[비즈한국] Companies sometimes make decisions that are difficult to explain based solely on money. Understanding the laws or systems hidden behind them can help you grasp the deeper background. ‘Useful Business Tips (Al-Ssul-Bi-Beop)’ introduces clues that help you understand business trends.
There is an expression called a "private company" (gaein hoesa). Its meaning is somewhat ambiguous. Depending on the situation, it can refer to a sole proprietorship or a company where a single shareholder owns 100% of the shares. Strictly speaking, the former is not an appropriate term. Since a company is a legal entity established for profit-making purposes, such as commercial activities (Article 169 of the Commercial Act), a sole proprietorship, where an individual (natural person) is the subject of business rather than a company, cannot be a company. Therefore, it is appropriate to consider a private company as one where a single shareholder holds 100% of the shares.
Then why, and in what situations, is the expression "private company" used? In the author's experience, the term is used to describe a situation where a shareholder can operate the company at will. For instance, phrases like “That’s A’s private company, so they can do as they please” or “If you get A’s permission, you don’t need to worry about the rest of the company staff” are common.
Since the owner of a company is the shareholder, if an individual is a majority shareholder with a 100% stake, that individual is the owner of the company. From this perspective, it seems natural for the company to be operated according to the individual decisions and judgments of the majority shareholder, and people subtly take this for granted. In television dramas, we often see the owner family making major company decisions as they please, and I have never seen anyone around me point out that this is unrealistic or inappropriate.
Furthermore, by effectively utilizing the company's legal personality, one can evade various liabilities for damages and enjoy tax-saving effects through expense processing. Since duties can be distributed and responsibilities limited through the appointment of executives, it is common for even small-scale business owners to establish a corporation once their business reaches a certain level of success.
Most majority shareholders of small companies are dedicated to the success of their business, but there are cases where this is not the case. Some hire family members as company employees even without an actual employment relationship to receive salary-equivalent payments, deploy company employees for personal tasks, or even withdraw company funds under the guise of an advance (temporarily received money) for private use.
The private use of company assets is not usually apparent in daily operations. However, it often leads to trouble for the majority shareholder when exposed to the outside world due to management disputes, investigations by authorities, or tax audits. No matter how much it is considered a "private company," the legal personality of the individual and the company are separate. Therefore, using company assets for private purposes without justifiable reasons or reasonable grounds can lead to criminal penalties for embezzlement or breach of trust, or become the subject of taxation by tax authorities.
The aforementioned cases are somewhat extreme; recently, company assets are often utilized in more sophisticated and indirect ways. This includes using company opportunities or assets for personal gain, or taking personal advantage during transactions by using other businesses as a front.
A representative example is the abuse of trade secrets. A majority shareholder, while serving as a company executive like a CEO, gains knowledge of trade secrets during decision-making processes and may pursue private interests by leaking them or using them personally. Additionally, a director who is a majority shareholder may conduct transactions with the company by presenting their spouse, children, or other businesses in which they hold stakes, and provide benefits to themselves or those entities by manipulating unit prices or providing various favors.
Such incidents were so common that the amended Commercial Act of April 14, 2011, explicitly stipulated provisions to regulate acts of diverting company profits externally through the misappropriation of company opportunities and assets or self-dealing.
Regarding the prohibition of the misappropriation of company opportunities and assets, Article 397-2, Paragraph 1 of the Commercial Act stipulates that "a director shall not use any business opportunity that may become a profit for the company, currently or in the future, for their own or a third party's interest without the approval of the board of directors," and such board approval must be granted by a supermajority of two-thirds or more.
Each subparagraph of the above article specifies that the scope of application includes: △Business opportunities learned during the performance of duties or using company information; and △Business opportunities closely related to the business that the company is currently conducting or planning to conduct. Furthermore, Paragraph 2 of the same article stipulates that "a director who violates Paragraph 1 and causes loss to the company, and the directors who approved such act, shall be jointly and severally liable for damages, and any profit gained by the director or a third party thereby is presumed to be the loss of the company."
Regarding transactions between directors and the company—that is, self-dealing—Article 398 of the Commercial Act stipulates that for a director, their relatives, or a company in which they hold a stake to engage in transactions with the company for their own or a third party's account, they must disclose important facts regarding the transaction to the board of directors in advance and obtain board approval. In this case, the board approval requires a vote of two-thirds or more of the directors, and the content and procedures of the transaction must be fair.
Since the amended Commercial Act strictly regulates asset misappropriation and self-dealing, judicial precedents also show a negative stance on transactions that do not meet preliminary requirements such as board approval, as well as the practice of holding a board meeting after the fact to ratify such transactions.
For example, Supreme Court Ruling 2021Da291712 held that because a director must obtain board approval "in advance" to engage in transactions with the company for their own or a third party's account, a transaction is void unless there are special circumstances if board approval was not obtained beforehand. It further ruled that even if board approval is obtained "after the fact," the void transaction does not become valid unless there are special circumstances.
However, because the human composition of a private company is closed, the company's situation is not exposed to the outside. There is no disclosure requirement, making it impossible for outsiders to perceive internal company problems. Therefore, even though Commercial Act provisions and precedents are strict regarding asset misappropriation and self-dealing, it was difficult to actually capture such cases until recently.
But the situation has changed a lot recently. The reasons for this include: △increased involvement of outside members in company management through loans from financial companies, investments from financial or strategic investors, and acquisitions by private equity funds, which has made company management more transparent than in the past; and △frequent management disputes and sharply conflicting interests among internal members, leading to more debates questioning the procedural legitimacy and the existence of reasonable grounds for company decision-making.
Ultimately, while a majority shareholder establishes and operates a private company for various conveniences, the scope of the majority shareholder's maneuvering in the management process has narrowed compared to the past. This trend is desirable in terms of preventing the misappropriation of company assets. However, from the perspective of a majority shareholder or executive, it means that the costs required to meet legal requirements have increased, and there is much more to consider in terms of preventing disputes.