Internal-Control Oversight Duties of Directors of Large Companies, Non-Competition and Usurpation of Corporate Opportunities: An Analysis of Three Company Law Judgments

Question

This brief examines, through three judgments, the standards for breach by representative directors and outside directors of large listed and construction companies of their duties to establish internal control systems and to oversee, and the principles for calculating damages where a director transferred an exclusive distribution right through a competing company in breach of the non-competition duty and through usurpation of a corporate opportunity.

The first issue is the question addressed in judgment 2021Da279347: "Is an outside director of a large construction company that failed to prevent repeated bid-rigging liable for damages for breach of the duty of oversight?" The second issue is the question addressed in judgment 2017Da222368: "In a company that was imposed a surcharge for large-scale price-fixing over a long period, how far does the representative director's duty of oversight extend?"

The third issue is the question addressed in judgment 2016Da16191: "Where a director establishes a competing company, moves an exclusive distribution right to it and transfers the goodwill, how far does the damage extend?" All three judgments ask how the boundaries of the statutory wording and the substantive factors for decision are to be identified on the record.

Material to check

First (2021Da279347), this decision addresses a case in which the issues were whether directors, including outside directors, have a duty to supervise the compliance of the representative director or the director in charge of the Work with statutes and regulations, and the content of the duty to supervise through an internal control system at a large company, together with the limitation on the amount of damages. To confirm from the Records the status of the outside director, the Work subject to supervision, and the circumstances taken into account in limiting the amount of damages, examine the appointment-related materials, the internal materials on the division of duties, and the objective materials concerning the circumstances of the breach of duty and the occurrence of loss. To support the point stated in the Summary of Decision that "such duty to monitor and supervise is no different for an outside director or any other director who does not engage in the day-to-day affairs of the company," examine the objective materials showing whether the director engages in the day-to-day affairs of the company. To confirm the standard stated in the Summary of Decision that "the duty to supervise must be performed by establishing an internal control system and ensuring that it operates," examine the internal rules on the ascertainment of and compliance management for all applicable statutes and regulations, and the materials relating to reporting, notification, and corrective measures.

Second (2017Da222368), this decision addresses a case in which the issues were whether the representative director has a duty to supervise the unlawful exercise of duties by other directors, and whether a large company must establish an internal control system notwithstanding the division of duties. To confirm the point stated in the Summary of Decision that the representative director "bears the duty to supervise the performance of duties by all employees and, as a member of the board of directors, has the authority and responsibility to supervise the overall exercise of duties by the director in charge of the Work, including other representative directors," examine the articles of incorporation and the materials on the division of duties showing the authority and scope of duties of the representative director, and the materials relating to instructions and reports. To confirm the standard stated in the Summary of Decision that the system "must be embodied in a form whereby the company systematically ascertains all statutes and regulations to be observed in the conduct of its business, manages compliance therewith, and, upon discovering any violation, immediately files a report or notification so that corrective measures can be taken," examine the internal rules on the ascertainment of and compliance management for statutes and regulations, and the materials relating to information and reporting.

Third (2016Da16191), this decision addresses a case in which the issues were whether board of directors approval is required where a director becomes the controlling shareholder of a company in a competitive relationship and participates in its decision-making and exercise of duties, and the content of the duty not to misappropriate business opportunities, the limitation on the amount of damages, and adequate causation (proximate cause). To confirm the requirements for approval of competing business, examine the share-related materials showing the establishment of the competing company, the status of controlling shareholder, and participation in decision-making, and the board minutes concerning the point that the director "must obtain the approval of the board of directors of the company to which he or she belongs." To confirm whether a business opportunity was misappropriated and the damages and adequate causation (proximate cause), examine, in light of the standard that "where there is a business opportunity that may be of benefit to the company, a director shall offer it to the company so that the company may make use of it, and shall not, without the company's approval, use it for the benefit of himself or herself or a third party," the contracts relating to the exclusive distribution agreement, the documents relating to the provision and approval of the business opportunity, the materials relating to the assignment of the business, and the objective materials concerning the occurrence of loss.

Possible readings

In case 2021Da279347, the issues were whether a director owes a duty to oversee and supervise the conduct of business by the representative director or the directors in charge of business, and whether the same applies to outside directors; liability for damages under Article 399(1) of the Commercial Act where a director, in breach of the duty of oversight, left unlawful conduct of business unchecked; and the duty of oversight in a large company where division of duties is unavoidable.

In case 2017Da222368, the issues were the liability for damages of a representative director who, in breach of the duty of oversight, left another director's unlawful conduct of business unchecked; whether the mere fact that division of duties is unavoidable in a large company relieves the director of the duty of oversight; and the form of internal control system that must be established.

In case 2016Da16191, the issues were whether a director who becomes the controlling shareholder of a company engaged in a competing business must obtain the approval of the board of directors under Article 397(1) of the Commercial Act; the content of a director's duty not to usurp corporate opportunities; and whether a director's liability for damages may be limited and the grounds to be taken into account in doing so.

