Essential Legal Checkup for Executives, Review Cases of Business Embezzlement Crime

Law firm Veat received a request from an entertainment company (hereinafter "client") to review the risk of breach of duty by the company's executive.

Breach of duty (Article 356 of the Criminal Law) occurs when an agent handling another’s affairs commits an act contrary to their duties, causing damage to the principal (company) and simultaneously obtaining property gains for themselves or a third party. If an executive of a company improperly disposes of company assets or prioritizes the interests of a third party over the company’s interests, the act may be judged as breach of duty.

Here, the act ‘contrary to duties’ includes all acts that violate the principal’s trust relationship by failing to perform actions expected by law, contract, or principles of good faith, or by performing actions that should not be performed, based on a review of the specific situation, nature, and characteristics of the agency.

It can be determined whether the act violates the executive's performance of duties, whether actual damage occurred to the company, and whether the executive intentionally committed the act while aware of the damage. Simple business mistakes or failures do not constitute breach of duty, and whether there was an intent to harm the company’s interests is an important criterion for judgment.

Business inherently contains risk, so even if a business manager makes a decision based on available information with the intent to benefit the company without personal gain and makes careful judgments, there may be cases where the prediction is wrong, resulting in damage to the company. Therefore, in such cases, the standard for interpreting intent must be relaxed so that criminal liability for breach of duty cannot be imposed, and whether to recognize the intent for breach of duty based on business judgment depends on the circumstances leading to the questioned business judgment, the motivation, the nature of the business subject to the judgment, the economic situation of the company, the likelihood of loss and the likelihood of gain, and whether it is recognized as an intentional act of acquiring property gains for themselves or a third party and causing damage to the principal. (Supreme Court Decision 2007. 3. 15. in Case No. 2004do5742)

The Supreme Court has ruled that a distinction must be made between breach of duty and business judgment. That is, even if a business manager makes a careful judgment without the intent to obtain personal gain, and as a result, damage occurs to the company, the standard for interpreting intent must be relaxed so that it cannot be punished as breach of duty.

However, if a specific decision was deliberately made knowing that it would cause damage to the company and a third party obtained economic benefits, the possibility of breach of duty increases.