천경훈, 재무정보의 부실공시에 대한 상장회사 理事의 責任과 ‘상당한 주의’ 抗辯, 2017.08, 증권법연구
The Korean Journal of Securities Law, Vol. 18, No. 2, 2017
Liability and Due Diligence Defense of Directors of Listed Companies for Defective Disclosure of Financial Information
Chun, Kyung Hoon
ABSTRACT
A director of a listed company may be held liable for defective disclosure of financial information pursuant to the Capital Markets Act, Korean Commercial Code, or Korean Civil Code, but a defense is available if he performed his duty with due care. Meaning of due care or due diligence is unclear under the current statutes and court precedents. However, reasonable reliance upon the portion audited or reviewed by experts (with respect to financial information, mainly certified public accountants) should be protected, so long as there was no reasonable ground to believe that there were material misrepresentations or omissions of material facts. Additional measures such as due inquiry or further investigation would be required on the part of the directors only when there are reasonable grounds to believe the existence of material misrepresentations or omissions of material facts (i.e., “red flags”). Such “reasonable reliance” approach, adopted by 1933 Securities Act of the US and developed in BarChris case, is also possible interpretation of Korean law. According to this approach, a “red flag” would be found to exist when, for example, (i) there occurs reasonable suspicion as to the reliability of the management of the issuer who provided the financial information or the experts in question who “expertised” the relevant portion, (ii) the mere appearance of the financial statements creates reasonable suspicion, or (iii) serious accounting frauds or problems have been reported in the same industry. Such an approach would better promote good faith disclosure and the board’s monitoring activity than imposing strict liability on directors.
Key Words: Defective Financial Statements, Defective Disclosure, Directors’ Liability, Due Diligence Defense, BarChris case
천경훈, 재무정보의 부실공시에 대한 상장회사 理事의 責任과 ‘상당한 주의’ 抗辯, 2017.08, 증권법연구
The Korean Journal of Securities Law, Vol. 18, No. 2, 2017
Liability and Due Diligence Defense of Directors of Listed Companies for Defective Disclosure of Financial Information
Chun, Kyung Hoon
ABSTRACT
A director of a listed company may be held liable for defective disclosure of financial information pursuant to the Capital Markets Act, Korean Commercial Code, or Korean Civil Code, but a defense is available if he performed his duty with due care. Meaning of due care or due diligence is unclear under the current statutes and court precedents. However, reasonable reliance upon the portion audited or reviewed by experts (with respect to financial information, mainly certified public accountants) should be protected, so long as there was no reasonable ground to believe that there were material misrepresentations or omissions of material facts. Additional measures such as due inquiry or further investigation would be required on the part of the directors only when there are reasonable grounds to believe the existence of material misrepresentations or omissions of material facts (i.e., “red flags”). Such “reasonable reliance” approach, adopted by 1933 Securities Act of the US and developed in BarChris case, is also possible interpretation of Korean law. According to this approach, a “red flag” would be found to exist when, for example, (i) there occurs reasonable suspicion as to the reliability of the management of the issuer who provided the financial information or the experts in question who “expertised” the relevant portion, (ii) the mere appearance of the financial statements creates reasonable suspicion, or (iii) serious accounting frauds or problems have been reported in the same industry. Such an approach would better promote good faith disclosure and the board’s monitoring activity than imposing strict liability on directors.
Key Words: Defective Financial Statements, Defective Disclosure, Directors’ Liability, Due Diligence Defense, BarChris case