Amendment of Korea Commercial Act

The Amendment of the Commercial Act was approved by the National Assembly on December 9, 2020, promulgated on December 29, 2020, and enforced on the same day. Key aspects of the recent amendment include the implementation of multiple derivative suits by shareholders, change in the composition of audit committees, etc.

[1] Implementation of Multiple Derivative Suits (Dajoong Daepyo Sosong)

1) Overview of Shareholders’ Derivative Suits

A derivative suit or representative suit is a lawsuit brought by a shareholder on behalf of a corporation against executive officers or directors or audits of the corporation. Article 403 of the Commercial Act(Article 415 for audits) provides the legal grounds in which shareholders with 1%(0.01% for listed companies(Article542-6(6) or more of total shares can file a liability claim against the directors on behalf of the company(Article 403(1). Shareholders’ derivative suits is only possible if the company refuses or fails to file a lawsuit within 30 days of receiving a request to claim for liability, in writing, from shareholder(s)(Article 403(2)(3), with the exception of whence irreparable damages is likely to the company—in which shareholder(s) can file the lawsuit without going through the company first(Article 403(4). The Court ruled that the shareholder derivative suit is possible for shareholders whose total shares amount up to 1% or more of the total shares. The lawsuit remains in effect even if the total shares owned by the shareholders is diminished and does not amount up to the required number of shares(Article 403(5), but will be dismissed as improper if the plaintiff or plaintiffs cease to own any shares of the company. One the shareholder has filed the lawsuit, he cannot dismiss, renounce, or admit to the claim, or come to a compromise with the defendant(s) without permission from the court(Article 403(6))

2) Multiple Derivative Suits Before the Amendment

A ‘multiple derivative suit’ refers to when the shareholder of the parent company files a lawsuit against the executive officer or director of the subsidiary company. There were no legal grounds to this type of derivative suit; and the Court also confirmed that “the shareholder of a parent company shall not file a derivative suit against executives of the subsidiary company even if the subsidiary company suffers damages from her director(s)’s wrongdoing—first because the parent company and the subsidiary company are two separate legal entities under the Commercial Act, and second because the shareholder who has the legal status to pursue derivative suits is confined to shareholders of companies whose director(s) is to be held liable—and thus, the shareholder cannot file what is known as multiple derivative suits under Article 403 and 415 of the Commercial Act.”(Supreme Court Decision 2003Da49221 decided 2004. 9. 23.)

3) Implementation of Multiple Derivative Suits

Article 406-2 was newly implemented in the December 9, 2020 Amendment of the Korea Commercial Act, which allows shareholders of a parent company with a certain number of shares(1% for unlisted companies and 0.5% for a minimum of six months before the filing for listed companies(Article542-6(7) to file a lawsuit against the director(s) of the subsidiary company. In addition, the Amendment removes the possibility of multiple derivative suits from being dismissed by providing that any termination of the relationship between the parent and the subsidiary after the lawsuit has been filed shall not affect the lawsuit. A parent company by definition of the Korean Commercial Act, is a company which owns 50% or more of the subsidiary’s total shares. Therefore, even if the parent company attempts to stall a multiple derivative suit by selling off the subsidiary’s shares so that it no longer is a parent company, the lawsuit will remain legitimate.

4) Related Issues

* The Amendment includes the provision that once a multiple derivative suit is filed it cannot be stalled by diminishment of shares on part of the parent company of its subsidiary. However, the provision excludes instances where the parent company sells off all of its subsidiary’s shares, meaning that the suit can still be dismissed. With regard to this issue, whether the multiple derivative suit shall be dismissed regardless of level of court once the parent company ceases to hold any shares of the subsidiary, or will not be dismissed after a specific point in time is yet to be resolved.

* The supplementary provisions of the Amendment fails to determine the timeframe for which the multiple derivative suits can be filed against. Whether the wrongdoings of director(s) committed prior to the Amendment can be addressed is yet to be resolved.

* According to Article 342-2(3) of the Commercial Act, the company whose shares of 50% or more is owned by the parent company and its subsidiary or by the subsidiary itself is also by definition a “subsidiary”. Therefore, the question remains as to whether the shareholder of the grandparent company can file a multiple derivative suit. Considering that the Amendment does not exclude shareholder derivative suit of grandparent company shareholders, it is highly likely that the Court will interpret grandparent shareholder’s derivative suit also permissible.

* Other issues surrounding multiple derivative suits is expected to arise since the number of shares a grandparent or a parent company holds is bound to fluctuate.