Self-dealing

Self-dealing (자기거래) is usually referred to the dealing between the director and the company. Article 398 of the Commercial Act (hereinafter the "Act") provides that the director may deal a transaction with the company only if the Board of Directors approves it.

Self-dealings come into effect when there is a board approval, and whether it is a fair dealing is not the factor of the effectuation. But the question of when who can be approved about what dealing, and from whom or how to be approved, the boundary is not clear. There also has been plenty of debates about the interpretation on the effect of the dealing without an approval or with the approval in defect, and on the liability of the director in that case.

Key words
director, self-dealing, fiduciary duty, duty of loyalty, board of directors, board approval

Statutory grounds for regulating Director's Self-dealing
There are supposed to be other hidden commandmenta than the following statutes, which are usually assigned to a director of a company. It must be "First in the interest of your company. Never your own interest first!" Article 398 of the Act provides as follows:
 * A dirctor may effectuate a transaction with the company for his own account or for accout of a third person only if he has obtained the approval of the board of dirctors.
 * In this case, Article 124 of the Civil Act shall not apply.

Article 382(2) of the Act provides for the regulation on delegation (so called “fiduciary duty”) to the company-director relationship.

In addition, Article 382-3 of the Act sets forth director's duty of loyalty.

Director who requires an approval
The Director that calls for an approval of the board of directors under Article 398 of the Act, considering the intent of the provision, means any director appointed by the stockholders' general meeting or by other legal procedure, who is authorized to participate in and control on decision making of the corporate management in the board.

When an approval is required
The director may deal with the company — only if the board of directors approves Article 398 of the Act. On the question of the board approval whether it should be prior or can be ex post facto, the majority objects to ex post facto approval for it is not desirable that the third party standing fluctuate according to ex post facto and for, if allowed, it would encourage the director in Self dealing. The Supreme Court clearly states that the board can ratify the self-dealing of the director later.

Dealing that requires an approval
Article 398 of the Act clearly stipulates that it applies to the case when the profit and loss returns to the director no matter who the interested party or the name holder of the trade is. Considering the legislative purpose of the Article 398, the self dealing that requires an approval is any legal action dealing any property that might cause the conflict of the director-company interests.

Article 398 of the Act makes the board approve the self-dealing of the director. The approval is authorized by the board of directors in principle, or exceptionally by the stockholders' general meeting if it is one-man company or it has special provisions in the articles of incorporation. The board approval should be made in properly convened board by majority of all member directors pursuant to Article 391(1) of the Act. The approval of the board should be made for an individual dealing, and comprehensive approval is not allowable. Nevertheless, in case of repetitive trade it may be comprehensive within the reasonable extent in type and the period etc.

When process of convocation or vote in defect, the decision of the board becomes void, but if unanimously agreed, it is valid.

Validity of the Self-dealing without Approval
The self-dealing of director without the board approval is invalid between the director and the company. But between the company and a third party, it is appropriate to admit it void only when the company proves the third party is not in good faith, for the safety of business transactions and the interest of the company.

Director's Liability on Self-dealing
Restraining the self-dealing of the director is to prevent the interest of the company from being harmed by the selfish act of the director, so it is proper the director be responsible for the damages of the company arising out of the director's self-dealing.

This kind of liability of director is the liability for the damages from tort when the director's self-dealing meets the requirements of the tort, and for the breach of contract in a mandatory relationship with the company. The director is also liable for the damages under Article 399 of the Act.