Suppose a company merges with another. Its board must decide whether to proceed and at what ratio to exchange shares. Whose interests should directors use as the standard for that judgment? The company itself, the controlling shareholder, or all shareholders including minority holders? The recently revised Commercial Act broadened the object of a director's duty of loyalty from "the company" to "the company and its shareholders."
The practical implications of that change are clearest in mergers between affiliates. Because the same governance structure spans both companies in such deals, the process of setting the merger ratio tends to face closer scrutiny. Even when the company as a whole suffers no loss, the method of calculation can leave minority shareholders with relatively unfavorable consideration. The Ministry of Justice's recent guidelines on standards of conduct for directors take mergers between affiliates and delisting-type transactions as their first subject of review, reflecting the demand that boards keep a careful record of how they reach their decisions.
The guidelines are soft law, not statute. They matter nonetheless because they translate the business judgment rule, which court rulings have described only in the abstract, into concrete standards of conduct. In cases involving conflicts of interest, Korean courts examine point by point whether the board reviewed enough of the necessary information and whether it had reasonable grounds to conclude that a deal served both the company and its shareholders. The only way a board can defend itself if it later faces litigation or a dispute is to leave behind a record that it followed the proper process.
The sharper the conflict of interest in a merger, the greater the need for mechanisms that support the fairness of the judgment. The guidelines propose forming a special committee to review the purpose and terms of a transaction, and having outside experts with no stake in the deal verify the adequacy of the merger price and the deal structure. They also call for setting out in detail, in the board's written opinion to shareholders, the conflicts of interest involved and the steps taken to resolve them. These are not legally binding obligations, but their importance is far from small given the risks a board takes on by skipping them.
One approach under discussion is to gather only shareholders with no stake in the deal and decide by majority vote among them, but Korean law offers little basis for such a procedure, making it difficult to restrict a controlling shareholder's voting rights at will. Even so, there have been cases in which a special committee surveyed minority shareholders and, finding widespread opposition, recommended delaying the merger. In the end, the message of the guidelines is simple: a director serves not one group of shareholders but the company and all of its shareholders. The more sharply interests diverge, as they do in a merger, the more a board must prove that commitment through process rather than words.