What the decisions held

Supreme Court Decision 2021Da279347 decided May 12, 2022 held as follows: "Such duty to monitor and supervise is no different for an outside director or any other director who does not engage in the day-to-day affairs of the company." Through this decision, the Supreme Court reasoned that a director must, beyond the Work in his or her charge, supervise to ensure that the representative director or the director in charge of the Work observes statutes and regulations, that an outside director is no exception, and that if the director leaves matters unattended despite grounds for suspecting a violation, he or she bears liability for compensation under Article 399(1) of the Commercial Act. It held that, at a large company, the content of the duty consists of establishing and operating an internal control system that ascertains statutes and regulations for work carrying significant legal risk and makes it possible, upon the discovery of a violation, to report and take corrective measures. It found no error in the court below having held that a code of ethics and training alone provide no control mechanism, and having recognized a violation arising from the absence of internal controls on the basis of past sanctions and statements as to practices and the like. The limitation on the amount of damages may take into account the nature of the business, the circumstances of the violation, the degree of contribution and whether any benefit was gained, defects in the organization, and other matters, and the determination of the ratio is respected as a finding of fact unless it is manifestly contrary to equity.

Supreme Court Decision 2017Da222368 decided November 11, 2021 held as follows: "In particular, as the representative director has authority to perform all acts in and out of court in respect of the company's business (Commercial Act Articles 389(3) and 209(1)), he or she bears the duty to supervise the performance of duties by all employees and, as a member of the board of directors, has the authority and responsibility to supervise the overall exercise of duties by the director in charge of the Work, including other representative directors." Through this decision, the Supreme Court set out the representative director's overall duty to supervise on the basis of Articles 399(1), 389(3), and 209(1) of the Commercial Act. Even at a large company where division of labor is unavoidable, the duty to supervise is not discharged merely by a division of duties, and the establishment of an internal control system is necessary. That system must be a mechanism that is not confined to accounting fraud but also encompasses compliance management for statutes and regulations and reporting and corrective measures. The collusion in this case continued from November 2004 to November 2010 across various items through meetings of executives and meetings of team leaders, and administrative fines totaling KRW 32,043,000,000 were imposed. Even where no direct instruction is found, if the matter was left unattended with no effort whatsoever made to establish the system, liability for breach of the duty to supervise arises.

Supreme Court Decision 2016Da16191 decided October 25, 2018 held as follows: "Accordingly, a director must obtain the approval of the board of directors of the company to which he or she belongs not only where he or she becomes a director or the representative director of a company in a competitive relationship, but also where he or she becomes the controlling shareholder of that company and thereby becomes able to participate in that company's decision-making and exercise of duties." Through this decision, a director who may become the controlling shareholder of a company in a competitive relationship and participate in its decision-making and exercise of duties must obtain the approval of the board of directors. Where there is a business opportunity that would be of benefit to the company, it must be given to the company, and without approval it must not be used for the benefit of the director or a third party. Non-party 1 engaged in competing business from around 1999 to around the end of 2005, and from around 2006 to around 2011 took the exclusive import and sales opportunity, thereby breaching the duty. The amount of lost sales was taken as the amount corresponding to the sales of Japanese Dunlop products sold by Samhwa Giyeon, and the net profit margin was determined from the financial statements for 1999 to 2001. The value of the business opportunity, being the transfer price minus the portion created by the party's own efforts, must also be included in the damages, and dissolution alone does not sever causation.

Practical checklist

First, whether an outside director of a large construction company who failed to prevent repeated bid rigging bears liability for compensation for breach of the duty to supervise? Compare the disposition documents with the records of the establishment and operation of the internal control system to examine whether liability for breach of the duty to supervise arises from leaving grounds for suspecting a violation unattended and from the absence of efforts to urge the establishment of the system.

Second, how far does the representative director's duty to supervise extend at a company that was fined for long-running, large-scale price fixing? Compare the documents imposing the administrative fine with the records of the establishment and operation of the internal control system to examine whether liability for breach of the duty to supervise arises from leaving grounds for suspecting a violation unattended and from the absence of efforts to establish and operate the system.

Third, where a director sets up a competing company, transfers exclusive distribution rights, and assigns the business, how far do the damages extend? Examine whether disposition documents or objective circumstances are confirmed in the Records that support the requirement that the director "must obtain the approval of the board of directors of the company to which he or she belongs," the standard that the director "shall not, without the company's approval, use it for the benefit of himself or herself or a third party," and the circumstances concerning adequate causation (proximate cause).

Glossary

Directors' duty to supervise and the criteria for establishing internal controls at a large company (2021Da279347): The Supreme Court reasoned that a director must, beyond the Work in his or her charge, supervise to ensure that the representative director or the director in charge of the Work observes statutes and regulations, that an outside director is no exception, and that if the director leaves matters unattended despite grounds for suspecting a violation, he or she bears liability for compensation under Article 399(1) of the Commercial Act. It held that, at a large company, the content of the duty consists of establishing and operating an internal control system that ascertains statutes and regulations for work carrying significant legal risk and makes it possible, upon the discovery of a violation, to report and take corrective measures. It found no error in the court below having held that a code of ethics and training alone provide no control mechanism, and having recognized a violation arising from the absence of internal controls on the basis of past sanctions and statements as to practices and the like. The limitation on the amount of damages may take into account the nature of the business, the circumstances of the violation, the degree of contribution and whether any benefit was gained, defects in the organization, and other matters, and the determination of the ratio is respected as a finding of fact unless it is manifestly contrary to equity. The decision factors presented include the size and organization of the company, the regulation by statutes and regulations, and the business situation and financial status.

