Directors’ Duty of Loyalty in South Korea: 2025 Commercial Act Guide

1. Why Were These Guidelines Issued? — Background of the 2025 Amendment

South Korea’s Ministry of Justice published the “Guidelines on Directors’ Conduct in Corporate Restructuring Transactions” in response to the amendment to Commercial Act Article 382-3 (Act No. 20991) that took effect on July 22, 2025. While the amended statute is clear about what directors must achieve, it does not tell directors specifically how to act in concrete situations. The guidelines were designed to fill that gap.

Purpose and Nature of the Guidelines

The guidelines state their purpose as follows: to “present matters for directors to note and reference when performing their duties in compliance with their obligations under the Commercial Act, thereby enhancing legal certainty following the implementation of the amended Act and supporting directors in making sound business judgments.” (Source: Ministry of Justice Guidelines, p. 1)

A critical point for foreign investors and counsel is that the guidelines have no binding legal force. The text explicitly provides that they do not bind the courts under any circumstances, do not constitute an administrative disposition or guidance under the Administrative Procedures Act, and the Ministry will not penalize any company or director for not following them. Moreover, the fact that a director did not follow the guidelines shall not, by itself, be interpreted as a failure to fulfill the director’s duties.

That said, the guidelines carry significant practical weight. Directors who follow them can demonstrate good faith, strengthen the presumption that their decisions were procedurally fair, and reduce litigation risk in the event of shareholder disputes.

Scope of Application

The guidelines apply to directors of all South Korean joint-stock companies (주식회사) subject to the Commercial Act, whether listed or unlisted. In practice, they will be most relevant to listed companies, where conflicts between controlling and minority shareholders are most likely to generate duty-of-loyalty disputes. The current version of the guidelines focuses specifically on inter-affiliate mergers and going-private transactions, with the Ministry noting that additional guidelines on other topics may follow.

2. What Does the Amended Article 382-3 of South Korea’s Commercial Act Actually Say?

Understanding the legal framework requires reading the statute directly. The full text of the amended Commercial Act Article 382-3, effective July 22, 2025, is as follows.

Commercial Act Article 382-3 (Full Text)

Article 382-3 (Directors’ Duty of Loyalty, etc.)

① A director shall perform his or her duties faithfully for the company and its shareholders in accordance with the provisions of statutes and the articles of incorporation.

② In performing his or her duties, a director shall protect the interests of all shareholders as a whole and shall treat the interests of all shareholders equitably.

The shift from “for the company” to “for the company and its shareholders” is not cosmetic. The legislative history quoted in the guidelines confirms the intent: the amendment was designed to fill the gap where “the company suffers no harm but all shareholders suffer a loss,” or where “the company suffers no harm but some shareholders benefit while others are harmed.” (Source: Guidelines, p. 4, citing Representative Lee Jeong-moon’s remarks at the 2nd Sub-committee on Legislation Review, 422nd National Assembly, February 24, 2025)

Paragraph 1 — Who Are “the Shareholders”?

The guidelines interpret “shareholders” in paragraph 1 as meaning shareholders as a collective body, not specific or individual shareholders. A director does not breach the duty by failing to reflect an individual shareholder’s preferences or declining an individual shareholder’s request, as long as the director acts in the long-term best interests of the company and shareholders as a whole.

Paragraph 2, First Clause — Duty to Protect the Interests of All Shareholders as a Whole

Under this clause, the term “all shareholders” (총주주) means “shareholders as a whole” — not respecting each individual shareholder’s preferences, but “protecting the collective interests of shareholders viewed as a single group.” (Source: Guidelines, p. 4, citing Representative Lee Jeong-moon) The guidelines further interpret “interests” as long-term interests, including sustainable corporate prospects, not short-term gains. The guidelines cross-reference Supreme Court Decision 2020Do17272 (October 16, 2025) on paid-in capital reduction, which held that causing concrete and realistic risk to corporate operations through an excessively large asset outflow violates directors’ duty to protect company assets even if the formal legal procedures were followed.

