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Management Succession in Korea: Tunneling, Semi-Tunneling, and the Reaction of Corporate Law

By: Kyung-Hoon Chun



Recently in Korea, certain issues of corporate law became the subjects of fierce political debates unlike many other jurisdictions where corporate law issues generally remain in the exclusive realm of professionals and academics. This Article begins with the question of why corporate law issues attracted so much political attention in Korea and whether such political attention actually helped improve the corporate law. In pursuing the answers to such questions, this Article identifies a recurring pattern: (i) existence of strict rules against seeking private benefits; (ii) various clever measures to circumvent such rules; (iii) failure of the courts to regulate such circumventing measures; (iv) many proposals for new statutes in the legislature, which often become politicized and lead to suboptimal results; and (v) the stricter new rules that prompt another round of circumvention.

This pattern of “rules—circumvention—passive judiciary—stricter statutory rules—further circumvention” is most salient when the controlling shareholders attempt to implement “management succession” (i.e., transferring ownership and managerial power to the descendants of the controlling family). This Article analyzes a few measures widely used in Korea for management succession: issuing stock at a low price, selling treasury stock at a low price, “funneling” of business, “tolling,” and conducting horizontal spin-offs. While some of these measures fall under the typical category of tunneling, some are dubious. By tracking the chain of actions (by the corporations and the controlling family members) and reactions (by the government, including the executive, judiciary, and legislative branches) along the line of the foregoing pattern, this Article shows the importance of the judiciary’s role in corporate law and the limitation of the political lawmaking process in corporate law. The stories involving management succession in Korea also show that the rules, being vulnerable to circumvention, cannot effectively address the corporate governance problems without the concurrent application of the standards.

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