The new article 397-2 of the Korean Commercial Code, which is to take effect in April 2012, prohibits a director of a company from utilizing corporate opportunities without approval of the board of directors.
Corporate opportunity is broadly defined so that any business opportunity which is closely related to the current or future business of a company would constitute a corporate opportunity for the purpose of this provision.
Breach of this provision would enable the company (and its shareholders by way of derivative suits) to make damage claims against the director who usurped the corporate opportunity. Further, any profit obtained by the director from the corporate opportunity is presumed to be the damages incurred by the company.
Given the seemingly draconian language of the new legislation, it is not surprising that many businessmen and scholars are fiercely opposing to this provision arguing that it will create unreasonable burden on the companies and suffocate enterpreneur spirit. On the contrary, many scholars and NGO activists insist on strict enforcement of this new provision in order to prevent the practice of so-called mol-a-ju-gi (practices that certain Korean companies belonging to large conglomerate groups grant profitable business opportunities to, or doing substantial businesses with, certain affiliate companies owned by the largest shareholders or their family members).
The author tries to present reasonable ways to interpret this arguably overreaching provision. To begin with, given the broad statutory definition,the concept of corporate opportunity should be understood to include business opportunities which are in either a horizontal or vertical relationship with the business the company is or expects to be engaged. In this regard, review of 20 famous US cases on corporate opportunity doctrine and certain allegations in Korea reveals that two types of fact patterns are dominant: horizontal and vertical. In case of horizontal cases, the usurped opportunities constitute businesses competing with the company; in case of vertical cases, the usurped opportunities constitute businesses transacting with the company. Horizontal cases may lead to breach of duty of noncompetition,while vertical cases may lead to self dealing. In any event, it seems inevitable that a corporate opportunity will be quite easily found to exist under the new provision.
In order to limit the overreaching scope of this provision, the board of directors should be allowed to use appropriate discretion in deciding whether to utilize or reject the corporate opportunities. As Coase observed,a company may choose between expanding itself or contracting with other businesses, depending on the level of organization costs and transaction costs. In this regard, the directors’ business judgment on whether to utilize or reject the opportunity should be respected to the extent that they made an informed, good-faith decision after careful review of the relevant information without conflict of interests.
Thus, if there is a possibility or suspicion that certain business opportunity may constitute a valuable corporate opportunity, the relevant director should take conservative approach by reporting the details of such opportunity as well as his interest involved in it to the board of directors.
The directors reviewing this matter should be provided with sufficient information and access to professional advices, and their decision on whether to take or reject such an opportunity should be protected under the business judgment rule. Ex post ratification by the board of directors should be allowed to promote candid disclosure even after the fact. The new voting requirement of “two-thirds of all the incumbent directors” should be amended back to the simple majority rule since the new requirement does not anticipate delegation to sub-committee within the board.
The proposed way of interpreting this new provision will, on the one hand, promote open discussion of the matters relating to potential corporate opportunities and transactions with affiliates, especially the affiliate companies where the largest shareholder of the company has higher stake than he/she has in the company. On the other hand, it will prevent the possibility that the directors take unreasonably conservative approach for fear of being sued.