In a November 11, 2021 decision, the Korean Supreme Court explicitly held for the first time that the CEO of a company can be liable for his failure to establish a proper internal control/antitrust compliance program or for his willful disregard of proper implementation of an otherwise properly designed compliance program to prevent, detect or deter cartel violations. (Dongkuk Steel/Union Steel Shareholder Derivative Litigation, Supreme Court Case No. 2017Da222368, Nov. 11, 2021). This latest opinion expands and clarifies the Court's prior decision that a director/officer may be liable for failing to establish or run an effective internal control/compliance system to prevent, detect or deter violations of all applicable laws. (Shinhan Bank v. Directors of Daewoo, Supreme Court Case No. 2006Da68636, Sep. 11, 2008). It also comports with the recent judicial and legislative trend to expand the scope of D&O liability.
In reversing the lower courts' decisions, the Court established that it is no justification for the CEO to show that he was not personally involved in the cartel violation himself, did not condone the illegal conduct, and did not even know of the violation. The Court also rejected the lower courts' findings that there was no evidence that the company did not establish a proper internal control/compliance system and no evidence that the CEO violated his duty to supervise the company's internal control system by intentionally ignoring an otherwise properly established internal control system. Instead, the Court found a way to conclude that the CEO failed to establish and run a properly designed internal control program. In essence, the Court determined that the CEO should have known better to ensure and supervise other directors, officers and employees of the company to design and run a more vigorous internal control/antitrust compliance program in light of the nature of the industry at issue, its susceptibility to cartel violations, and the severe sanctions the relevant laws impose.
The Court further held that, even in the context of a large company, the mere fact that the company's day-to-day responsibilities are highly compartmentalized and specialized will not exonerate the CEO from the duty to oversee and ensure the company's compliance with all applicable laws and regulations, including the antitrust laws that prohibit cartel agreements and impose both substantial administrative fines and criminal penalties. To the Court, the fact that the KFTC imposed a large amount of an administrative fine on the company for its involvement in a long-running cartel agreement (from 2004 to 2010 involving various officers and employees of the company's sales team) may have meant the CEO willfully disregarded his duty to properly and effectively design, implement and run an internal control/antitrust compliance program.
At a minimum, this decision strongly suggests–if not conclusively requires–that the CEO (and perhaps each member of the Board of Directors as well as senior executives) has an affirmative duty to help establish a properly designed internal control/antitrust compliance program and to effectively run it to prevent, deter or detect cartel violations. There is a real risk that, whenever a cartel violation is uncovered, shareholders can claim that either the internal control program was not properly designed to begin with and/or the CEO willfully ignored to run it properly. This may be more than just a point of academic debate. For a long time and until July 2019 when it changed its policy, the Antitrust Division of the U.S. Department of Justice did not give credit to a defendant in a criminal cartel case during the charging stage, by taking the position that if a given internal antitrust compliance program failed to prevent a cartel violation in the first place, then by definition it was not a properly designed program or was not effectively managed. Therefore, the Court's decision could be misread (or perhaps that is what the Court really meant) to impose in essence "strict liability" whenever a cartel violation is uncovered and the company is ultimately assessed an administrative fine.
It remains to be seen whether the Court actually meant to require willful disregard or gross negligence to find D&O liability or mere negligence is sufficient. Furthermore, it also remains to be seen whether the CEO should immediately report the potential violation to the KFTC and/or the Prosecutors' Office or at least promptly take proper disciplinary actions against the suspected violators to avoid his own personal liability or whether he can first conduct an in-depth internal investigation. An even more difficult question may be whether, after an internal investigation, the CEO could afford to decide to contest the cartel violation charges only to lose before the KFTC and in subsequent judicial appeals.
What if the internal control/antitrust compliance system detects a potential violation and the company promptly files a leniency application with the KFTC but only receives cooperation credit because other cartel participant companies file leniency applications just barely faster to receive full immunity or larger fine deductions? Will the CEO still be held liable in shareholder derivative lawsuits for implementing and running a not-fast-enough compliance program?
While no internal control/antitrust compliance system is likely to be perfect at preventing cartel violations, at a minimum, directors and officers may have to promptly and adequately discipline the offending officers/employees to show their good-faith effort to deter future violations. Otherwise, they may have difficulty escaping what could amount to strict liability.
Finally, the Court will decide soon another shareholder derivative case from the Seoul High Court that explicitly held liable not just the CEO but also both inside and outside directors for the company's cartel violation. (Daewoo Construction Four River Cartel Shareholder Derivative Action; Seoul High Court Case No. 2020Na2034989; Sep. 2021). It will provide additional guidance on the Court’s position on the scope and extent of D&O liability for the company's cartel (and possibly other types of antitrust) violations.