Duties and liability of directors under Korean law
Oftentimes, a foreign direct investment under the Foreign Investment Promotion Act of Korea via share acquisition is accompanied by the relevant foreign investor’s participation in the board of directors of the Korean company in which the foreign investment is made. And, as for the foreign individuals becoming directors of a Korean company, it becomes natural for them to wonder about the possibility of being exposed to any liability while serving as director of a Korean corporation. So we take a look briefly at duties and liabilities of directors under Korean law.
Under Korean law, the relationship between a company and a director(s) is a fiduciary relationship where the company has entrusted the director with the management of affairs and the director(s) has consented thereto. Based on such relationship, a director is required to manage the affairs entrusted to him with the care of a good manager (Paragraph 2 of Article 382 of the Commercial Act and Article 681 of the Civil Act). A director is also required to perform their duties faithfully for the good of the company in accordance with laws, subordinate statutes, and the articles of incorporation (Article 382-3 of the Commercial Act).
So if a director violates the above-noted duty of care as a good manager and duty to faithfully perform for the interests of company, the director may be held liable to the company or to a third party, and be required to pay damages.
More specifically, under Article 399 of the Commercial Act, a director would be held liable to the company for damages if (s)he acted in violation of any laws or of the articles of incorporation, or neglected to perform his (or her) duties as a director. If any act referred to in the foregoing sentence were done in accordance with the resolution of the board of directors, the directors who assented to such resolution would be held jointly and severally liable. As a related matter, even if a director voiced his dissenting opinion in the meeting, but any record of the dissenting opinion was not entered in the minutes thereof, then the director may be presumed to have assented to the said resolution.
In addition, under Article 401 of the Commercial Act, a director would be held liable to a third party if (s)he neglected to perform his duties willfully or by gross negligence causing damages to the third party. As with director’s liabilities to a company, if any act referred to in the foregoing sentence were done in accordance with the resolution of the board of directors, the directors who assented to such resolution would be held jointly and severally liable, as well as director(s) having voiced his dissenting opinion but not having any record of the said opinion in the relevant minutes.
It is noted, however, that As with the US common laws, a director faced with a liability lawsuit (e.g., breach of duty of care as a good manager) could claim as a defense that the director exercised his or her business judgment, and if a court accepts such defense, then the director could be exculpated from liability unless the party bringing (e.g., shareholder) proves otherwise.
In addition, looking at the potential liabilities of a director as noted above, one could make a case that a director should be held liable only to a company when the director has not properly discharged any of the required duties, but not to a third party, since the director acts pursuant to the mandate issued by the relevant company. Korean courts also recognize this foregoing point, and so award damages to a third party in limited cases where a director acted irrationally to a significant extent and/or discharged any of the required duties unreasonably so as to cause damages to a third party.
Apart from civil liability towards the relevant company or a third party, it is noted that a director could also be criminally liable for breach of trust cases.
Under Article 355 of the Criminal Act, the offense of breach of trust is applicable to a person, who, administering another’s business, obtains pecuniary advantage or causes a third person to do so from another in violation of ones duty, thereby causing loss to such person and is punishable by imprisonment for not more than five years or by a fine not exceeding fifteen million won. Korean courts are normally known to recognize the breach of trust offense for cases when financial institutions have unreasonably made loan arrangements with other parties.