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Supreme Court's Ruling on Director's Fiduciary Duty (May 12, 2022)




Summary

The Supreme Court of Korea reaffirmed the previous ruling regarding the director's duty to monitor and supervise. It extended its application to Non-Executive Directors (i.e., Independent Directors, "NED") on Daewoo E&C's shareholder derivative action regarding the 4-River Project colluding.


"NEDs must establish an internal control system. If an internal control system exists, they are responsible for monitoring whether it operates,, accordingly. Thus, silence on any suspicious circumstances that could potentially lead to the malfunction of the system will constitute a violation of the director's fiduciary duty (monitoring duty)."



Corporate Guard - Insurance for Directors & Officers

In general, insurance programs can protect directors. Especially, foreign companies established in Korea have heavy shields. Sometimes the guards could be tripled (fund, manager, and global program level).


However, there are multiple exclusions. For example, the insurance cannot cover criminal conduct which is either established by final adjudication, admission by the insured, or written finding of a regulator, which includes "condoning of"(i.e., to ignore or accept behavior that is considered wrong) dishonesty, fraud or a criminal breach of law or regulation.


Further, the insurance excludes a consensual claim from its coverage including shareholder derivative action unless it's not solicited by or brought with the voluntary intervention, assistance or active participation of any director or officer or any policyholder or any subsidiary.


Foreign Companies

Empty Board of Directors and Officers

Foreign companies established in Korea have unique governance as they need to maintain their control and risk management consistently throughout the world. They have a more robust risk management frame than local companies. However, the local staff has limited authority due to the global periphery. In substance, the international policy has tighter programs, but in formality, the absence of local staff's sovereignty leads to the breach of the separation of ownership and management. In other words, local directors and officers do not have actual decision-making authority (especially HR and Security). They need to get the global and/or regional head's approval on their decision which make the local board members and officers impotent.


The implication of the Supreme Court's Ruling to Directors of Foreign Companies

Suppose a case that a local director raised an issue, but the regional and/or global approver rejected it. Can such a director be free from the breach of the fiduciary duty? In reality, there is no further step that such a director can take insofar as they did their best to persuade the global head.


As to "Doing the Best," speaking up to all local staff could be one of the options. One voice from the local level is much stronger than one director's voice. Then non-doing of such speak up consists of a breach of fiduciary duty?

Resigning directorship is the reality, but the resigning makes the director free from fiduciary duty ?

Or should they "Speak Out?" for the public interest?


Criminal Breach of Fiduciary Duty

A unique Korean concept of a criminal breach concerning directors' fiduciary duty makes all foreigners surprise.


In many cases, this becomes a deal killer for foreigners. For them, it is hard to understand the underlying rationale for making a monetary claim turn into a criminal claim as the damage could include "Potential Damage," Mens rea (guilty mind) include "Recklessness."


Therefore, the possibility of criminal breach of fiduciary duty became a monster to the foreigners.


Now it's time to revisit whether I am an eligible person for either internal or external directorship of a company.





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