10/16/2014

Fiduciary Duties of Directors/Representative & Controlling Shareholders of Korean Companies

Directors of companies, registered in Korea, many be held criminally and civilly liable for acts as a director (in limited cases even controlling shareholder).  Many acts that would not be deemed criminal in the West are, often, deemed criminal in Korea.  Additionally, matters that are considered in the West as mere "civil" matters, often, begin and end at the prosecutor's office.

A little due diligence, complying with corporate formalities, nuanced corporate governance practices and a little street smarts coupled with good liability insurance is a good start in succeeding in business in Korea. 
 
We have been on both sides of matters were directors (and even controlling shareholders) have been prohibited from departing Korea, jailed and fined.  In most cases, liability is unlimited and it is presumed that a director has complied with the decision of the Board of Directors if no dissent is noted in Board Minutes.

Article 399 of Korean Commercial Code notes:
(1) If a director has intentionally or negligently acted in violation of any Act or subordinate statute or of articles of incorporation or has neglected to perform his/her duties, he/she shall be jointly and severally liable for damage against the company.

(2) If any act under paragraph (1) has been done in accordance with a resolution of the board of directors, the directors who have assented to such resolution shall take the same liability.

(3) Directors who have participated in the resolution mentioned in paragraph (2) and whose dissenting opinion has not been entered in the minutes shall be presumed to have assented to such resolution
Ordinary Prudent/Reasonable Person Standard
The standard of care, in Korea, is similar to the West.  Article 382 of the Korea Commercial Act and Article 681 of the Civil Act of Korea notes that: "A person mandated the duty shall manage the affairs entrusted to him with the care of a good manager in accordance with the tenor of the mandate."

The Korea Supreme Court has interpreted this clause to mean that a fiduciary shall be held to an "ordinary prudent" person standard.

This standard allows the court, (and prosecutors), to delve into the actual knowledge of the individual and the knowledge that a ordinary prudent person should have. 

Not being a director of a company does not relieve one of this potential criminal and civil liability.
Controlling shareholders have, also, been held criminally and civilly liable if the party acts as a de facto director.

What do you think?

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Sean Hayes may be contacted at: SeanHayes@ipglegal.com.

Sean Hayes is co-chair of the Korea Practice Team at IPG Legal. He is the first non-Korean attorney to have worked for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty. Sean is ranked, for Korea, as one of only two non-Korean lawyers as a Top Attorney by AsiaLaw.