[보도] It’s Time to Institute Business-Friendly Corporation Act

The Corporation Act refers to the basic law governing economic activities by legal entities known as the company or corporation based on principles of private autonomy. This law pursues different objectives from the economy-related laws that are mainly aimed at restricting the business scope of chaebol or conglomerates. Therefore, corporation law should not entail any features of prior regulations.

But the revisions to the Corporation Act introduced by the Justice Ministry and the Finance and Economy Ministry during the Roh government have tilted more toward prior regulations than private autonomy. Thus whenever a bill was proposed, the government had to face strong protest from business circles. The discrepancy in perspectives between the government and business has been so great that the lawmakers put amendments to the key part of the Commercial Code on the shelf for months. The new bill is expected to be placed on the agenda for approval at the earliest only when the National Assembly starts an extraordinary session in February.

But what's important is not about revising the law per se but building a legal system through the amendments that ensures efficient economic activities for enterprises. We need to review the kernel of the revised bills regarding corporate governance structure to see whether they are appropriate and efficient. The discussion will then lead us to how to make a business-friendly corporation law that contributes to national economic development.

Restriction-Oriented Revisions

According to the bills for the special provisions of to the Commercial Code on listed companies submitted by the Ministry of Justice and some lawmakers in 2005, the government intends to introduce new arrangements such as statutory executive officer system, double derivative lawsuits, a ban on directors from appropriating exclusive corporate opportunities. As the revision bills presented by the lawmakers call for the double derivative lawsuits, which are omitted in the Justice Ministry's version, the three reform initiatives are expected to take center stage in discussions in the near future.

One of the most controversial clauses is the double derivative lawsuit, which allows shareholders of a parent company to sue directors of unlisted subsidiaries on behalf of the corporations involved despite their lack of direct ownership in them. It's a scheme designed to protect shareholders' rights effectively and discourage conglomerates from engaging in unlawful activities through their subsidiaries. Due to the intricate ownership pattern at most large conglomerates and through the delicate and complicated intra-group transactions, affiliates easily get away with fraud or other irregularities. The lawsuit is in essence an expansion of the minority shareholders' right to penalize the parent company into the affiliates and subsidiaries.

The new clause of double derivative lawsuit will not create much problem when the subsidiaries are fully-owned by the parent. But there is no way to protect the shareholders of a subsidiary if the parent owns more than 50 percent but less than 100 percent stake in the affiliate. If some ill-willed shareholders of the parent file a lawsuit against affiliate companies, it will do an inevitable harm to the shareholders of the subsidiaries in reality.

The Justice Ministry has also proposed a bill to ask board members to be more careful about using corporate opportunities by prohibiting them from taking personal advantage of opportunities that belong to the corporation, such as classified information or clientele. But the malfeasant use of corporate opportunities can be governed by the current regulations over the directors stated in the current commercial code, such as the prohibition of competitive transaction, fiduciary duty, self-dealings. Under the current corporation law, directors seeking to transact business with their corporations for their own or a third party's account must obtain approval from the board of directors. Otherwise, those transactions would be considered null and void and the director responsible for any corporate losses is subject to early termination by the corporation. Tightening the regulation with another legal prong will only be an additional burden that could adversely affect corporate management activities when no other country has a separate law designed to ban the usurpation of corporate opportunity.

The statutory executive officer system, a new clause that the Justice Ministry wants to insert into in the commercial code, is a dispositive law. But the regulation can restrict the management's autonomy and thus hamper the managerial efficiency by forcing the board of directors to be engaged more in an oversight role than in decision-making. The Justice Ministry insists the new system be flawless since the corporations are allowed to freely decide whether to introduce the post of executive officer such as chief executive officer or chief financial officer. But from the enterprises' point of view, once adopting the system, then they have to fully comply with the entire codes stipulated by the commercial law, a condition that can be hardly described as ''autonomy." They fear that it's rather detrimental to managerial efficiency.

