General Shareholders vs Individual Shareholders – Issues of Defining the Duty of Care in the Corporate Law Amendment

Introduction: Background and Issues of the Commercial Law Amendment

The amendment to the Commercial Act led by the Democratic Party focuses on expanding the duty of care for corporate directors from "the company" to "the company and shareholders." This is intended to protect shareholder rights and enhance corporate governance accountability amid recent changes in the global financial landscape and movements towards increasing transparency in the stock market. In particular, the "KOSPI 5000 Special Committee" launched by the Democratic Party has indicated its aim to bolster trust in the South Korean capital market and to improve the structure of the stock market through such legal amendments. In line with this intent, the government has expressed concerns about the potential abuse of applying the crime of breach of trust for directors and has suggested modifications to certain wording. The core of this proposal is to define the duty of care for directors not simply as "shareholders," but as "all shareholders." Although this may superficially seem to ensure the rationality of management decisions and the clarity of criminal liability, it raises significant controversies in legal interpretation and practical application. Therefore, this article aims to examine whether the introduction of the concept of "all shareholders" aligns with the original intent of the Commercial Act amendment and what implications it holds for the protection of minority shareholders and improvements in corporate governance. Additionally, it seeks to explore the potential impacts of these changes on corporate management practices and the capital market from a measured perspective.

Main Point 1: The Logic and Intention Behind the Introduction of the Concept of 'All Shareholders'

The core logic of the concept of 'all shareholders' presented by the government is that imposing a duty of loyalty to all individual shareholders on directors could lead to an excessively heavy burden of responsibility. This is particularly true in cases of large corporations with tens of thousands of shareholders, where one director's judgment may benefit some shareholders while inevitably harming others. For example, if the management decides to expand long-term investment and fails to meet the expectations of shareholders seeking short-term profits, directors may find themselves embroiled in litigation for breach of duty due to their obligations to individual shareholders. Such situations can seriously constrain the autonomy and independence of management decisions, leading to a chilling effect on the company’s investment decision-making and strategic operations. To prevent these issues in advance, the Ministry of Justice proposed to the Democratic Party to define the duty of loyalty of directors in relation to 'all shareholders.' The intention is to consider all shareholders as a single collective unit, thereby setting the standards for directors' duties at a more comprehensive and abstract level. In other words, if a director's judgment aligns with the common interests of all shareholders, that judgment could be exempted from criminal liability, even if it adversely affects some shareholders. This direction can serve as a stabilizing mechanism for managers, reducing the risks of post-hoc liability for rational decision-making. Additionally, it is expected to function as an institutional foundation for activating investments and advancing corporate management.

Main Point 2: Ambiguity of the 'Overall Shareholder' Concept and Concerns about the Violation of Minority Shareholders' Rights

However, the concept of "all shareholders" is gaining credibility as a point of contention for being legally and practically ambiguous. According to legal provisions, "all shareholders" do not constitute a single legal entity but rather consist of a collection of shareholders with diverse interests. Therefore, it is unclear how the standard of "the interests of all shareholders" can be interpreted in actual decision-making scenarios, raising concerns that the criteria may operate in favor of management or major shareholders. For example, if a board controlled by a major shareholder justifies specific decisions under the guise of "the interests of all shareholders," there is a possibility that dissenting opinions from minority or small shareholders may be inadequately reflected and marginalized. Such situations can lead to outcomes that reinforce a structure of accountability avoidance rather than responsible corporate governance. Ultimately, the original purpose of expanding directors' fiduciary obligations may lose its practical efficacy under the abstract concept of "all shareholders." Additionally, the concept of "all shareholders" carries the risk of expanding the arbitrariness of legal interpretation. If a concept that has not been clearly established through case law or legislative examples is introduced into the statutes, there is a possibility that conflicting judgments on the same issue may arise depending on the interpretations of courts and prosecutors. This is a concerning aspect in terms of legal stability and predictability. Consequently, rather than clarifying the scope of directors' responsibilities, "all shareholders" may actually widen the scope for interpretation and dilute the rights of small shareholders in the process. Therefore, careful consideration of how this concept will be applied in practice is required before any legal amendments.

Main Point 3: Retreat from the Purpose of the Law and Presentation of Alternatives

The basic aim of the proposed amendment to the Commercial Act is to advance corporate governance and strengthen the protection of shareholder rights. This is linked to the recent issue of the "Korea Discount" that the Korean capital market faces. Foreign investors and institutional investors continue to demand high standards regarding the transparency and management accountability of Korean companies, and the amendment to the Commercial Act can be seen as part of an internal reform aimed at improving such external evaluations. However, the introduction of the concept of "all shareholders" partially conflicts with the fundamental direction of this reform. This is because instead of strengthening the existing management accountability framework, it has the potential to obscure the sources of responsibility within that framework. Therefore, it would be a more balanced alternative for the amendment to maintain the fiduciary duty of directors to "the company and its shareholders," while specifying the requirements for the application of the crime of breach of trust or clearly presenting the standards of reasonableness for business judgment. Additionally, the legislative introduction of separate provisions or mechanisms for the protection of minority shareholders should also be considered. For instance, in cases of conflicts of interest among shareholders, there could be guidelines that objectively present the criteria for resolution, or procedural requirements that enhance the listening to and incorporation of minority shareholders' opinions. Such an approach would provide a realistic alternative for more delicately balancing management autonomy and legal accountability.

Conclusion: Direction and Responsibility of the Revision

The revision of the Commercial Act is not merely a procedure to adjust the wording of legal clauses. It is also a process of reestablishing the fundamental principles of corporate management and rebuilding trust between shareholders and market participants. In this process, the government and the National Assembly must responsibly answer the question of whose interests the legislation serves. The concept of 'all shareholders' may function in terms of protecting management, but if the protection of minority shareholders, which is another pillar of the amendment, is neglected, the amendment may be deemed one-sided or regressive. Therefore, what is needed now is a sophisticated legislative design that prevents excessive risks of criminal penalties while preserving the principle of shareholder rights protection. The government and the legislature should create an opportunity through this amendment to the Commercial Act to substantially enhance the trust and transparency of the South Korean capital market. It would be more desirable to move towards a direction that practically protects the rights of individual shareholders and secures a balance in management responsibility rather than relying on the ambiguous concept of 'all shareholders'.