A Review on Shadow Director Cases in Korea

Korean legislators believed that the 1997 IMF Crisis had been at least partially caused by the improper and distorted business models and practices used by the major controlling shareholders of some big corporations. As a result, they amended the Korean Commercial Code (“KCC”) to introduce shadow director liability. This is a system designed to prevent controlling shareholders’ improper influence over the operation of a business by imposing liability upon those who are involved with the operation either directly or indirectly while not being a director of the corporation. Section 401-2 of the KCC classifies those who are involved with the operation either directly or indirectly into three different categories. First, persons who instruct directors using their influence over the corporation; second, persons who conduct the business of the corporation using the name of a director (unauthorized agent); and third, persons who conduct the business of a corporation using titles that give impression of authorization such as honorary chairman, chairman, president, vice president, executive manager, managing director or director while not being an actual director (apparent director). As for these persons, they will be deemed actual directors for the purposes of applying Sections 399 (liability to the corporation), 401 (liability to a third party), and 403 (derivative litigation) concerning the undertakings they instruct or conduct. In other words, these so-called shadow directs are liable for damages suffered by the corporation or third parties, and may become the target of derivative suits. Also, under Section 401-2 paragraph (1), if a director is liable for damages against the company or a third party, the director shall be jointly and severally liable with such shadow directors. If one considers the development of such concepts in other countries, one can find that, in the United States, controlling shares owe fiduciary duties to minor shareholders in limited circumstances under its common law tradition. As for Germany, Article 117(1) of German Stock Corporation Act (Aktiengesetz) prescribes that any person who, by exerting his influence over the company, willfully induces a member of the management board or the supervisory board, a registered authorized officer or an authorized signatory to act to the disadvantage to company or its shareholders, shall be liable to the company for any resulting damages. Such person shall also be liable to the shareholders for any resulting damages insofar as they have sustained a loss in addition to the loss which they have sustained due to the damages to the company (so called “indirect damages”). This provision is utilized as means to impose liability with respect to the abuse of controlling shareholder’s position. The shadow director provisions in the U.K. Company Act are also similar to these provisions. This paper analyses eight major Korean cases involving the issues of shadow directors decided after the 1998 Amendment and discusses the significance of these opinions. Specifically, it points out that it is not very practical in Korea to impose liability on a shadow director under Section 401-2 paragraph (1) item 1, because Korea does not have liberal discovery rules that are available under the Anglo-American legal systems. Thus, this paper argues that in some specific situations, there should be a burden-shifting. In addition, it maintains that there must be provisions to impose upon such persons duty of loyalty such as the duty of non-competition under Section 397, the duty to refrain from using corporate opportunities under Section 397(2), and the duty against self-dealing under Section 398.