[Korean Law Insights] Introduction of Directors’ Duty of Loyalty to Shareholders in Korea

[Published on July 8, 2025 edition of the "Korean Law Insights" column in the Korea Daily’s Economic Expert Section]

- Directors must now consider not only the interests of the company but also those of shareholders

- Adherence to sound management principles and adoption of shareholder-friendly policies are necessary

Among the new policies introduced by the Korean government, one of the most hotly debated topics is the amended Commercial Act. While the amendment covers various areas such as electronic shareholder meetings and audit committee reforms, the most significant and impactful change is the introduction of directors’ duty of loyalty to shareholders. This is a particularly important issue for Korean-American investors and those who establish or operate businesses in Korea. 

Under the existing Commercial Act, directors are required to act loyally only toward the company, making decisions in the best interest of the corporation. Although shareholders are the owners of the company by virtue of their stock ownership, Korea’s legal system recognizes a clear separation between ownership (shareholders) and management (directors), treating the company and its shareholders as distinct legal entities. Thus, directors have only owed a duty of loyalty to the company—not to its shareholders.

However, as legal disputes have emerged in relation to critical corporate actions such as issuing new shares, mergers, and spin-offs—often alleging that directors made decisions favoring certain controlling shareholders—there has been growing concern that the duty of loyalty should be expanded to include shareholders as well.

The amended Commercial Act has now passed the National Assembly and is expected to be implemented without much difficulty. With this change, directors will now bear the added burden of making decisions that consider the interests of both the company and its shareholders. From the shareholders' perspective, the likelihood of legal disputes may increase, especially if they believe a director has acted against their interests.

To minimize the risk of legal disputes and liabilities in this new legal environment, directors must consider both the company’s and shareholders’ interests when making decisions. However, in practice, it may be difficult to fully serve both simultaneously. In situations where shareholder interests conflict with each other, any decision made could lead to accountability. In such cases, the Korean Supreme Court has recognized the “business judgment rule” as a potential defense against liability. Therefore, adhering to the principles of sound business judgment during the decision-making process becomes the most practical safeguard for directors.

From the company’s standpoint, an increase in lawsuits against directors could be detrimental and hinder directors’ ability to perform their duties. To mitigate this risk, companies may consider implementing stronger internal control systems and securing directors and officers liability insurance for their board members. Strengthening communication with shareholders, introducing shareholder-friendly policies, and preparing detailed explanatory materials for general meeting agendas in advance could also help reduce potential conflicts.

While some argue that the amendment may not lead to a significant rise in legal disputes involving directors, the heightened legal exposure could still have a major impact on companies. Particularly since the new duty of loyalty to shareholders will take effect immediately—without a grace period—companies planning major decisions like issuing new shares, mergers, or spin-offs should proactively assess the legal risks for their directors and take preventive steps. 

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Jin Hee Lee/K-Law Consulting Korean Attorney

[Reference link in original Korean] 

https://www.koreadaily.com/article/20250708220930090