Establishing a Reasonable Decision-Making Structure Through Review of Director Self-Dealing and Conflict-of-Interest Issues in a Subsidiary Fund Investment

1. The Client's Situation

A mid-sized investment company was reviewing a structure in which the headquarters would invest in a fund formed through a subsidiary. In this process, it emerged that the representative director was indirectly involved on the side of the GP (management company) of that subsidiary's fund, raising concerns that this could constitute a conflict of interest and self-dealing under the Commercial Act. Accordingly, the client requested legal advice in order to find a way to maintain the investment structure while minimizing legal risk.

Your Legal Team organized the key legal issues centering on the requirements for a director's self-dealing and the existence of a conflict of interest, and analyzed the actual governance structure and fund flows to determine the existence of risk under the relevant laws. In particular, we examined from multiple angles the possible application of Article 398 of the Commercial Act (the prohibition on self-dealing), and presented a direction for determining the legality of the transaction depending on whether the board-approval requirements were met and whether the director complied with the duty of loyalty. We also proposed, together, a structural change and improvements to the board decision-making process so that the client could achieve its substantive investment objective while preventing legal risk.

On the basis of Your Legal Team's advice, the client lawfully met the board-resolution requirements and, by clearly organizing its relationship with the management company, was able to resolve the concerns over self-dealing and conflict of interest. As a result, it maintained the investment structure while preventing the possibility of legal disputes in advance, and its external credibility was also enhanced.