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The amendment to the Commercial Act expanding the scope of directors’ duty of loyalty to include shareholders in addition to the company has recently passed the National Assembly. The legal community is responding with both welcome and concern. While expectations are high for the law to enhance legal protection of shareholder interests, there are concurrent concerns regarding a potential surge in litigation seeking to hold directirs liable for alleged breaches of duty. For this reason, experts emphasize the need for companies to strengthen their decision-making processes and ensure they are objective and well-documented.
One of the core elements of the Commercial Act amendment passed on the 3rd is the revision of Article 382-3 (Directors’ Duty of Loyalty). Previously, this article only required directors to “faithfully perform their duties for the company in accordance with laws and regulations, and the company’s articles of incorporation.” However, the revised article mandates that directors owe a duty of loyalty to shareholders as well. New provisions have been added requiring directors to i) protect the interests of the total shareholders’, and ii) treat the interests of all shareholders fairly in performing their duties.
Legal experts evaluate this change positively, noting that it will lead directors to be more cautious in their decision-making and enhance both shareholder and corporate value since the newly imposed duty also requires directors to fairly treat shareholder interests.
Observations have also been raised that this shift will exert a positive influence on environmental, social, and governance (ESG) management. Attorney Ji-ho Kim of LIN LLC commented:
“Companies are highly likely to introduce institutional mechanisms to fulfill their duty of loyalty—such as director nomination committees and compensation committees—to enhance the board’s independence and transparency. This could improve corporate governance and foster a greater commitment to ESG management aimed at long-term protection of shareholder interests.”
She added that if a director’s decision conflicts with the interests of certain shareholders or is deemed to have violated the duty of loyalty, the risk of lawsuits seeking to hold directors legally liable may increase significantly. In particular, regarding criminal liability, the applicability of breach of trust (professional malfeasance) may expand.
Kim explained:
“Previously, precedents held that directors do not stand in the position of those who manage the affairs of individual shareholders. However, this amendment may categorize directors as fiduciaries , meaning that violations of this duty resulting in shareholders’ loss (such as dilution of share value) is more likely to be recognized as a criminal breach of trust.”
As a countermeasure, Attorney Kim suggested enrolling in Directors and Officers (D&O) liability insurance. She advised:
“While joining a DOA liability insurance policy that covers damage claims by minority shareholders may serve as a safety net for directors, it is essential to verify whether the exemption clauses are overly broad and whether there are special riders that specifically cover lawsuits filed by such shareholders.”
For further details, please refer to the original article below.
Original article:
Bloter
https://www.bloter.net/news/articleView.html?idxno=640217
One of the core elements of the Commercial Act amendment passed on the 3rd is the revision of Article 382-3 (Directors’ Duty of Loyalty). Previously, this article only required directors to “faithfully perform their duties for the company in accordance with laws and regulations, and the company’s articles of incorporation.” However, the revised article mandates that directors owe a duty of loyalty to shareholders as well. New provisions have been added requiring directors to i) protect the interests of the total shareholders’, and ii) treat the interests of all shareholders fairly in performing their duties.
Legal experts evaluate this change positively, noting that it will lead directors to be more cautious in their decision-making and enhance both shareholder and corporate value since the newly imposed duty also requires directors to fairly treat shareholder interests.
Observations have also been raised that this shift will exert a positive influence on environmental, social, and governance (ESG) management. Attorney Ji-ho Kim of LIN LLC commented:
“Companies are highly likely to introduce institutional mechanisms to fulfill their duty of loyalty—such as director nomination committees and compensation committees—to enhance the board’s independence and transparency. This could improve corporate governance and foster a greater commitment to ESG management aimed at long-term protection of shareholder interests.”
She added that if a director’s decision conflicts with the interests of certain shareholders or is deemed to have violated the duty of loyalty, the risk of lawsuits seeking to hold directors legally liable may increase significantly. In particular, regarding criminal liability, the applicability of breach of trust (professional malfeasance) may expand.
Kim explained:
“Previously, precedents held that directors do not stand in the position of those who manage the affairs of individual shareholders. However, this amendment may categorize directors as fiduciaries , meaning that violations of this duty resulting in shareholders’ loss (such as dilution of share value) is more likely to be recognized as a criminal breach of trust.”
As a countermeasure, Attorney Kim suggested enrolling in Directors and Officers (D&O) liability insurance. She advised:
“While joining a DOA liability insurance policy that covers damage claims by minority shareholders may serve as a safety net for directors, it is essential to verify whether the exemption clauses are overly broad and whether there are special riders that specifically cover lawsuits filed by such shareholders.”
For further details, please refer to the original article below.
Original article:
Bloter
https://www.bloter.net/news/articleView.html?idxno=640217