Paragraph 2, Second Clause — Duty to Treat All Shareholders Equitably

This clause requires directors to treat every shareholder equitably. The guidelines interpret it as meaning that the gains accruing to shareholders as a whole must be distributed fairly among them. This clause is most relevant when controlling and minority shareholders have conflicting interests.

Importantly, equitable treatment does not mean mechanically identical treatment. The guidelines invoke Supreme Court Decision 2021Da293213 (July 13, 2023), which held in the context of the shareholder equality principle that courts must “carefully examine, in light of concepts of justice and equity, whether differential treatment of shareholders by granting superior rights or benefits to some serves the interests of both the shareholders and the company as a whole.” The guidelines state this reasoning is equally relevant to the equitable-treatment duty.

What matters is whether a shareholder’s rights were substantively harmed relative to other shareholders without justification from the perspective of the company and all shareholders’ interests — not whether shareholders were formally treated identically.

Scope of Application of the Duty of Loyalty

The guidelines take the position that the amended duty-of-loyalty provision applies to all of a director’s conduct, not only to transactions involving conflicts of interest. However, situations involving actual or potential conflicts of interest present the heightened risk of duty violations. In such situations, directors must rigorously examine how their decisions affect not just the company but all shareholders, and whether equitable treatment of individual shareholders may be at issue.

The guidelines also explicitly reference the prior Supreme Court Decision 2002Do7340 (May 13, 2004), which held that because directors are agents of the company and not of shareholders, no criminal breach of trust liability arises merely from causing loss to shareholders. The guidelines note that the 2025 amendment was specifically intended to address this gap in shareholder protection.

Relationship Between the Duty of Loyalty and the Duty of Care

The duty of care (선관주의의무) is grounded in Commercial Act Article 382(2), which incorporates Civil Act Article 681, requiring directors to manage company affairs with the care of a good manager. Academic opinion is divided on whether the duty of care and duty of loyalty are distinct (analogous to the Anglo-American duty of care and duty of loyalty) or functionally identical. The Supreme Court generally refers to both as “the duty of care or duty of loyalty” without a sharp distinction, except in a few decisions that address the duty of loyalty alone (Supreme Court Decisions 2014Da11888 of January 28, 2016, and 2016Da222453 of August 24, 2016). The guidelines take the pragmatic position that regardless of which view is adopted, directors must: (1) perform their duties with the care of a good manager; (2) avoid conflicts of interest; and (3) act for the benefit of the company and all shareholders, not themselves or the controlling shareholder.

3. What Is the Business Judgment Rule Under South Korean Law?

The guidelines identify the business judgment rule as the central framework for assessing directors’ conduct. When the rule’s requirements are met, courts find no breach of the duty of care or duty of loyalty (Supreme Court Decision 2015Da70044, September 12, 2017, among others), and no criminal intent for the offense of breach of trust under the Criminal Act (Supreme Court Decision 2015Do12633, November 9, 2017, among others).

The Business Judgment Rule Standard

The Supreme Court formulation of the business judgment rule, cited directly in the guidelines, is as follows:

“If a director, after sufficiently gathering, investigating, and reviewing all reasonably available information regarding the extent of anticipated benefits and losses to the company, made a business judgment in good faith with a reasonable belief that it was in the best interests of the company and in accordance with the principle of good faith, and the content of that judgment was not grossly unreasonable and fell within the range of choices that could reasonably be made by a standard director, then even if the company subsequently suffers a loss as a result, the director’s conduct falls within the permissible scope of business judgment discretion and the director cannot be held liable for damages to the company.” (Supreme Court Decision 2006Da33333, October 11, 2007, among others; cited at Guidelines, p. 7)

Under the amended Commercial Act, the guidelines confirm that the requirement to act with “a reasonable belief that the decision is in the best interests of the company” is now assessed against the best interests of “the company and its shareholders.”

Three Practical Standards for Directors

The guidelines break the business judgment rule requirements down into three practical categories of conduct.

(1) Sufficient Gathering, Investigation, and Review of Necessary Information

Board agenda materials should contain, to the extent available, not only an explanation of the matter itself but also supporting data, comparisons with other companies, possible alternatives, and a multidimensional analysis of benefits and costs from the perspective of the company and its shareholders. Directors should actively request information and ask questions of management to receive substantive materials before making decisions. The guidelines recommend holding a pre-meeting briefing a few days before the board meeting, at which directors can ask questions and discuss the agenda in detail. Where high levels of expertise are required, directors may engage external advisors at the company’s expense.

