KT&G Treasury Stock Donation Ruling Ignites Controversy

The foundation's chairperson is composed of current and former KT&G CEOs, and it has never cast a single dissenting vote against management's proposals at KT&G shareholder meetings. This raises suspicions that the public interest foundation has effectively been used as a friendly stake for management.

Under current regulations, there is no limit on the ratio of treasury shares that can be donated to a public interest foundation in companies with professional management and no controlling shareholder. In contrast, public interest foundations of companies with a major shareholder are restricted from exercising voting rights exceeding 5%. This regulatory imbalance is pointed out as having the potential to be misused as a means of defending management rights through treasury shares under a professional management system.

The fund argued that the directors' act of donating company treasury shares while also serving as chairpersons of the public interest foundation constituted a breach of trust due to their use of their positions. However, the Daejeon District Court ruled against the shareholders in the first instance, finding that the plaintiffs failed to sufficiently prove the directors' conflict of interest and breach of trust. The court concluded that the plaintiffs did not clearly demonstrate that the directors' actions caused harm to the company.

Concerns are growing as courts continue to place the burden of proof for breach of trust on the plaintiff shareholders. There is criticism that the directors' fiduciary duty to shareholders, introduced last year, could lose effectiveness due to this judicial practice. It is pointed out that without a shift in the burden of proof, the fiduciary duty provision would merely be a formal clause, limiting its ability to prevent management's conflict of interest actions.

This structure, an 'entrenchment' strategy, can be used by professional managers to solidify their control through mutual cooperation and prevent external intervention. This can be perceived as prioritizing the management's position over shareholder interests.

By legally prohibiting the exercise of voting rights for donated shares, it is believed that these shares should be prevented from siding with management and diluting shareholder value. This is emphasized as an essential measure for protecting shareholder interests and establishing fair governance.

The Commercial Act contains provisions that allow exceptions for the exercise of voting rights when treasury shares are donated to in-house welfare funds and employee stock ownership associations. However, critics argue that these exceptions, coupled with the reality that union and welfare fund managers are often company insiders, can serve as a structural cause making it difficult to replace management. This structure can enhance management stability while weakening independent oversight functions over shareholders.

The core of the KT&G case is the revival of voting rights by contributing treasury shares, purchased with shareholders' money, to a public interest foundation for free. It is pointed out that this is fundamentally different from cases like the Wallenberg family in Sweden, where the major shareholder contributes their own personal assets to a public interest foundation. Using treasury shares, which are shareholder assets, for the purpose of defending management rights is criticized as an act that harms shareholder value.

While the Delaware court system in the U.S. adheres to the Business Judgment Rule (BJR) as a global standard, it applies exceptions when there is a potential for director conflicts of interest. If the plaintiff demonstrates a conflict of interest structure with 51% probability, the burden of proof shifts to the defendant directors. Directors must then prove that their actions were fair to the company and its shareholders. If this principle were adopted by Korean courts, it could proactively deter conflict-of-interest actions and enhance director accountability. This structure would encourage boards to approach decisions that could harm shareholder interests more cautiously and contribute to resolving the 'Korea Discount'.

If the burden-shifting principle is introduced, the personal legal liability burden on directors could significantly increase. If directors fail to prove the fairness of their business judgment in a conflict of interest situation and lose the lawsuit, they could face the potential risk of incurring substantial losses, estimated at approximately 70 billion won. This increase in legal risk would serve as an important criterion to induce directors to make rational and transparent business judgments. Consequently, changes in the court's review standards would lead management to exercise greater caution in risk management that considers shareholder value, contributing to an overall improvement in corporate governance.