This content is from: Local Insights

South Korea

A recent precedent-setting court ruling that upheld the rights of minority shareholders may mark the first stir of change for the nation's companies, especially conglomerates, where board decisions were often made without regard for shareholders.

The Suwon District Court gave a ruling on December 27 2001, after more than three years of fierce court battle, ordering certain existing and former board members of Samsung Electronics to reimburse W90.28 billion ($69 million) for losses allegedly caused by their failure to fulfil their fiduciary duty towards shareholders. The court ordered that the Samsung Group chairman, Lee Kun-Hee, return W7.5 billion, which he allegedly diverted from the company to bribe a former president.

The ruling's dominant principle is that the company's directors did not act in the best interest of the company and its shareholders. The court was referring to a one-hour discussion at a board meeting, which decided to sell 20 million shares in Samsung General Chemicals to other sister companies at a price below the market value and to acquire Ichon Electronics, which was already financially unstable. The acquired firm went bankrupt shortly after the purchase. As for the bribery, the court held that "business must be done within the legal boundaries and even if such acts may be of benefit to the company criminal acts such as bribery cannot be permitted as a legitimate means of doing business nor as an inevitable business judgment".

The citizens' group that led the court battle applauded the court's decision while some business organizations raised their concern about the validity and far-reaching effects of the ruling. They referred to a so-called "business judgment rule", under which directors are protected from liability when decisions were made in good faith and within the authority of management. Some business leaders argued that the ruling might inhibit companies from making vital business decisions or taking business risks.

The citizens' group representatives, including professor Jang Ha-sung of Korea University and the well-known lawyer Park Won-soon, countered by arguing that the ruling was about the manner in which the board decisions were taken, not on the decisions themselves. The group further argued that the board did not render a "business judgment" at all, thus failing their basic duty towards shareholders.

The fact that this ruling (including the order against the chairman Lee Kun-Hee to personally return the money he "donated" to a former president of Korea) is somewhat removed from the reality of the Korean business world cannot be denied, but at the same time many argue that the ruling will help to increase transparency and accountability in corporate governance. The ruling will definitely bring changes to the way board members conduct themselves, for they are no longer exempt from liability for the decisions they participate in. We may now see board members asserting themselves against the interest of the dominant owner if the owner's position does not conform to the interests of the company at large. This would constitute a fundamental shift in corporate governance in Korea. It is expected that Samsung's lawyers will appeal the decision and that the battle will continue all the way to the Supreme Court.

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