(2) Reasonable Belief That the Decision Is in the Best Interests of the Company and Its Shareholders

Directors must be alert to conflicts of interest in the agenda item: whether any director, executive, controlling shareholder, or their related parties has an interest in the transaction that conflicts with the company’s interest, and whether controlling and minority shareholders’ interests are in conflict. The guidelines warn that approving a matter without properly recognizing the inherent conflicts of interest makes it difficult to argue that the director acted with “a reasonable belief that it was in the best interests of the company and its shareholders.” Directors must also remember they are agents of the company, not of the controlling shareholder.

(3) Business Judgment in Accordance with the Principle of Good Faith

Board decisions should be treated as substantive exercises of judgment, not mere rubber-stamping of management proposals. Directors should actively consider alternatives. The guidelines also introduce the concept of a “dynamic approach”: since transactions considered by the board often cannot be categorized as clearly lawful or clearly unlawful in advance, it may sometimes be appropriate to incrementally adjust a transaction’s procedures or terms to reduce the risk of duty violations, rather than simply approving or rejecting the transaction as presented.

4. What Fairness Measures Should Directors Take in Conflict-of-Interest Transactions?

The guidelines devote their most detailed section to fairness enhancement measures — steps that directors in conflict-of-interest transactions may voluntarily take to strengthen the fairness of their decision-making and reduce litigation risk. These measures are not mandatory obligations; the guidelines expressly state that choosing not to adopt any of them does not, by itself, constitute a breach of the duty of loyalty.

(1) Special Committee

Where structural conflicts of interest and information asymmetry call the independence of the full board into question, directors may consider establishing a special committee of independent outside directors with no interest in the transaction to review the legitimacy of the transaction’s purpose, the fairness of its terms, and the appropriateness of its procedures.

Composition: Committee members must satisfy three criteria: (1) independence from the controlling shareholder; (2) independence from the outcome of the transaction; and (3) professional expertise sufficient to assess the transaction’s fairness. Outside directors appointed under Commercial Act Article 542-8 (independent directors) are the preferred members. External advisors may also serve as committee members, but the guidelines recommend that, where circumstances permit, the committee be composed solely of independent outside directors, with separate external advisors retained to support the committee’s work.

Authority and Role: Under the Commercial Act, the authority to make major business decisions rests with the full board. The special committee is therefore primarily an advisory body to the board, not a decision-making body in its own right (see Commercial Act Article 393-2(2) for the rules on board sub-committees). The board must give maximum deference to the committee’s conclusions, and if it reaches a different conclusion, it should record the reasons clearly in the board minutes or a separate document. Alternatively, if the special committee is composed entirely of outside directors and meets the statutory requirements for an internal board sub-committee under Article 393-2(2), the board may formally delegate decision-making authority to it.

Timing: The committee must be established early enough to meaningfully review the legitimacy, fairness, and appropriateness of the transaction. Establishing it after the terms have effectively been decided is not appropriate.

Information Access: Subject to each member’s confidentiality obligations under Commercial Act Article 382-4, the committee must have access to material non-public information necessary to carry out its work.

(2) Independent External Advisors

Directors may retain external professionals with the necessary expertise and independence to review the structure, procedures, and fairness of the transaction terms. The guidelines distinguish two categories.

Legal advisors should review not only legal risks but also the legitimacy of the transaction’s purpose, the fairness of its terms, the appropriateness of its procedures, and the independence of other participants including special committee members and financial advisors. Legal advisors who are independent of the transaction and its parties should be engaged from the earliest stage.

Financial advisors play a crucial role in valuing the transaction. Where applicable law mandates an external valuation — such as under the Financial Investment Services and Capital Markets Act (자본시장법) — compliance is obviously required. But even where no legal mandate exists, retaining an independent financial advisor as a voluntary fairness measure is worth considering. The guidelines note that while fairness opinions are used in some jurisdictions, no standard market practice for such opinions has yet developed in South Korea, and it may be premature to recommend them as a general measure at this stage.

