Shareholder Suits and Outside Director Liability: The Case of Korea

Abstract

Reforms to Korean corporate and securities law carried out in the wake of the 1997-1998 East Asian financial crisis included a mandate that boards include a minimum number of outside directors and facilitation of shareholder lawsuits against board members for damages. The strategy of imposing liability risk on directors (both inside and outside) appeared to follow U.S. practice. In the U.S., outside directors of public companies are often sued but rarely face personal, or “out-of-pocket,” liability unless they engage in self-dealing. Instead, damages and legal fees are paid by the company, directors’ and officers’ (D&O) insurance, or both. Outside directors of public companies in Australia, Canada, Britain, France, Germany, and Japan similarly rarely face out-of-pocket liability due to shareholder lawsuits. Moreover, when events have occurred in these countries that increase the risk of out-of-pocket liability, there is a strong tendency for political or market forces to reestablish a non-zero but minimal level of risk for actions that do not involve self-dealing. Korea’s experience seems to be similar. We argue that Korea could go somewhat further to encourage litigation against outside directors of public companies, but should not open the way for “out of pocket” liability to become commonplace.