Debate on Breach of Trust

Suppose a businessman is imprisoned on charge of breach of trust, or malfeasance (배임죄/背任罪). Is it good for the justice of economy? Otherwise, could it discourage badly needed entrepreneurship?

If businessmen have to be concerned about criminal charges, they will inevitably become more risk averse. In the name of “economic democratization,” the latest buzzword, there have been calls for stricter punishment of embezzlement and misfeasance. Some claim that the application of misappropriation charges would unduly restrain corporate management and investment. In academic circles, some call for a legal clause to exclude legitimate business judgments from misfeasance charges.

There takes place a debate on whether misappropriation charge should not apply to big business argued by Prof. Jun-son Choi.

On the other hand, an NGO activist, Attorney Ji-su Lee, member of the Solidarity for Economic Reform, argued from the perspective of economic democratization.

[PRO] Business judgment is not a crime
The misfeasance charge is defined in criminal law, commercial law and the act on the aggravated punishment of specific economic crimes. Misfeasance in office is an act that goes against the duty of someone who is in charge of another person’s business. When the person entrusted with responsibility receives illicit financial gain, the act is punishable by law. The special misfeasance charge applies to members of the board of listed companies and is applied through commercial law.

I want to make it clear that I am not arguing for elimination of the misfeasance charge. Rather, I am merely proposing that the commercial law should be revised to exempt the members of corporate boards of directors from being punished for special misfeasance when their business judgment results in a loss to the company.

When board members make business decisions, they are doing their job.

Someone who receives bribes from a client or embezzles company funds should be punished justly. However, there are many cases of criminal indictments involving big losses that resulted from mistakes in business operations. And punishment standards for misfeasance are rather ambiguous, stating that directors and executives can be punished not only for actual personal gain or corporate loss, but for the “risk” of loss as well. The criminal law’s purpose is to deal with the legal violations that caused damage. But punishment for causing risk amounts to intervention by the state before any actual legal violations occur. Compared to other criminal charges, the acquittal rate for misfeasance is five times higher because of the ambiguity of precisely what constitutes a violation.

The essence of misfeasance is betrayal. Betrayal is an ethical matter that should be dealt with by civil law. The misfeasance crime should be resolved through civil - not criminal -means. It is an excessive intervention of punitive authority that poses a risk to an individual’s liberty. Therefore, punishable acts need to be clarified.

According to the act on the aggravated punishment of specific economic crimes, misfeasance is subject to a prison term of at least five years when the gain is more than 5 billion won ($4.6 million), and three years for a gain of 500,000 won to 5 billion won. Former and incumbent Saenuri Party lawmakers formed the Economic Democratization Action Group and proposed the first bill for economic democratization in July. According to the bill, misfeasance that results in more than 30 billion won is subject to imprisonment of a minimum of 15 years and misfeasance should be exempt from stays of execution or pardons.

Today, because of economic expansion and a decline in the value of the currency, many cases involve more than 500,000 won. The standard of 30 billion won is not so big as it might sound, considering the size of projects that global corporations handle. The market environment is rapidly changing, and global competition is extremely intense. For corporate management, taking risks is part of the job, but risks today are incomparably bigger than they were in the past. If businessmen have to be concerned about criminal charges, they will inevitably become more risk averse and less able to compete.

We need to introduce the business judgment rule acknowledged in American judicial precedent and German securities law to exclude legitimate business decisions from misfeasance charges.

The clauses on special misfeasance charges in commercial law should include a statement that business judgment is not punishable. When a manager makes a judgment based on reasonable business practice with no intention of personal gain, he should not be held legally accountable for any loss.

[CON] Prepare first, then apply the rule
Few executives and directors charged with misfeasance are free from conflicts of interest.

The business judgment rule is a legal principle developed in the United States according to case law. In Korea, while the rule not stipulated in text, some judicial precedents have at least partially applied it. According to those who want to introduce a business judgment rule in cases where misfeasance is charged, the misfeasance crime in commercial law suggests that a civil case adjudicated according to criminal law could violate the “no penalty without a law” principle. However, this reasoning risks exempting the illegal activities of conglomerates as well.

Before introducing the business judgment rule, the following preconditions must be considered. In order to understand the business judgment rule, it is first necessary to understand the accountability of corporate boards of directors. An individual entrusted with another person’s assets has the duty of trust, or fiduciary duty.

This responsibility includes the duty of care and duty of loyalty. The two duties are distinguished based on whether the person who has made the decision has any conflicts of interest. Here, the area protected by the business judgment rule violates the duty of care, which does not involve conflicts of interest. At the same time, violations of duty of loyalty are not protected by the business judgment rule.

If the individual who has participated in the decision-making process of the company made a decision in good faith with no conflict of interest, the court cannot hold the person accountable under the business judgment rule, even if the decision resulted in a loss to the company. However, if that person has any personal interests in any form, the court would perceive the decision to be influenced by self-interest and review not just the outcome of the decision, but also the decision-making process. The legal term is “entire fairness.” In other words, if there is any conflict of interest, the business judgment rule is not applied from the beginning.

How is misfeasance on duty treated in Korea? Few executives and directors charged with misfeasance are free from conflicts of interest.

In other words, most misfeasance cases in Korea are violations of duty of loyalty caused by prioritizing personal interests over the interests of the company or shareholders. Therefore, it is a dangerous idea to grant protection of the business judgment rule without an accurate understanding of the distinction between duty of care and duty of loyalty.

If the business judgment rule must be introduced in the commercial law, there needs to be a few preconditions. Most importantly, procedural obstacles should be removed. Multiple derivative suits or shareholders’ derivative suits based on the exclusive right of stockholders should be recognized.

Also, in duty of loyalty violations, procedures should be revised so the responsibility of proof is shifted from the plaintiff to the defendant. If the plaintiff is responsible for proving the violation and protected by the business judgment rule, the defendant would be at a great disadvantage.

Once legal measures are prepared for those at loss to file for sufficient and fair legal remedy to the responsible individual, the introduction of the business judgment rule can be discussed. Inciting citizens without proper understanding of the legal principles is hardly desirable.