The standard for the representative director's duty to supervise and the duty to establish an internal control system at a large company (2017Da222368): The Supreme Court set out the representative director's overall duty to supervise on the basis of Articles 399(1), 389(3), and 209(1) of the Commercial Act. Even at a large company where division of labor is unavoidable, the duty to supervise is not discharged merely by a division of duties, and the establishment of an internal control system is necessary. That system must be a mechanism that is not confined to accounting fraud but also encompasses compliance management for statutes and regulations and reporting and corrective measures. The collusion in this case continued from November 2004 to November 2010 across various items through meetings of executives and meetings of team leaders, and administrative fines totaling KRW 32,043,000,000 were imposed. Even where no direct instruction is found, if the matter was left unattended with no effort whatsoever made to establish the system, liability for breach of the duty to supervise arises. The decision factors presented include the purpose and size of the company, the nature of the business, and the regulation by statutes and regulations.

The prohibition on competing business and on the misappropriation of business opportunities, and the criteria for calculating the amount of damages (2016Da16191): A director who may become the controlling shareholder of a company in a competitive relationship and participate in its decision-making and exercise of duties must obtain the approval of the board of directors. Where there is a business opportunity that would be of benefit to the company, it must be given to the company, and without approval it must not be used for the benefit of the director or a third party. Non-party 1 engaged in competing business from around 1999 to around the end of 2005, and from around 2006 to around 2011 took the exclusive import and sales opportunity, thereby breaching the duty. The amount of lost sales was taken as the amount corresponding to the sales of Japanese Dunlop products sold by Samhwa Giyeon, and the net profit margin was determined from the financial statements for 1999 to 2001. The value of the business opportunity, being the transfer price minus the portion created by the party's own efforts, must also be included in the damages, and dissolution alone does not sever causation. The decision factors presented include the circumstances and manner of the breach of duty, the circumstances of the occurrence and expansion of loss, defects in the organizational structure, and the risk management system.

Sources and limitations

This white paper was prepared solely on the basis of the texts of Commercial Act Articles 382(2), 382-3, 393, 397(1) and (2), 397-2, 399(1), 403, and Civil Act Articles 393, 681, 750 disclosed on the National Law Information Center, and the judgments in Supreme Court Decision 2021Da279347 decided May 12, 2022, Supreme Court Decision 2017Da222368 decided November 11, 2021, and Supreme Court Decision 2016Da16191 decided October 25, 2018.

This is an academic research material organizing general legal principles and standards for record review, and is not legal advice on an individual case or an opinion submitted to a court.

Points left open

2021Da279347: Where the liability of all directors is imposed on the ground of the absence of internal controls, how far can the scope of an outside director's supervision extend?

2017Da222368: In an oligopolistic market with strong incentives to collude, what reporting system must a representative director have in place for the duty to supervise to be regarded as performed?

2016Da16191: Setting aside the portion accumulated in the business taken over, how can the value of the appropriated opportunity itself be ascertained?

When to reconsider

2021Da279347: Revisit when the operation of control mechanisms is again at issue in records such as the bid rigging in the Four Major Rivers Project, the bid rigging in the Yeongju Dam project, and the bid rigging in the Incheon subway project.

2017Da222368: Revisit the determination if minutes or reporting system materials showing efforts to establish and operate internal controls are additionally confirmed.

2016Da16191: Revisit if materials are added that distinguish, within the transfer price, the portion uniquely created and the value of the appropriated opportunity.

Statutes referred to

• 상법 제382조 제2항, 제382조의3, 제393조, 제397조 제1항·제2항, 제397조의2, 제399조 제1항, 제403조
• 민법 제393조, 제681조, 제750조

Decisions referred to

• 대법원 2022. 5. 12. 선고 2021다279347 판결 · Decision ledger
• 대법원 2021. 11. 11. 선고 2017다222368 판결 · Decision ledger
• 대법원 2018. 10. 25. 선고 2016다16191 판결 · Decision ledger

Verification status

The cited provisions (Commercial Act Articles 382(2), 382-3, 393, 397(1) and (2), 397-2, 399(1), 403; Civil Act Articles 393, 681, 750) and the decisions addressed (Supreme Court Decision 2021Da279347 decided May 12, 2022, Supreme Court Decision 2017Da222368 decided November 11, 2021, Supreme Court Decision 2016Da16191 decided October 25, 2018) were compared against the current statutes on the National Law Information Center and the full texts of the Supreme Court decisions as of 2026-10-15. This white paper cites only the three decisions listed under decisions addressed.