Supreme Court of Korea Rules KT Slush Fund Was a Breach of Duty... Holds Koo Hyun-mo and Hwang Chang-gyu Liable for Damages

[Financial News] The Supreme Court of Korea has reversed and remanded a case involving former KT Corporation (KT) CEO Koo Hyun-mo and former KT Chairman Hwang Chang-gyu, who had received final criminal fines for illegal political donations. The court held that they bear partial liability for damages claimed by minority shareholders.
According to the legal community on the 2nd, the Third Petty Bench of the Supreme Court of Korea, with Justice Lee Heung-gu of the Supreme Court of Korea presiding, recently overturned a lower court ruling that had denied liability for damages on the part of former CEO Koo in a lawsuit filed by 35 KT minority shareholders against former management, and sent the case back to the Suwon High Court.
In March 2019, the minority shareholders filed a lawsuit seeking damages of about 76.5 billion won, arguing that KT suffered losses due to unlawful acts committed by former and current executives.
They sought to hold management liable in connection with several issues: the illegal overseas sale of the Koreasat 3 satellite in 2010; monetary contributions to the Mir Foundation in 2015 during the Park Geun-hye administration; and network disruptions caused by a fire at the KT Ahyeon Branch in 2018.
They also claimed damages over the creation of roughly 330 million won in slush funds by former CEO Koo between May 2014 and October 2017, using a scheme in which gift certificates were purchased and then resold. Together with nine former and current executives, he then made so-called "split" political donations to 99 lawmakers from both ruling and opposition parties in the 19th and 20th National Assemblies.
The charge of violating the Political Funds Act became final when both the prosecution and Koo withdrew their appeals, leaving in place a lower court sentence imposing a fine of 7 million won. In contrast, the Supreme Court of Korea last June finalized an acquittal on the charge of occupational embezzlement.
In the damages lawsuit, both the first and second instance courts ruled entirely against the plaintiffs, finding that, except for former CEO Koo and former Chairman Hwang, there was no violation of law or neglect of duties by the other former and current executives.
With respect to former CEO Koo, the courts did acknowledge violations of law and neglect of duties. However, they held that he had no liability for damages because about 230 million won of the slush funds, which had been provided as political contributions, was fully returned to the company.
The Supreme Court of Korea, however, reached a different conclusion. It ordered the lower court to conduct a new review on the premise that liability for damages should be recognized.
The Supreme Court of Korea stated, "Koo Hyun-mo’s creation of a slush fund constituted a neglect of duties under his mandate contract with KT," and added, "There is room to view that, from the time he was appointed as a director until the date the slush fund creation ended, he failed to fulfill his duty as a director to supervise."
The court further held that the lower court had misapplied the law by treating only the portion of the slush fund used as political contributions as the amount of loss. It said the court must also examine whether the remaining slush funds should be regarded as part of the loss. On that basis, it reversed and remanded the ruling that had denied damages liability for former KT Chairman Hwang Chang-gyu, who was involved in major management decisions at the time, instructing the lower court to reconsider his responsibility as well.
hwlee@fnnews.com Lee Hwan-joo Reporter