need to strengthen their internal corporate control systems in order to engage in compliant management operations. Even if a director did not actively instruct or engage in illegal acts, the courts held that an absence of reasonable internal control systems aimed at preventing illegal acts such as price-fixing by officers and employees, or a director’s failing to make efforts to build and implement such systems violate a director’s duty to monitor and supervise. Those decisions have significant implications because the courts concluded that a company’s internal control systems are insufficient if they are composed of only the internal accounting control system established pursuant to the Act on External Audit of Stock Companies. Furthermore, there may be an increased risk of liability associated with the failure to observe the duty to monitor and supervise on the part of representative directors and directors, especially in cases where they are appointed as outside directors or non-executive directors of target companies through a joint venture or minority equity investment.
 
The two decisions above, which consistently acknowledged that a director has a “duty to establish a reasonable information and reporting system and an internal control system and a duty of care to ensure that such system works properly,” have been considered in the industry as the most important precedents in 2021 pertaining to corporate governance, shareholder response, and the operation of the board of directors. Taking these precedents into account, many companies have reviewed measures to improve their information and reporting system and internal control system, and multiple institutional investors are also considering a shareholder response policy that reflects those precedents.
 
In this regard, we hereby inform you of the Supreme Court’s final decision rendered on May 12, 2022 with respect to the above Seoul High Court decision rendered on September 3, 2021.
 
In the Supreme Court case, the shareholders of Company D filed a shareholder derivative lawsuit against the then-representative director E, director F and other outside directors of Company D for damages in the amount of the KFTC’s administrative fine imposed against Company D resulting from its practices of bid-rigging in the market.
 
The trial court held that only representative director E breached his duty to monitor Company D’s officers and employees.
 
However, the Seoul High Court expanded the scope of liability to recognize that the other directors (including director F), besides representative director E, also breached their duty to monitor and supervise. The Seoul High Court ruled that “even if the defendants were unaware of, could not have been aware of, or had no circumstance to suspect bid-rigging because they were not involved in or reported on the bidding for individual construction projects, the defendants (director F and others) breached their duty to monitor by failing to establish a reasonable information and reporting system and an internal control system that may have caught these illegal bid-rigging acts by the officers and employees and to ensure that such system works properly.”
 
In this regard, the above Supreme Court decision dismissed the appeal and affirmed the lower court’s decision. In addition, it set out the criteria for determining whether outside directors have breached their monitoring duty by explaining, “however, in the case of outside directors that are not in charge of the company’s business affairs, they may be recognized to have breached their duty to monitor if they (i) have failed to make any efforts to call for the establishment of an internal control system where the company does not have any such system in place, or (ii) even if the company has an internal control system, the outside directors have ignored or neglected circumstances to suspect that it is not being operated properly. The Supreme Court added, “in a case where a director is liable for damages to his/her company arising from his/her violation of laws, regulations or the company’s articles of incorporation by willful misconduct or negligence, or negligence in performing duties, the amount of damages may be limited in light of the guiding principle of the damage compensation system—i.e., equitable apportionment of damages. In doing so, the overall circumstances shall be taken into account, including the following: (i) the substance and nature of the business; (ii) the circumstances leading up to and specific aspects of the director’s breach of duties; (iii) the objective circumstances and degree of the director’s involvement in the occurrence and aggravation of the damage; (iv) the director’s usual level of contribution to the company; (v) whether the director benefited from the breach of duties; (vi) whether there exists any defect in the company’s organizational system; and (vii) whether a risk management system has been established. In this case, it is the prerogative of the trial court to find facts relating to the grounds for limiting the damages amount or determine the ratio of limitation, unless it is significantly unreasonable in light of the principle of equity to do so (see, e.g., Supreme Court Decision 2007Da34746, Oct. 11, 2007).” This decision reaffirmed the consistent view of the existing Supreme Court precedents and upheld the lower court’s decision that limited the director’s liability for damages in light of the overall circumstances.
 
The Supreme Court’s affirmation above made the prevailing view of the precedents even clearer: even directors (including outside directors), besides the representative director, can be held liable for breaching their duty to monitor through an internal control system, and the liability would remain the same even if they were unaware of, could not have been aware of, or had no circumstance to suspect bid-rigging.

[Korean version]