Supreme Court Precedents on Voting Restrictions for Shareholder-Directors with Special Interests in Resolutions Setting Officers’ Compensation Limit at General Meetings of Shareholders

As previously noted (Link), a lower court recently ruled that a shareholder of a company who also serves as a director of such company (a “shareholder-director”) should be considered to be a shareholder with a special interest and therefore should be restricted from voting on shareholder resolutions setting a cap on the aggregate compensation of directors under Article 368(3) of the Korean Commercial Code (the “KCC”). Similar lower court rulings were upheld by the Supreme Court without further deliberation (Supreme Court Decision No. 2025Da210138 rendered on April 24, 2025).

Shortly after upholding such lower court rulings without further deliberation, the Supreme Court issued Decision No. 2025Da219931 rendered on April 2, 2026, which expressly articulated the applicable legal principles to the effect that the voting rights of shareholder-directors should be limited with regard to shareholder resolutions setting the cap on aggregate compensation of directors. This decision drew considerable attention. Details of the precedent are outlined below.

Overview of the Case

The defendant is a Korean joint stock company with two shareholders: (i) the plaintiff, who holds 24% of the defendant’s issued shares; and (ii) the defendant’s representative director (the “Representative Director”), who holds the remaining 76%. At the defendant's ordinary general meeting of shareholders held on March 29, 2024, an agenda item “to cap the aggregate compensation of directors at KRW 450 million” was proposed and adopted, with the Representative Director voting in favor of the relevant resolution. The plaintiff, as a shareholder of the defendant, alleged that the resolution was defective because the Representative Director, who defend alleged is a shareholder with a special interest, voted on the resolution. The plaintiff sought, as its primary remedy, a declaration of non-existence of the resolution and, in the alternative, the annulment of the resolution.

Decision of the Lower Court (Acceptance of the Plaintiff’s Claim and Annulment of the Resolution)

The lower court upheld the plaintiff’s allegations, holding that the resolution in question should be annulled because the Representative Director exercised its voting rights with respect to the resolution despite being a shareholder with a special interest in the subject matter of the resolution (i.e., the cap on aggregate compensation of directors), and, as such, was subject to the voting restrictions under Article 368(3) of the KCC.

The defendant argued that the Representative Director should not be considered to be a shareholder with special interest under Article 368(3) of the KCC because a resolution setting a cap on the aggregate compensation of directors (as opposed to a resolution fixing the actual compensation for each director) does not predetermine the actual compensation to be received by each director, and therefore no director should be considered to have a special interest that is separate from its status as shareholder. The lower court rejected this argument, holding that any shareholder-director should be deemed to have a special interest in a resolution concerning the approval of a cap on the aggregate compensation of directors (among other things): (i) the cap on the aggregate compensation to directors has a material effect on the actual compensation to be received by each director; (ii) once a resolution setting the cap on the aggregate compensation of directors is adopted, shareholder-directors will become positioned to receive compensation within that cap and are thus directly affected by such resolution; and (iii) the compensation to be received by a shareholder-director is more closely related to its own private economic interests than to the interests in corporate control.

The defendant further argued that, if Article 368(3) of the KCC were to be applied in the manner that plaintiff alleges, minority shareholders who are not well acquainted with the company’s circumstances could, in effect, determine director compensation or make it impossible to provide compensation to directors if minority shareholders refuse to do so—both outcomes which the defendant described as unfair. The lower court rejected this argument as well, holding that Article 388 of the KCC is a mandatory provision that is intended to protect the interests of the company, its shareholders and its creditors by preventing potential harm caused by shareholder-directors in their pursuit of personal interests (Supreme Court Decision Nos. 2016Da241515 and 2016Da241522, rendered on June 4, 2020, et al.). If shareholder-directors who hold a majority of the issued shares of a company were to be able to exercise voting rights on matters concerning their own compensation, they could easily approve excessive compensation at shareholder meetings that they control, thereby directly undermining the intent of Article 388 of the KCC. Moreover, under Article 381 of the KCC, where a shareholder was unable to exercise its voting rights with regard to a shareholder resolution pursuant to Article 368(3) of the KCC, such shareholder resolution is manifestly unfair and such unfairness could have been prevented had that shareholder been permitted to vote, the shareholder may bring an action for annulment or modification of such resolution within two (2) months from the date of such resolution. In light of these considerations, the lower court concluded that the arguments asserted by the defendant were not sufficient to exclude application of Article 386(3) of the KCC to the fact pattern presented.

Decision of the Supreme Court (Dismissal of Appeal)

The Supreme Court dismissed the defendant's appeal and upheld the lower court's decision, articulating the following legal principles.

Under the KCC, except as otherwise provided in the KCC or the company’s articles of incorporation, shareholder resolutions shall be adopted by (i) the affirmative votes of a majority of the voting rights represented at the meeting of shareholders and (ii) shareholders holding at least one-fourth (1/4) of the total number of issued and outstanding shares, and no person who has a special interest in a shareholder resolution shall exercise his/her voting rights with respect to such shareholder resolution (Article 368(1) and (3) of the KCC). Therefore, absent special circumstances (e.g., where all shareholders are directors or where no shareholders other than a person with special interests can exercise voting rights at the general meeting of shareholders) shareholder-directors may not vote on resolutions concerning director compensation pursuant to Article 388 of the KCC because such shareholder-directors have a special interest in the subject matter of the resolutions. In such case, the voting rights attached to shares held by such shareholder-directors shall be: (i) excluded from the voting rights represented at the meeting under Article 371(2) of the KCC; and (ii) excluded in the “total number of issued and outstanding shares” under Article 368(1) of the KCC (see Supreme Court Decision No. 2006Da3585 rendered on July 12, 2007).

The doctrine restricting the voting rights of shareholder-directors with respect to resolutions setting a cap on aggregate compensation to directors has been subject to much controversy, including during the slate of 2026 ordinary general meeting of shareholders. It has been reported that there have been instances in which proposals to set such cap on aggregate compensation of directors were defeated by application of this doctrine. Previously the Supreme Court had not expressly articulated its position on this doctrine (apart from a decision dismissing the appeal without further deliberation); hence it is particularly noteworthy that the Supreme Court has expressly articulated the relevant legal principles in this case. The lower court’s rejections of counterarguments are also worth noting (e.g., that rejecting the agenda would unfairly invalidate compensation payments to all directors, or that the resolution in question sets a cap only on aggregate compensation of directors and therefore does not predetermine compensation to be received by individual directors). However, it is also important to note that the aforementioned Supreme Court precedent concerns an unlisted company with two (2) shareholders, not a major listed company, and the compensation cap set by the resolution in question was not substantial. Moreover, the Supreme Court recognized exceptions under which the matter may be judged differently (e.g., where all shareholders are directors or where no shareholders other than a person with special interests can exercise voting rights at the general meeting of shareholders). We believe that these considerations are meaningful because they reflect issues that have been controversial in practice. As such, it is necessary to carefully consider the above matters in determining the future compensation of directors and in convening general meetings of shareholders.

[Korean Version]

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