Law Should Be the Rules That Protect the Market, Not Orders That Direct It

A Business Environment Worsened by Three Revisions

The Commercial Act was revised three times within a single year. The first revision, on July 2025, added “shareholders” alongside the company as the beneficiaries of directors’ duty of loyalty, changed the name of outside directors to independent directors, and raised the mandatory appointment ratio for general listed companies from one-fourth to one-third of the total number of directors. The second revision, in September of the same year, made cumulative voting mandatory for large listed companies with assets of KRW 2 trillion or more and expanded the separate election of audit committee members. The third revision, in March 2026, required treasury shares in principle to be cancelled within one year of acquisition. Among the first revision’s provisions, the duty of loyalty clause took effect immediately, while the independent director and audit committee provisions will take effect in July 2026, and electronic shareholder meetings in January 2027. The second revision is set to take effect in September 2026, and the third revision took effect upon promulgation.

The justification has been consistent throughout: protecting minority shareholders and improving corporate governance. There is indeed a need for safeguards against controlling shareholders using their power to appropriate the share that belongs to ordinary shareholders.

The problem lies elsewhere. The question is not whether shareholders should be protected, but how they should be protected. One path is for the government to specify in law, point by point, the governance structure it deems desirable. The other is to establish predictable rules that apply equally to everyone and leave the rest to corporate judgment. These two paths lead in entirely different directions. Should business decisions be left to the market, or designed by the state through law? That is the essence of today’s debate over the Commercial Act. The direction of the recent revisions is clear in that they have successively prescribed by law corporate governance, directors’ responsibilities, and methods of capital utilization within a short period. The law is rapidly replacing the sphere of corporate judgment.

The expansion of the duty of loyalty is a textbook example. Under the previous Commercial Act, a director’s duty of loyalty was the duty to faithfully perform his or her duties for the company in accordance with statutes and the articles of incorporation. Representative areas in which that duty was concretized included the prohibition on competition, regulation of self-dealing, and the prohibition on usurping corporate opportunities. This revision, however, expanded the beneficiary of that duty to include “shareholders” and newly imposed the standards of “protecting the interests of all shareholders and treating all shareholders fairly.” Directors are agents of the company, not representatives who follow the instructions of individual shareholders whose interests differ. The moment the beneficiaries of the duty are expanded to all shareholders, it becomes unclear what exactly that duty requires.

Mergers and spin-offs, capital increases, and entry into new businesses all differ in character. If all of these decisions are placed under the yardstick of “protecting the interests of all shareholders and fair treatment,” directors cannot know where proper fulfillment of duty ends and where violation begins. This becomes even clearer in management control disputes. When shareholders backing the current management clash head-on with funds demanding management replacement, what counts as “fair treatment”? If either choice allows the other side to allege a breach of duty, then that duty becomes not a standard for conduct but a pretext for litigation. It is easy to create a new duty. But a duty without boundaries only appears to broaden the scope of protection while in reality erasing the line of responsibility.

The Business Judgment Rule Is the Global Standard

Whenever the Commercial Act is amended, the phrase “global standard” follows. But a global standard is not a matter of copying one foreign system wholesale. Each country’s corporate law has grown together with its courts, litigation culture, shareholder composition, and the history of its capital markets. If one compares only isolated pieces of a system, misunderstanding follows. The real substance of the global standard consists of a few principles: shareholders’ rights and management responsibility must be clear; directors’ discretion and liability must be balanced; companies must be able to choose the governance structure that suits them; and the law must be predictable. At the core of this is the business judgment rule.

The business judgment rule is simple and clear. If directors make a decision in good faith, without conflicts of interest, and based on sufficient information, they are not held liable by revisiting that judgment even if the outcome turns out badly. Entrepreneurs make decisions while bearing risk. Not every challenge succeeds. If every failed judgment results in a courtroom battle, no one will take risks. Protecting business judgment is not about going easy on entrepreneurs; it is a condition for allowing the market to function. This is why major corporate law systems, including Delaware in the United States, protect judgments made in good faith and on the basis of sufficient information. Designing stronger accountability together with protection for business judgment—that is a balanced global standard.

In Korea, this principle has yet to gain real force. The Supreme Court also holds that if a director has not violated the law, has sufficiently reviewed information that could reasonably be obtained, and made a decision in the good-faith belief that it would benefit the company, and if that decision is not markedly unreasonable, then it falls within the discretion protected as business judgment. However, that protection depends not on statutory text but on case law, and courts look beyond the information-gathering process into the substance of the decision itself. This differs from the Delaware-style structure, which starts from a presumption of good-faith judgment and places the burden of rebutting that presumption on the party raising the challenge. If directors’ duties were to be expanded to shareholders, then the law should also have clearly specified how far that judgment would be protected. If only liability is expanded while the boundary of protection is left undefined, the balance collapses. If responsibility is to be clarified, protection must be clarified as well. The business judgment rule should not be left to case law; it should be codified.