The Finance and Economy Ministry combined the five securities-related laws to establish the Capital Market Consolidation Act in 2007. With the current Securities Transaction Law to be replaced by the new legal paradigm in 2009, special clauses for the listed companies under the commercial code are expected to be scattered into the ''Law on Listed Companies" proposed by the finance ministry and the revamped commercial code prepared by the Justice Ministry. But as the new framework entails no fundamental changes in the text of the imperative regulations regarding the listed companies' corporate governance structure stipulated by the current Securities Transaction Law, its effectiveness is still in doubt.

Business-Friendly Corporation Act

A business-friendly corporation act requires several pre-conditions. First, imperatives and prior regulations should be minimized and second, the management control should be protected. A cluster of imperative and prior regulations can reduce the managerial efficiency at companies and thus become a huge obstacle to the nation's economic development. If company owners and top officials have to fret about any sort of threat to their management control all the time, then they would restrain facility investment, which, in turn, could hamper the expansion of the capital market and the national economic growth.

Therefore, in order to make a corporation act more favorable to the enterprises, the government should first abolish the existing imperative regulations over the corporate governance structure in the corporation law and reduce prior regulations as much as possible. Moreover, it should install more safeguards to spur the greater corporate investment.

To this end, the government should drop the revisions for the commercial code that have been proposed to force a change in the current corporate ownership structure, such as dual derivative lawsuit, statutory executive officer system, the ban on the usurpation of corporation opportunities. It also needs to withdraw the imperative regulations over the ratio of outside directors and audit committee from the second amendments to the commercial code. The deregulatory move will ensure a system whereby the corporations can build their own efficient corporate governance structure under the market's supervision.

The government also needs to enhance the legal framework to help the companies better protect their management controls to the level of developed countries so that the top managers can pursue aggressive goals with a sense of security. In 2006, the Justice Ministry was known to present to the National Assembly a proposal to remove the clause on shares with veto power from the commercial code, a system similar to the golden share widely used in many companies around the world.

Our current corporation act has produced an imbalance between the corporate raiders and defenders in the fight for management control after tearing down most of the restraints on merger and acquisition deals in a bid to attract foreign investors and facilitate the corporate restructuring in the wake of the 1997 financial crisis. Therefore, companies tend to repurchase their shares with their ample cash reserves, rather than heavily investing for expansion, in a bid to protect their management control, a pattern that is a big loss for the national economy as a whole.

Against this backdrop, it's necessary to revise the corporation act in a way to provide local companies with a number of effective weapons to protect their management control against hostile takeover attempts at lower costs. In the US, 93.6 percent of the S&P 500 listed companies have resorted to a variety of safeguards, such as ''poison pill.'' In Europe, 55 percent of the Swedish companies and 36 percent of the Finnish corporations have introduced the ''dual class stock system'' to defend themselves from corporate raiders.

To make a level playing field, the government needs to promote a more business-friendly corporation act by allowing golden shares, poison pill, or dual class stock system so that local companies can feel less vulnerable and pursue bold and aggressive business plans.

Corporation Act and Private Autonomy

Since the birth of the World Trade Organization-led international free trade regime, each country has been embroiled in a cut-throat economic war to tap into the vast global market. Under the circumstances, the government's move to overlook the international economic trends and the business-friendly legal frameworks in other countries and instead further tighten its grip on local companies cannot help sparking strong criticism of a typical retrogression. Revamping the corporation law in such a way to help local companies promptly and effectively expand their influence in the global market is exactly what the government has to do.

From this perspective, it's no wonder to see that our ''lost 10 years'' has been accompanied by the decade-long effort to revise the corporation act. The next government should restore what has been lost over the past 10 years and establish a solid legal system for a business-friendly corporation law that would lead the economy to prosperity in the coming 100 years. Implementing and enforcing the new law is equally urgent. The corporation act should return to the basic principle of private autonomy and serve as the bedrock for effective and efficient business management.

This article was carried on the Web site of the Center for Free Enterprise.