(3) Substantive Disclosure to Shareholders

The guidelines emphasize that meaningful disclosure to shareholders is a prerequisite for their informed participation. In transactions involving conflicts of interest, directors should explain clearly the rationale for the decision, the process by which alternatives were considered, whether conflicts of interest exist, and the content and limitations of any fairness measures taken. Shareholders must be given sufficient information to independently verify the procedural and substantive fairness of the decision.

This does not impose new disclosure obligations. Rather, the guidelines recommend that when fulfilling existing statutory notification, public notice, disclosure, and reporting obligations — such as the board opinion statement required under Article 176-5(6) of the Enforcement Decree of the Financial Investment Services and Capital Markets Act for listed company mergers — directors should provide substantive content rather than boilerplate.

(4) Minority Shareholder Approval

The guidelines conclude that minority shareholder approval (majority-of-minority voting) cannot be recommended as a general fairness measure in South Korea for the following reasons: it creates disproportionate voting power for some shareholders contrary to the shareholder equality principle; the Commercial Act contains no provision for convening a shareholder meeting limited to certain shareholders; the scope of “controlling shareholders” excluded from voting is unclear; and there is no mechanism to implement it for transactions that do not require a shareholder resolution under Commercial Act Article 361. The guidelines do suggest that in transactions with especially high conflict-of-interest and harm potential, a shareholder survey modeled on the minority approval concept may be worth considering, but caution that any such survey process would require careful attention to public disclosure obligations to avoid securities law violations.

5. Inter-Affiliate Mergers and Going-Private Transactions — What Are Directors Required to Do?

The guidelines select inter-affiliate mergers and going-private transactions as the two transaction types most in need of specific director conduct standards, because they present the sharpest conflicts between controlling and minority shareholders and cause harm directly to shareholders rather than to the company itself.

Inter-Affiliate Mergers

The core problem: In an inter-affiliate merger, the controlling shareholder can influence both sides of the transaction. Setting the merger ratio to favor one company’s shareholders necessarily disadvantages the other company’s shareholders. Without protective measures, there is a structural risk — and public suspicion — that the merger ratio will be set to favor the company in which the controlling shareholder holds a higher proportion of shares. This problem persists even under the existing Financial Investment Services and Capital Markets Act regime, which requires listed companies to base the merger price on recent market prices, if the market price itself is manipulated or the timing of the merger is strategic.

Directors’ duties: Directors approving an inter-affiliate merger must protect all shareholders’ interests and ensure no shareholder suffers unjustified disadvantage. The guidelines stress that the merger must be pursued for long-term corporate value enhancement, and that directors must resist short-term market pressures when making their judgment. The guidelines explicitly protect this long-term perspective: sound merger decisions motivated by long-term corporate value should not be impeded by short-term expectations or pressures.

Specific fairness measures:

• Replicating arm’s-length conditions: The guiding principle for inter-affiliate mergers is to create conditions that replicate, as closely as possible, an arm’s-length transaction between independent parties. A special committee established for each party to the merger, independently reviewing the merger terms from the perspective of each company and its shareholders, is the primary mechanism for achieving this.
• Securing a fair merger price: The guidelines acknowledge that merger pricing is not a matter of finding a single correct numerical answer but of securing substantive and procedural fairness throughout the valuation, negotiation, and agreement process. Multiple valuation methods — discounted cash flow, comparable company analysis, precedent transaction analysis, and others — may yield different results, and different assumptions within the same method will also produce different outcomes. The guidelines suggest considering multiple advisors where the potential for shareholder harm is high, while acknowledging that the limited pool of qualifying accounting firms in South Korea makes this a context-dependent judgment.
• Substantive disclosure: For listed company mergers, the board opinion required under Article 176-5(6) of the Enforcement Decree of the Financial Investment Services and Capital Markets Act should contain substantive information including: the necessity of the merger; the reasons for the chosen timing; the merger’s impact on shareholder value; the type of merger consideration and the reasons for choosing it; the valuation method used for the merger price and the reasons for selecting that method; the interests of directors, controlling shareholders, and affiliates in the merger; the impact of the merger on shareholders’ ownership stakes; and changes to the governance structure and board composition following the merger.