Claims such as “other countries all do this” or “only Korea has this” should be used with caution. Still, one fact is clear. Making cumulative voting mandatory for all large listed companies is not an internationally universal approach. Japan allows companies to exclude cumulative voting through their articles of incorporation, and Delaware, the leading corporate law jurisdiction in the United States, implements it only when provided for in the certificate of incorporation. Both legal systems take an optional approach that leaves the choice to the company. The premise that mandatory adoption is itself an international standard does not hold. If Korea selectively imports only foreign systems that strengthen liability while omitting the protections for business judgment and the safeguards against abusive litigation that invariably accompany them, then that is not a global standard but only half of one.

Regulate Conduct, Not Corporate Size

Korea’s corporate regulation has a long-standing habit. It asks first not what a company has done, but how large it is. Obligations and restrictions are divided according to asset size, group affiliation, and listing status. This second revision does the same by drawing a line at KRW 2 trillion in assets and imposing heavier obligations on companies above it. There may be reason to require more extensive disclosure or oversight for larger companies. But forcing them, solely on the basis of asset size, to adopt a uniformly designed governance structure is a different matter. The more the same conduct is treated differently depending on corporate size, the more the generality of the law is undermined.

There is a deeper problem as well: the structure itself, under which regulation increases as a company grows. When crossing a certain threshold suddenly triggers a flood of new obligations, companies try not to cross that threshold. This creates incentives to avoid it by shrinking through division or delaying a listing. A system that penalizes growth can lead companies to choose not to grow. It is contradictory to urge entrepreneurs to take on challenges while burdening them with regulation as the price of success. The law should operate not because a company is large, but because it infringes on others’ rights or harms fair competition. Even if larger companies are to bear heavier responsibilities, the standard must be clear and must not sway with political circumstances.

The revision on treasury shares shows well what it means to regulate conduct. In the course of split-offs or mergers, new shares were sometimes allocated to treasury shares that had carried no voting rights, thereby inflating the controlling shareholder’s power. This is the so-called “magic of treasury shares.” The revision prohibits the allocation of new shares to treasury shares in mergers and spin-offs, blocks the issuance of bonds with treasury shares as the subject of exchange or redemption, and makes clear that treasury shares have neither voting rights nor dividend rights. This is regulation precisely aimed at conduct that distorts control. It is the right direction. But requiring any company that holds treasury shares to cancel them within one year is a different story. The revised law also provides exceptions: in cases such as employee compensation or employee stock ownership plans, and for business purposes such as introducing new technology or improving the financial structure as specified in the articles of incorporation by special resolution of the shareholders’ meeting, a company may exceptionally hold or dispose of treasury shares if its holding or disposal plan is approved by the shareholders’ meeting every year. Even so, we must ask whether a framework that makes cancellation the default and requires annual reapproval of such plans also suppresses normal capital management. Distortive conduct should be blocked, but legitimate uses should not be tied down as well.

From Laws That Control the Market to Laws That Protect It

Law is not a command for the government to move a particular group in the direction it wants. It is a fair rule applied equally to everyone. When the law is universal and predictable, the market can move freely, and responsibility for the outcome also becomes clear. Freedom is not laissez-faire; it presupposes responsibility. The same is true for business. Companies should be free to make judgments but also responsible for the results, and the role of law is to draw the boundary of that responsibility. The government must not substitute its own judgment for that of firms. Yet the current Commercial Act is moving in the opposite direction. The more the government specifies in detail by law the forms of governance and capital management it prefers, the more companies respond first not to consumers and investors but to the model answers drawn by law. Discrimination through regulations that differ by size, and interference that steers companies down a government-designated path, are both manifestations of this.

The path the Commercial Act should take is clear. It should prohibit only the conduct that must be prohibited by law and leave the rest to corporate freedom, while imposing commensurate liability for illegality. Corporate autonomy and responsibility, shareholders’ rights, and protection for business judgment must be balanced, and regulation must target conduct, not corporate size. All of this converges on one point: a law that applies equally and predictably to all companies. Shareholder protection and managerial autonomy are not a choice between two alternatives. When clear conduct rules, protection for business judgment, and effective shareholder remedies are designed together, both values can stand together. The question is not which direction to drive companies, but how to establish rules that apply to everyone. Laws that seek to design the market will only stifle it. Laws that protect the market will help it grow.

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Original title: 법은 시장을 이끄는 명령이 아니라 시장을 지키는 규칙이어야 한다

Author: Sung-no Choi

Date: 2026-08-03

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=1&idx=29317