1. Introduction: Understanding Occupational Breach of Trust under Korean Law
The global financial crisis and the COVID-19 pandemic have driven the world into the New Normal era. In an era of uncertainty, the focus of corporate management is also moving from growth towards sustainability. By virtue of this trend, non-financial factors, such as Environmental, Social, and Governance (ESG), have become a megatrend in today's corporate management. The importance of risk management cannot be overemphasized in an ever-changing business environment where ESG leads to corporate value. Among various risk management issues, embezzlement and occupational breach of trust by the management is not only a representative governance controversy but is also a huge risk itself that shakes up sustainability. Under the law of the Republic of Korea ("Korea"), there are comprehensive provisions by which business people may be subject to punishment for occupational breach of trust. There exists criticism that excessive criminal intervention takes place in management and corporate activities are discouraged because of the ambiguous scope of application of legal provisions. In order to run a business in Korea, it is necessary to have a prior understanding of occupational breach of trust under the current law.
2. Characteristics of Occupational Breach of Trust under the Current Law
2.1. Under the Korean law, breach of trust is defined by the Criminal Act (Article 356 and Article 356 (2)), the Commercial Act (Article 622), and the Act on the Aggravated Punishments, etc. for Specific Economic Crimes ("Specific Economic Crime Act," Article 3). The Commercial Act regulates crimes of special misappropriation by incorporators, directors, executive directors, auditors, etc. However, in practice, the crime of occupational breach of trust prescribed in Article 356 of the Criminal Act, which has no restrictions on the subject, applies to corporate activities. According to the provisions on occupational breach of trust, when a person who administers another's business obtains pecuniary advantage or causes a third person to do so from another in violation of one's duty, thereby causing loss to such person, he/she is subject to imprisonment for not more than ten years or a fine not exceeding KRW 30 million. The Specific Economic Crime Act is a special law of aggravated punishment for cases where the amount of breach of trust is not less than KRW 500 million with the provisions that: (i) if the amount of profit is not less than KRW 500 million but less than KRW 5 billion, the statutory punishment is the imprisonment with labor for a limited term of no less than three years under Article 3 (1) 2; (ii) if the amount of profit is not less than KRW 5 billion, the statutory punishment is the imprisonment for life or of no less than five years under Article 3 (1) 1; and (iii) a fine equivalent to the amount of each profit may be imposed concurrently under Article 3 (2). Therefore, if the amount of occupational breach of trust is not less than KRW 5 billion, the person responsible is subject to the Specific Economic Crime Act, and imprisonment cannot be avoided unless an exceptional condition is provided, even when extenuating circumstances are considered.
2.2. As such, the crime of occupational breach of trust under the current law not only imposes an excessive statutory penalty, but is also established with the mere risk of pecuniary damages at the time of action. There also exists room for broad interpretation due to the abstractness and ambiguity in concepts that constitute the crime, such as the terms violation of duty, and pecuniary damages. For such reasons, it is criticized for and often referred to as the "wastewater treatment plant for pecuniary offense." Investigative agencies bring prosecutions against businesspeople by broadly applying occupational breach of trust to their overall business activities. It is problematic that even if a normal business activity is carried out, crime can be established depending on the outcome of the activity. For example, while businesses often make strategic decisions to acquire or invest in a new promising business, the new business may fail. Furthermore, in cases where a company provides support to a sister company under financial distress, the management of the company providing support may be subject to punishment for occupational breach of trust, even if the sister company recovers.1 As a result, it is no exaggeration to say that every business decision made in Korea carries the risk of punishment for occupational breach of trust.
3. Relevant Legislation in Other Jurisdictions and the Business Judgment Rule
3.1. Countries with Express Provisions on Occupational Breach of Trust: Germany and Japan
Besides Korea, Germany and Japan stipulate penalty provisions for occupational breach of trust by law. The provisions for occupational breach of trust in Germany and Japan differ from those of Korea in that the requirements for the constitution of the crime are clearer and requirements for its establishment are stricter. Under the German law, the subject of the occupational breach of trust is limited to "a person who causes damage on a person of protection required for pecuniary interests by: (i) disposing of a third party's properties granted by the deligation and legal acts by the laws and the authorities; (ii) abusing the authorities to impose obligations to a third party; or (iii) violating the obligation to protect a third party's pecuniary interests granted by the deligation and legal acts by the laws and authorities, or a trust relationship." Under the Japanese law, occupational breach of trust is considered to be established only if the subjective requirements for its constitution are met, which is "the purpose of inflicting damage to oneself or the interests of oneself or a third party."
