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[Legal Update - Corporate/M&A] Whether it is possible to adopt resolutions on the reduction of reserves and the distribution of such reduction as dividends at the same general meeting of shareholders

27 Feb 2018

This is to inform you of the recent change made by the Ministry of Justice (the "MOJ") on its authoritative interpretation of Article 461-2 of the Korean Commercial Code (the "KCC"): whether a company at the same general meeting of shareholders may adopt resolutions to (i) reduce its reserves in accordance with the said article, and (ii) distribute funds made available from such reduction as dividends. 


Previous Interpretation – Possible 


The MOJ's previous interpretation of Article 461-2 of the KCC was that the statutory reserves (i) are unappropriated surplus earnings which shall become the source of profits available to be distributed as dividends by a resolution on the reduction of reserves adopted by a general meeting of shareholders, and (ii) may be used to distribute profits or acquire treasury shares by adopting a resolution at the same general meeting of shareholders. Based on the foregoing, it is our understanding that the MOJ previously took the view that it is possible to adopt resolutions to reduce reserves and to distribute funds made available from such reduction as dividends at the same general meeting of shareholders. 


Changed Interpretation – Impossible 


However, the MOJ has recently changed its view to the effect that adopting resolutions to reduce reserves and distribute funds made available from such reduction as dividends at the same general meeting of shareholders under Article 461-2 of the KCC shall not be permitted (January 2018, Korea Listed Companies Association, Practical Consultation Cases). 


This seems to be based on the MOJ's opinion that the resolution to reduce reserves at a general meeting of shareholders cannot be deemed to have increase the amount of "reserves accumulated until the settlement of accounts period," which serves as the basis for the source of dividend for the relevant year. The KCC provides that the source of dividend for the following year shall be determined based on the settlement of accounts in the immediately preceding period. 


Since there is no established court precedent on the issue, the outcome of a specific case may vary. However, based on this changed view of the MOJ, adopting resolutions to reduce reserves and distribute funds made available from such reduction as dividends at the same general meeting of shareholders may no longer be permitted. 

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