KLRI : KOREA LEGISLATION RESEARCH INSTITUTE

I. Background and Purpose of Research

▶ Corporate Social Responsibility and Sustainability 

○ Corporations are key actors in capitalist economic development, but they are also key contributors to the climate crisis facing humanity.  

○ Corporate sustainable development and corporate social responsibility are important institutional issues.  

-Corporate sustainability, E.S.G., and responsible investment are important. 

○ The duties and responsibilities of directors are important because ownership and management are separated in large joint-stock companies and management is delegated. In addition, it is necessary to set the limits of liability for damages so that directors can make reasonable management judgements based on their discretion. 

-Once the E.S.G. disclosure regulations are established, directors' responsibilities may be expanded to include the fulfilment of E.S.G.-related disclosure obligations. Therefore, this study analyses the liability of directors, the level of duty of care, and the principles of management judgement. 

 

▶ Purpose of the Study 

○ The purpose of this study is to find corporate governance improvement issues for directors' responsibilities and management judgement principles from the perspective of E.S.G.. It is a follow-up study to “ E.S.G. Legislative Policy Study(Ⅲ)：Issues to reform Corporate Governance for E.S.G. - Focusing on Shareholders and Shareholder Meetings”

- The purpose of this study is to present the separation of ownership and management from the perspective of E.S.G., and the application criteria and utilisation of directors' duty of care and management judgement principles. 

○ This study analyses the delegation relationship between directors and the company and the duties and responsibilities of directors as fiduciaries. It also analyses the business judgement principle and its development through U.S. corporate law case law to respect the business judgement of directors and define the limits of directors' liability based on the principle of separation of ownership and management.   

 

II. Background and Purpose of Research

▶ The delegation relationship between a director and a company and the duties of a director as a delegate 

○ Directors and corporations are subject to the delegation relationship of civil law, and directors owe a duty of care to the corporation. 

- The duty of good faith applies not only to the performance of the directors' duties under the law, but also to the exercise of the powers prescribed by law in relation to the management of the company, such as the exercise of voting rights and the filing of lawsuits. 

○ Through the amendment of the Commercial Code in 1998 at the time of the IMF foreign exchange crisis, Article 382(3) states that "a director shall faithfully perform his or her duties for the company in accordance with the provisions of the law and the articles of association" and establishes the director's duty of loyalty. 

- There are two theories of interpretation: the homogeneous theory, which states that the director's duty of loyalty is essentially the same as the director's duty of fiduciary care, and the heterogeneous theory, which states that the director's duty of loyalty is different from the director's duty of fiduciary care because it is an acceptance of the duty of loyalty under English law. 

 

▶ Relationship between breach of duty and liability for damages

○ As a director, a director bears various obligations such as the duty of good faith, duty of monitoring, duty to attend the board of directors, and duty of loyalty, and must do his best to execute the company's business. 

○ If a director violates the laws or articles of association or neglects duty of care in the course of performing his or her duties, and the companysuffers damages as a result, the director shall be liable for damages to the company. (Article 399 of the Commercial Code) 

- A director's liability for damages to the company is usually established through a shareholder representative lawsuit, and the person claiming liability for damages due to the director's breach of duty must prove the fact of breach of duty, the occurrence of damage to the company due to the breach of duty, and the causal relationship between the two. 

  

▶ Comparative Review of other countries`legislation on the Business Judgement Principle 

○ (U.S.) The Business Judgement Rule in U.S. corporate law is a presumption in litigation law that "if a director's decision on a matter within the scope of the corporation's purpose and within the director's authority is made in good faith through the exercise of independent judgement, uninfluenced by other interests, in the belief that it has a reasonable basis and will be in the best interests of the corporation, the court will respect such business judgement and will not intervene to invalidate the transaction or hold the director liable for the corporation's damages". 

- United Copper Securities Co. v. Amalgamed Copper Co. 244 U.S. 261, 37 S.Ct. 509, 61 L.Ed. 1119 (1917)

○ (United Kingdom) If a director performs his duties and makes decisions in the belief that he has clear authority and is fulfilling his duties, it is difficult for a court to hold him liable for fraud or breach of duty, even if the director subsequently proves to be wrong. In other words, in relation to the liability of directors, it is not possible to hold a director liable on the basis of breach of duty of care unless the director has acted wilfully or grossly negligently in performing his duties and making business judgements. However, English company law does not codify the business judgement rule or consider it to be a well-established principle of case law. 

- Overend & Gurney v Gibb (1872) is a key precedent. 

○ (Japan) In determining whether a director has breached his or her duty of care, it is interpreted that "since directors have wide discretion in making management judgements, if there is no negligence in the process of making management judgements and there is no gross unreasonableness in the content of the management judgements, even if the company suffers damages due to the management judgements, the director who made the judgements cannot be considered to have breached his or her duty of care and therefore cannot be held liable for damages". 

- To be able to claim the business judgement doctrine, the information necessary for business judgement must have been sufficiently collected and reviewed, and the decision based on it must have been made reasonably. 

 

▶ E.S.G. Disclosure and Directors' Responsibilities and Application of the Business Judgement Principle 

○ Companies, especially listed companies, are required to disclose key  financial information in accordance with the Capital Market Act for investors' decision-making, and the duty of disclosure is a core task of  directors. 

- Although ESG information disclosure regulations have not yet been systematized, the Capital Markets Act and the Financial Services Commission's Notification provide for limited disclosure of E.S.G. companies and companies designated for environmental information disclosure under the Environmental Technology and Industry Support Act

○ Non-financial information disclosure, especially E.S.G. disclosure, is not yet systematised, it is expected that the E.S.G. disclosure system will be established soon, and the implementation of non-financial information disclosure obligations may be included in the main duties of directors in the future. 

- Therefore, in relation to the disclosure of non-financial information from the perspective of E.S.G., the director's judgement of the materiality of the disclosed information may affect the execution of the director's duties, and the business judgement principle may be used as an interpretation theory to limit the director's liability in relation to the E.S.G. disclosure of non-financial information.     

 

III. Expected Effects 

○ It provides a direction for reviewing the significance of the business judgement principle to limit the expansion of directors' liability for reasonable performance of duties based on the duties of good faith and loyalty and for business judgement.   

○ The business judgement rule has already been discussed in case law in Korea, the United States, the United Kingdom, and Japan. 

- With the establishment of the E.S.G. information disclosure system, the importance of non-financial information and the judgement of disclosure by directors are highlighted as important duties of directors, so breach of duty of care and liability for damages related to E.S.G. information disclosure and judgement of materiality by directors may become an issue. 

- The business judgement rule should be used to limit the unlimited expansion of directors' liability in relation to the implementation of the E.S.G. information disclosure regime.