For Whom and for What Purpose is the
Commercial Act Amendment?

Q. There are concerns from groups like FKI that the amendment could be exploited by foreign hedge funds as a means to attack management rights. Can you elaborate on this?

A. If activist funds harass directors, it could lead to short-term profit-seeking behaviors such as stock buybacks, asset sales, and increased dividends. South Korea has already become a target for global activist funds.¹ If the Commercial Act is amended in this context, it will provide these attacking forces with an excellent weapon.

Q. What are your thoughts on the claim that the current law inadequately protects minority shareholders?

A. The current law has various mechanisms to protect minority shareholders, with regulations addressing breaches of directors’ duties and abuses of control by major shareholders.² Even if the protection for minority shareholders is insufficient, we should push for the necessary improvements in the system instead of making unreasonable amendments to the directors’ duty of loyalty, which is a fundamental principle of corporate activity.

Q. Some view the amendment to the Commercial Act as a symbolic measure that could serve as a milestone in addressing the Korea Discount.³

A. I see it as quite the opposite. To address the Korea Discount, we need an accurate analysis of its causes. Due to regulations that do not align with global standards and high levels of anti-business sentiment, the institutional environment for domestic investment is not conducive. Simply expanding directors’ duty of loyalty will not solve all these issues. Sustainable enhancement of shareholder value can only occur if the foundational aspects and performance of companies improve. Merely amending the Commercial Act without addressing the poor management environment will not eliminate the Korea Discount.

Q. Some critics argue that FKI’s claim that “there is no overseas legislative precedent defining company and shareholder interests as separate, parallel concepts,” and that “it violates global standards,” is exaggerated. What are your thoughts on this?

A. We explained that there are no overseas legislative examples listing shareholders as a separate category, alongside the company, when defining directors’ duty of loyalty. Critics point to the Delaware General Corporation Law (DGCL) or the Model Business Corporation Act (MBCA) in the US, arguing that “shareholders” are included in these laws. If you look closely, however, these are entirely different from the proposed amendments to our Commercial Act. DGCL Section 102(b) lists optional provisions that corporations may include in their charters. For example, companies can choose to add a provision that prohibits the exoneration of directors for breaching their duty of loyalty to shareholders. MBCA Section 8.31(a) also mentions shareholders alongside the company, but the core content of this section pertains to limiting directors’ liabilities. It does not impose a mandatory duty on directors to act in the interests of shareholders. In fact, it is a misconception to claim that the duty of loyalty is universally applied to shareholders across major legal systems.

Q. In the end, it seems that the key is finding reasonable balance between shareholder protection and guaranteeing managerial autonomy.

A. Shareholders are likely to desire increased stock returns and dividends through the enhancement of corporate value. To achieve this, it is crucial to have a corporate culture and a legal system that encourage entrepreneurship. The late Hyundai founder Chung Ju-yung’s ventures into shipbuilding and automobiles or Samsung founder Lee Byung-chul’s entry into semiconductors would have been impossible without a daring entrepreneurial spirit that took on immense risks. For instance, the semiconductor industry incurred a cumulative deficit of KRW 140 billion from its inception in 1983 and 1987. Had the shareholders or the government raised concerns about this at the time, such success would not have been possible.

The stakeholders connected to a company range from shareholders and employees to creditors as well as the broader community. While protecting minority shareholders and promoting policies that enhance corporate value are well-intentioned, overemphasizing shareholder protection can potentially harm the interests of other stakeholders. Each company has different priorities. For some, increasing investment to strengthen business competitiveness may be more urgent than returning value to shareholders. Pushing all companies in one direction with a single policy is inappropriate. What is essential is to create a legal and institutional environment that enables entrepreneurs to take risks without fear.