Adverse Effects of Multiple Derivative Action System
When the South Korean government introduces the multiple derivative action system, a shareholder can take action against 1,188 affiliates of listed holding companies with only 3.5 million won (US$3,103), according to a recent survey. This is why some experts point out that the system will make listed holding companies a “playground” for foreign speculative capital.
The Korea Economic Research Institute (KERI) released a report on the effects of the multiple derivative action system on listed holding firms on Dec. 10. Under the multiple derivative action system, a shareholder of a holding company can bring an action for damage against an executive officer or director of a subsidiary or subsidiary’s subsidiary which committed an illegal act.
According to the KERI, a proposal put forward by lawmakers Roh Hoe-chan and Lee Hoon to amend the commercial law allows a shareholder with only one share in a holding company to file lawsuits against its affiliates. In particular, Roh’s proposal allows a shareholder to bring an action against executive officers at 1,188 affiliates under 90 listed holding companies with only 3.5 million won (US$3,103), which is equivalent to 0.000002 percent of the holding companies’ market cap of 184 trillion won (US$163.12 billion). Moreover, those who have one LG Corp. share worth 68,100 won (US$60) based on the closing price on Nov. 13 can file a compensation suit against executive officers at its 65 affiliates. Under the bill of lawmaker Chae I-bae, those who have 120 million won (US$106,383) worth of shares based on the closing price on Nov. 13 can sue 13 of LG Corp.’s all affiliates.
When another bill proposed by lawmakers Kim Jong-in, Oh Shin-hwan and Lee Jong-geol and backed by the Ministry of Justice is applied, 18.44 billion won (US$16.35 million) is all it takes to bring a multiple derivative action against 72.1 percent, or 408, out of all affiliates under the 90 listed holding companies.
In addition, 2 billion won (US$1.77 million) can file a lawsuit against 14 subsidiaries of Shinhan Financial Group worth 453 trillion won (US$401.6 billion) in assets as of the end of June 2018. In short, a small amount of money can strike a heavy blow to financial groups which has hundreds of trillions of won in assets.
The KERI said Japan is the only country that has legislated the multiple derivative action system in express terms in the world, and the United States and Britain only grant the system as precedents but require the complete relations between subsidiaries and holding companies. This is why it urges to refrain from introducing the system.
Meanwhile, some say that these are far apart from the flow of discussion on the multiple derivative action system at the Legislation and Judiciary Committee under the National Assembly. This is because there is no chance that the exclusive right of stockholders in the revised bill proposed by Roh will be passed in reality and the members are highly likely to agree on “more than 1 percent of stake in holding company or 0.01 percent in listed company” which is the current requirement of a shareholder derivative suit.