3.2. Business Judgment Rule
In most countries, including the United States, occupational breach of trust by the management is subject to civil compensation for damages rather than criminal punishment. The business judgment rule was established as a theory to limit the management's civil liabilities in the United States where occupational breach of trust is not subject to punishment, and is also stipulated in the German Securities Act2. The business judgment rule provides that if the management makes a prudent decision believing that it would be in the best interests of the company, the management shall not be held legally responsible even if the decision causes loss to the company. The business judgment rule requires that the business decision should: (i) be made in good faith; (ii) be in the best interests of the company; (iii) be made on an informed basis; (iv) not be wasteful; and (v) not involve self-interest3.
4. Requirements for Recognition of the Business Judgment Rule: Excluding Liability for Occupational Breach of Trust
4.1. Korean courts limit the scope of the establishment of criminal occupational breach of trust by applying the business judgment rule to criminal trials.4 The requirements for the recognition of the business judgment rule, set by the Supreme Court, are as follows:
- business management shall have gone through the process of collecting, investigating, and reviewing necessary information in a sufficient manner;
- based on such process, the management shall have made a business judgment in good faith with reasonable trust that the judgment is in the best interests of the company;
- content of such business judgment shall not be obviously unreasonable but be within the reasonable scope of a general managerial decision; and
- business activities under the judgment shall not be in violation of the law.
4.2. Among the four requirements, particular focus should be put on requirement (iii), which specifies that "the content of such business judgment shall not be obviously unreasonable but be within the reasonable scope of a general managerial decision. "While the other requirements have a clear meaning, making them relatively easy to prove, the reasonability of a business judgment cannot be decided upon without the intervention of the subjective value judgment of a judge. Courts may have different judgments for the requirement, and it is difficult for an offender to determine objectively whether the requirement has been met.5 In fact, in many cases where the innocence of business managers was protested against the business judgment rule, courts found that willfulness for occupational breach of trust could not be negated because requirement (iii) was not met. Therefore, in relevant court proceedings, one must actively persuade the court to accept that the choice is not reasonable from the standpoint of a third party through various indirect facts and documentary evidence.
4.3. As such, Korean courts apply the business judgment rule far more strictly than in the U.S. case law with respect to the requirements or the allocation of the burden of proof. Nevertheless, business management can reduce the criminal risks that underlie their business judgments by paying caution to the four requirements set forth in the Supreme Court decision above during the decision-making process.
1. In contrast, in the case of Rosenblum in 1985, the French Supreme Court established exceptional requirements for exemption by which criminal responsibility is relieved of a corporate group's abuse of the corporate properties, by finding that "even if some individual companies have suffered damages due to transactions among the affiliates, the punishment is exempted if all the requirements of the existence of corporate group, the existence of a unified management strategy, and the balance of interests and burdens among the affiliates for their funding are satisfied, focused on the entire group interests." This principle was enacted in 2004 in Italy.
2. In Korea, arguments have been made that the criminal responsibility for business management activities should be limited by expressly introducing the business judgment rule. Also, the proposed amendment to the Commercial Act was submitted, but has yet to be enacted.
3. Guidelines provided by Grobow v. Perot, 539 A.2d 180 (Del. 1988).
4. Since corporate management has inherent risks as a fundamental matter, even if the management makes a prudent decision believing that it is for the company's interests based on the collected information to a possible extent without having any intention to take personal interests, the company may suffer damages because the management's prediction turns out to be wrong. In such cases, it is unreasonable to hold the management criminally liable for the occupational breach of trust by mitigating the interpretation criteria for willfulness. Here, whether the intention of the occupational breach of trust can be recognized based on the business judgment rule shall be considered individually, depending upon cases where willful conduct is accepted under the recognition that one or a third party obtains pecuniary interests and that one causes damages to the one itself, in light of relevant circumstances, including the progress and motives that led to the business judgment in question, the content of the business to be considered, the economic situations of the company, the probability of occurrence of losses, the probability of obtaining profits. (See the Supreme Court decision 2015Do12633 decided on November 9, 2017).
5. With respect to a chief executive officer prosecuted for occupational breach of trust by providing liquidity support to an affiliate in financial difficulties, the Korean court has found that the willfulness for the occupational breach of trust exists, finding that it was a reasonable business judgment to take other remedial measures (as opposed to liquidity support), by considering as a whole the debt repayment capacity of the supported company at the time and whether it could be recovered with additional financial support. (Seoul High Court decision 2014No3512 decided on October 14, 2015 ).
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