Class Action Lawsuit System Has Weakness in Protecting Investors

It has been pointed out that the stock-related class action lawsuit system, which the government planned to introduce from next April, is not able to protect minor shareholders since the government was too concerned about the burdens that companies would bear.

According a tentative plan presented by Ministry of Justice and Ministry of Finance and Economy, a case of `accounting fraud` against which a class action lawsuit can be filed, is limited to a company`s declaration of negotiable securities and report of business plan.

Thus, reports occasionally presented by firms registered at KOSDAQ or listed on KOSPI to explain their significant marketing activities, the state of business in progress or rumors floating about the stock market are not subject to class action lawsuits even if they are false or fraud.

For example, if a company announces that it has induced foreign capital or that it is pulling up a treasure ship, but is found later to have lied, such a case is not subject to class action lawsuits.

Such a case is not reflected on the class action lawsuit system because it has been considered that negative effects can become greater if such a case is included from the initial period of that system.

Im Jong-Ryoung, the director of Ministry of Finance and Economy Stock-share System Department, said ``If occasional reports become subject to class action lawsuits, it is possible that companies do not present reports at all, which are concerned about being filed in lawsuits.`` and added, ``Such a clause is unnecessary because if accounting fraud presented by a company is related to stock price manipulation, then it is subject to class action lawsuits regardless of the size of the company.``

But the problem is that the governmental policy as such can possibly be abused in a situation that a company`s internal personnel, business managers, fund managers, analysts, stock brokers comprise a `task force` that occasional reports contribute to the manipulation of stock price to some extent.

Templeton Investment Trust Management Co. executive director Kang Shin-Woo said, ``There are many cases that companies support task forces by occasional reports to explain rumors floating around the stock market.`` and added, ``It would be better to include this part later though it has been omitted this time.``

Deputy Chairman of Korea Securities Research Institute Woo Young-Ho said, ``It is more practical to apply extensively the cases of accounting fraud on the declaration of negotiable securities and the report of business plan to small-sized companies than to decide the size of assets respectively.``

In particular, many point out that the government should relax the restrictions on business companies, including the restriction on conglomerates` equity in subsidiaries policy or the ranking system of 30 largest conglomerates, which has little economic justification and few practical effects, while improving management transparency of companies.

yhchoi65@donga.com