Going-Private Transactions

A going-private transaction, as defined in the guidelines, encompasses any transaction by which a listed company’s controlling shareholder acquires all or substantially all of the remaining shares and converts the company into a private company. It may take the form of a tender offer, open-market purchases, a comprehensive share exchange, a reverse stock split, or a controlling shareholder’s squeeze-out right, or a combination of these.

The most common structure involves: (1) a tender offer to first acquire a threshold level of shares, followed by (2) a comprehensive share exchange with cash consideration (交付金 株式交換, or a cash-out share exchange) to acquire all remaining shares. Alternatively, the controlling shareholder may continue tender offers until meeting the Korea Exchange requirements for voluntary delisting and then apply for delisting.

Directors’ expanded duties: Historically, target company directors did not involve themselves in tender offers because tender offers do not directly affect the company’s own profit or loss. Under the amended Article 382-3, however, the guidelines state that directors now have both the legal basis and the responsibility to protect minority shareholders if the controlling shareholder’s tender offer harms their interests. The guidelines specifically identify three structural risks in going-private transactions that directors must address:

• Structural conflicts of interest and information asymmetry between the controlling shareholder (who has superior access to the company’s non-public information) and minority shareholders
• Sell pressure on minority shareholders caused by the significant loss of share liquidity after delisting
• Sell pressure from the risk of a downward price step-down: where a cash-out share exchange is planned after the tender offer, shareholders who do not tender may receive a lower price in the subsequent share exchange than in the tender offer

Board opinion on the tender offer: Article 138 of the Financial Investment Services and Capital Markets Act permits — but does not require — the target company to voluntarily publish a statement of opinion on a tender offer. The guidelines recommend that target company directors actively consider submitting such a statement when the tender offer is part of a going-private transaction. The statement should include: (1) an opinion on whether the transaction structure adequately protects minority shareholders’ interests, with supporting reasoning; (2) an opinion on the fairness of the tender offer price and conditions, with supporting reasoning; and (3) a review of comparable precedents and an assessment of whether alternative, less harmful transaction structures exist. The guidelines also suggest that when the offeror is the controlling shareholder, a special committee of directors independent from the controlling shareholder should be formed to determine whether a statement should be issued and to set its content.

Cash-out share exchange: In going-private transactions combining a tender offer with a subsequent cash-out share exchange, the guidelines state that directors must carefully examine whether the exchange consideration can be set at a level at least equal to the tender offer price. Setting the exchange price below the tender offer price forces shareholders who did not tender to accept a lower value for their shares, which constitutes unfavorable treatment relative to tendering shareholders without justification. The guidelines also recommend evaluating whether to adopt special committee review and external advisor engagement for the cash-out share exchange, taking into account whether the preceding tender offer provided an adequate voluntary exit opportunity at a fair price.

The full text of the guidelines is available directly from South Korea’s Ministry of Justice: https://www.moj.go.kr/bbs/moj/182/603763/artclView.do

6. FAQ

Having handled numerous corporate M&A, inter-affiliate merger, and shareholder dispute matters, the impact of directors’ duty violations on litigation outcomes is something we have observed directly. The 2025 amendment and the Ministry of Justice guidelines do not simply expand directors’ exposure — they provide, for the first time in South Korea, a structured framework that allows directors to affirmatively demonstrate they fulfilled their duties. For foreign companies operating in South Korea or considering Korean M&A, understanding these standards is now essential to sound governance and risk management. If you require a legal assessment of specific transactions or director liability issues under South Korean law, we are available to assist based on precedent analysis and hands-on transactional experience.

The full text of the guidelines is available at the Ministry of Justice website: https://www.moj.go.kr/bbs/moj/182/603763/artclView.do

※ This article is based on the “Guidelines on Directors’ Conduct in Corporate Restructuring Transactions” published by South Korea’s Ministry of Justice and is intended for general informational purposes only. Legal conclusions may vary depending on the specific facts of each case. Please consult a qualified attorney before taking any action in connection with an actual matter.