Supreme Court Precedent
In the judgment issued on November 11, 2021 (Case No. 2017다222368), the Supreme Court ruled that "the defendant, who is the CEO, cannot avoid responsibility simply because they were unaware of the specific collusive actions in this case and did not directly instruct the executives' actions. If the defendant continuously neglected their duty to monitor as a CEO and, as a result, the company suffered damages, the defendant must be held liable for compensation."
Explanation
1. The duty of directors and CEOs to monitor
If a director intentionally or negligently commits actions that violate laws or the company's articles of association, or neglects their duties, the director is jointly liable for damages to the company (Article 399, Paragraph 1 of the Commercial Act). Directors of joint-stock companies not only have the duty to comply with the law themselves but also bear the responsibility to monitor and supervise other executive directors to ensure they comply with the law in performing their duties.
In particular, the CEO has the authority to perform all judicial and extrajudicial actions concerning the company's business (Article 389, Paragraph 3 and Article 209, Paragraph 1 of the Commercial Act). As a member of the board of directors, the CEO has the authority and responsibility to monitor the overall execution of duties by other executive directors, including other CEOs.
Therefore, if a CEO or other directors intentionally or negligently violate their duty to monitor and ignore the suspected illegal execution of duties by other CEOs or executive directors, they will be held liable for compensation under Article 399, Paragraph 1 of the Commercial Act for damages incurred by the company as a result.
2. To what extent are directors responsible for their duty to monitor?
The specific content of a director's duty to monitor may vary greatly depending on the size and organization of the company, the industry, regulatory requirements, business conditions, and financial status. In large, highly specialized companies, it may be inevitable for CEOs and executive directors to handle their own areas of expertise according to the internal division of duties.
However, the Supreme Court maintains that such circumstances alone do not exempt directors from their duty to monitor the execution of duties by other directors.
CEOs and directors must make efforts to establish a reasonable information and reporting system and an internal control system (hereinafter referred to as the "internal control system") and ensure that it operates properly. If they fail to make such efforts or, even if such a system is in place, they neglect their duty to monitor and supervise the overall company operations, they may not be aware of the risks or issues that require the attention of directors, such as illegal or inappropriate execution of duties by other directors. In such cases, the director will be held liable for damages due to the violation of the duty to monitor.
What happens if the duty to monitor is violated?
CEOs and directors will be held liable for damages to the company.
However, in reality, it is not easy for the company to claim damages from CEOs or directors. Typically, litigation proceeds in the form of a shareholder derivative lawsuit.
A shareholder derivative lawsuit can be explained as follows:
1. Shareholders who can initiate derivative lawsuits:
- For the subject company - Shareholders owning 1% or more of the shares in a non-listed company (Article 403 of the Commercial Act) or those owning 0.01% or more of the issued shares in a listed company, continuously for 6 months prior (Article 542-6, Paragraph 6 of the Commercial Act).
- For the parent company - Shareholders owning 1% or more of the total issued shares (Article 406-2 of the Commercial Act) or, for listed companies, those owning 0.5% or more of the total issued shares continuously for 6 months prior (Article 542-6, Paragraph 7 of the Commercial Act). (Only one of the above two requirements needs to be met. A parent company refers to a company that owns more than 50% of the total issued shares of another company (Article 342-2 of the Commercial Act))
2. Shareholders mentioned in Paragraph 1 must submit a written request to the company to "file a lawsuit for damages against the director."
3. If the company does not file a lawsuit within 30 days from the date of receiving such a request, the shareholders in Paragraph 1 can file a lawsuit on behalf of the company.
4. In this case, the shareholder files a lawsuit demanding that "the director compensates the company for the damages," and not a lawsuit demanding that "the director compensates the shareholder for the damages."
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