On April 24, 2025, the Supreme Court upheld the lower court’s decision that a shareholder who is also a director (a “shareholder-director”) has a special personal interest regarding director compensation limits and should therefore be restricted from voting on such an agenda at the general meeting of shareholders. The Supreme Court dismissed the case without further deliberation or a hearing on the merits of the lower court’s decision.
Article 388 of the Korean Commercial Code (the “KCC”) provides that if the amount of directors’ remuneration is not determined in the articles of incorporation, it should be determined by a resolution of the general meeting of shareholders. Accordingly, most corporations present the compensation limit for directors for the relevant business year as an agenda item at their ordinary general meetings of shareholders. It is a common practice for the board of directors to determine the specific details – such as the amounts paid to individual directors – within the compensation limit set at the general meetings of shareholders (e.g., Supreme Court Decisions 2016Da241515 and 241522, rendered on June 4, 2020).
In this regard, whether a shareholder-director who is subject to the compensation limit falls under the category of a shareholder with a special interest as stipulated in Article 368 (3) of the KCC, and thus is restricted from exercising his/her voting rights on the compensation limit agenda, has recently become a topic of controversy in the lower courts.
The existing conventional theories and practices suggest the following: (i) when the ceiling amount of compensation or the specific amount of compensation of each director is determined separately at a general meeting of shareholders, the shareholder-directors are recognized as having a special interest, and (ii) when the total compensation for all directors is determined as a pooling limit at the general meeting of shareholders, the shareholder-directors are considered not to have a special interest and may vote on such agenda items. A “special interest” under Article 368 (3) of the KCC refers to a case where a specific shareholder has a personal interest in the agenda item at the general meeting, beyond his/her position as a shareholder (e.g., Supreme Court Decision 2007Da40000, rendered on September 6, 2007). In the former case ((i) mentioned above), it is recognized that the director’s personal benefit from compensation correlates with the agenda of the general meeting of shareholders, whereas, in the latter case ((ii)), as only an aggregate limit on the total compensation for all directors is established – with the board later determining individual allocations – the existing conventional theories and practices suggest that it is difficult to claim that the individual director has a personal interest in the agenda item.
Recently, however, several lower court rulings have departed from these conventional theories and practices, and some have been upheld by the Supreme Court without further deliberation, attracting the attention of businesses and the market.
For instance, Company A, a listed company, approved an agenda at its ordinary general meeting of shareholders in March 2023, to set the total compensation limit for all directors at KRW 5 billion. Shareholder-directors of Company A exercised their voting rights in favor of this resolution. Without their affirmative votes, the agenda could have been rejected. Following this instance, Company A’s auditor filed a lawsuit to annul the resolution of the general meeting of shareholders. The district court held that shareholder-directors “have a special personal interest because the resolution to determine the compensation limit allows them to receive compensation within that limit,” noting that “the compensation limit set for directors at the general meeting of shareholders inevitably has a significant impact on the future determination of the specific compensation amounts for individual directors, and shareholder-directors’ compensation is closely related to their personal interests rather than their interests in corporate control.” This ruling concluded that “a shareholder-director should be regarded as having a special interest in the agenda regarding the approval of the director’s compensation limit, which should not be viewed differently from other cases where specific compensation for individual directors is decided” (Seoul Central District Court Decision 2023GaHap66328, rendered on May 31, 2024). The ruling of the first-instance court was also accepted by the appellate court (Seoul High Court Decision 2024Na2027590, rendered on January 22, 2025), and the Supreme Court confirmed the ruling, dismissing the case without further deliberation. The case was closed without a hearing on the merits (Supreme Court Decision 2025Da210138, rendered on April 24, 2025).
Additionally, in another case where a shareholder of another listed company, Company B, filed a preliminary injunction against the exercise of voting rights at a general meeting of shareholders, claiming that the exercise of voting rights by shareholder-directors should be restricted, the court ruled that the voting rights of shareholder-directors should be restricted on the grounds that they have a personal interest in the approval of the compensation limit, thereby limiting their voting rights according to Article 368 (3) of the KCC (Busan District Court (Western Branch) Decision 2023KaHap100154, rendered on September 22, 2023).
The Supreme Court’s affirmation of the decision regarding the above mentioned Company A – even though it dismissed the case without deliberation or detailed reasoning – increases the likelihood that this decision will serve as a precedent for future general meetings of shareholders. It is therefore critical for companies to review developments on voting rights for shareholder-directors in future ordinary or extraordinary general meetings of shareholders. In particular, when major shareholders are shareholder-directors facing voting restrictions, it becomes unavoidable to secure the required quorum by actively soliciting proxy voting from other general shareholders. As a consequence, thorough preparation and close communication with shareholders are essential throughout the process of convening and conducting general meetings. It will also be important to monitor how future lawsuits unfold to determine whether the Supreme Court provides specific reasoning on similar issues as they arise.
In light of the foregoing legal principle, a director’s voting rights may be restricted even when resolutions to specify individual directors’ compensation are made at board meetings, and thus, corporations are advised to reconsider or revise their procedures for determining director compensation.
