Q) I would like to enquire about a situation of a director working at a Korean subsidiary (corporation) of U.S. company, who has secretly started a similar trade of business while still in employment with his current employer.  Having served in a managerial position, he has access to his employer’s full clientele’s information, trade secret and now he started the same business as his employer, directly causing many economic losses to his employer.  Is there any way legally to prevent the person from causing further damages?  

A) Under Korean law, a director of a corporation bears a fiduciary duty.  Thus the directors shall perform their duties in good faith for the interest of the company. Their activities shall not violate the statutes and the articles of incorporation of the company.

Overview of Director’s Fiduciary Duty Under the Korean Law

The Commercial Code of Korea details the liability of a director stemming from its fiduciary duty as follows:

• Duty to monitor the other director’s activities 

Article 393 (Authority of Board of Directors) (2) The board of directors shall supervise the performance of duties by directors.

• Duty not to compete with the corporate business

Article 397 (Prohibition of Competition) (1) No director shall, without the approval of the board of directors, engage in, on his/her own account or on the account of a third party, any transaction in the same type of business of the company or become a general partner or a director of any other company, the business purposes of which are the same as those of the company.

• Prohibition of a self-dealing

Article 398 (Transactions between Directors, etc. and Company) When a director intends to engage in a transaction with the company on his/her own account or on the account of a third party, he/she shall in advance disclose material facts about the relevant transaction at the board of directors and shall obtain approval therefrom.

• Prohibition of appropriation of the company’s business opportunity

Article 397-2 (Prohibition of Appropriation of Company’s Opportunities and Assets) (1) No director shall use business opportunities of the company falling under any of the following subparagraphs and likely to be of present or future benefit to the company, on his/her own account or on the account of a third party, without the approval of the board of directors. In such cases, the approval of the board of directors shall be granted with two thirds or more of the total number of directors:
1. A business opportunity that has become known to the director in the course of performing his/her duty, or a business opportunity taking advantage of information of the company;
2. A business opportunity closely related to the business that is being currently conducted or is to be conducted by the company.

The above question deals with a typical issue of a director’s fiduciary duties. Considering his high position within the company, he bears an obligation not to misappropriate the company’s business opportunity. His use of full clientele’s information and the trade secret of the company and doing the same type of business on his own account is a breach of the director’s fiduciary duty under Korean law.

Civil Liability for the Breach of Fiduciary Duty

If a director has intentionally or negligently acted in violation of fiduciary duty, he/she shall be jointly and severally liable for damage against the company.

Criminal Liability for the Breach of Fiduciary Duty

It also should be noted that a breach of fiduciary could under Korean law result in criminal punishment. It is very common in Korea that directors are prosecuted and punished for his breach of fiduciary duty and negligent failure of management.

For example, Article 356 of the Criminal Act) provides that a person who violated the duties to care for the other’s business shall be punished by imprisonment for not more than ten years or by a fine not exceeding 30 million won.   The statutory punishment can be severe if the amount of business loss and harm gets larger.

It is well known that the Korean court holds a strict position in protecting the corporate’s interest by putting a high standard of care in the director’s fulfillment of his fiduciary duty. This calls for caution from directors who are taking care of the everyday business of Korean companies.

We hope this article to be of assistance to you.  If you have any questions on this article or corporate matters under Korean law, please send an email by clicking here or visit Legal Consultation page. Our Korean licensed lawyers, not a U.S. lawyer residing in Korea, will answer your inquiry.

© Chung & Partners, Korean Full Service Law Firm.  All rights reserved.

Because of the generality of this update, the information provided herein, which may or may not reflect the most current legal development, may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.