Hybe, Ador, and Korean Corporate Governance Law — No, majority shareholders do not have unlimited control over a company
Preamble: I am not a lawyer. I am someone using research skills and some economic reasoning to get the broad strokes of how corporate governance is structured. I will be linking my sources so you can check my analysis and I welcome any lawyer who wants to chime in.
Recently there was an overview of Hybe and Ador's corporate interests posted here. I think OP was broadly correct except in their characterization of subsidiaries' legal duties.
As a conglomerate, HYBE's fiduciary obligations prioritize the growth, prosperity, and overall viability of the parent company, with subsidiary interests following suit.
Subsidiary companies have their own directors who have a fiduciary duty to serve the company. As I understand it, that means directors can't harm the subsidiary they run to further the interests of the parent company.
Article 382-3 (Duty of Loyalty by Directors)
Directors shall perform their duties in good faith for the interest of the company in accordance with statutes, and the articles of incorporation.
https://elaw.klri.re.kr/eng_mobile/viewer.do?hseq=54525&type=part&key=8
One instance where this would come up is if Source Music were to sell assets to BigHit for a below-market price. One might think that since Hybe wholly owns Source, there's no actual harm, but Source Music has creditors who would be harmed by Source's financial position weakening as the risk of default would increase. Creditors would have the ability to sue Source Music's directors on behalf of Source Music the company.
A director is held liable to a third party who suffers a loss caused by the director’s intentional or grossly negligent failure to perform his/her duty (ComC Article 401(1)). For example, if a director manipulated the financial statements of the corporation and a creditor provided a loan to the corporation relying on such false financial statements, the creditor may bring an action against the director on the basis of Article 401.38) The article does not state that a director has a direct duty to a third party. Rather, a third party who suffered harm due to the director’s breach of his/her duty to the corporation may sue such director. What has been breached here is the director’s duty to the corporation and not to a third party, such as a creditor.
Typical examples of cases in which directors were held liable under Article 399 of ComC include those involving (i) sale of a corporation’s asset at a considerably low price,33)
From the same source, this passage describes how directors of subsidiaries have been liable for actions that result in company losses to related companies. There is a business judgment defense, but as I understand there must be a reasonable case that proper judgment for what was in the interest of the company was being practiced.
Unlike the courts in many other jurisdictions, the Korean courts have not clearly declared that the business judgment rule does not apply to conflict-of-interest situations.22) In reality, however, the Korean courts tend to hold directors liable when a corporation allegedly incurred a loss in a transaction with parties related to it.23) Most of the major Korean corporations belong to a business group composed of dozens of affiliate companies that often have vertical or horizontal business relations. Thus, related-party transactions are inevitable and ubiquitous in Korea, and there have been increasing attempts to hold directors liable for allegedly unfair related-party transactions. In such cases, the business judgment rule is not entirely non-applicable per se, but it does not provide a complete defense.
When it comes to Ador, we have an additional wrinkle that MHJ owns around 18% of Ador. This gives her the right to bring a lawsuit on directors who have breached their duty to the company.
Under ComC, shareholders holding at least 1% of the total issued shares of the corporation can bring a derivative action against an erring director on behalf of the corporation (ComC Article 403(1)).
So in summary, I think this exchange at the top of the comments is incorrect.
disclaimer - I don't have any knowledge of Korean corporate laws
Since both BELIFT and ADOR are owned by HYBE, doesn't that mean HYBE owns all the rights to all IP from both subsidiary. If HYBE wants to take the IP from one entity and replicate it for another, they are within their rights.
In theory, yes, HYBE owns all intellectual property and content released by its subsidiaries. It's also true, due to ADOR's unique status as a semi-autonomous subsidiary, we don't have all the information. As for whether ADOR's internal complaint holds merit, it ultimately hinges on the contractual agreements between HYBE and ADOR. If ADOR can substantiate claims of HYBE's interference, whether direct or indirect, and such provisions are outlined in the contract, there may be grounds for legal action. However, the likelihood of a successful outcome in court remains slim IMO.
ADOR owns NewJeans and all the associated IP (I assume). HYBE owns a majority of ADOR but ADOR directors appointed by HYBE have a fiduciary duty to ADOR, not HYBE. Should they sell ADOR assets for below market-value, MHJ would be able to sue the directors on behalf of the company ADOR. This protection of minority shareholders is what allows for investment into companies to make economic sense.
Finally, I want to add that a lot of this is moot for now because MHJ is still the CEO of ADOR. When we say ADOR is semi-independent of HYBE, I think it is referring to how MHJ as ADOR CEO can make day-to-day decisions without reporting them to HYBE. MHJ has to answer to a board of directors but they only meet periodically. Technically any HYBE subsidiary CEO could go rogue for a while and not coordinate with HYBE, but that would likely get them replaced eventually. My guess is MHJ's contract makes removing her from the CEO position difficult without cause, hence HYBE doing an audit looking for evidence of wrongdoing. Because of all this, ADOR has definitely not transferred or licensed its IP to Belift as MHJ would not do that. ADOR could theoretically sue Belift for copyright infringement.
Now, how such a case would be decided is a separate matter, but legally speaking I think people are overstating what HYBE being the majority shareholder of ADOR means for how much HYBE can control what ADOR does. Even if they had a friendly CEO, which they don't, they'd be bound to make decisions plausibly in the interest of ADOR.
Posted Apr 25, 2024, 6:52 AM UTC