Supreme Court Decision on the Scope of the 5% Reporting Rule, and Disclosure for Jointly Held Shares and on Defects in Proxy Voting at Shareholders' Meetings

Recent amendments to the Korean Commercial Code have strengthened minority shareholder rights and revised corporate governance rules. As a result, campaigns, such as shareholder proposals by activist shareholders, and management control disputes among major shareholders, are increasing. Several issues have therefore frequently been raised in the exercise of proxy solicitation and shareholders’ meeting: the scope of the proxy solicitation rules and the so-called 5% Reporting Rule (i.e., reporting obligation for large shareholders) under the Financial Investment Services and Capital Markets Act (the "FISCMA"); and related issues of whether the resulting proxies are valid and whether the shareholders' meeting is defective.

A recent Supreme Court decision (Supreme Court Decision No. 2026Da200657, rendered on September 10, 2026; the "Subject Decision") clarified these questions, by holding that a shareholder who delegates voting rights to a proxy solicitor under Article 152 of the FISCMA for a specific shareholders' meeting on a temporary and revocable basis, does not establish a relationship of joint exercise of voting rights based on this action alone; the shareholder’s referenced action alone therefore does not trigger the aggregated 5% Reporting and Disclosure obligations. The decision resolves a long-standing debate in practice, and has drawn attention from the market and from companies.

We note that the Subject Decision and the lower court judgments also addressed other questions that also deserve close review: whether a violation of FISCMA’s proxy solicitation rules, including its rules on the form of proxy, affects the legal validity of these proxies, and whether these considerations make the shareholders’ meeting defective.

The facts, legal issues, and holdings of the Subject Decision and the lower court judgments are set out below.

Overview of the Case

Company A and other minority shareholders held shares in a KOSDAQ-listed company that develops and manufactures semiconductor-related products. With the court's permission to convene, they held an extraordinary general meeting of shareholders (the "Meeting"), whereby the agenda included the following: electing a temporary chair; amending the articles of incorporation; removing existing directors and statutory auditors; and electing new directors and statutory auditors. Before the Meeting, Company A and two other shareholders ("Company A et al. (3 persons)") agreed to exercise their voting rights jointly. Separately, Company A's side solicited proxies from small shareholders, obtained proxy forms, and exercised those votes at the Meeting. However, Company A et al. (3 persons) directly held only 872,765 shares in total, which was less than 5% of the total issued shares (37,946,235 shares). Meanwhile, Shareholder B and others opposed Company A's position, and ran a competing proxy contest over the Meeting. Another shareholder group, Company C and others, agreed to delegate their voting rights so that the votes would be cast as Shareholder B and others directed. They delivered proxy forms stating their vote for or against each agenda item to the proxy agent of Shareholder B and others. A person from Company A's side and the proxy agent of Shareholder B and others then destroyed those proxy forms. They prepared new proxy forms marking the votes differently from the destroyed forms, and used them to vote at the Meeting.

The plaintiffs, as shareholders of the company, made three arguments:

(i) 5% reporting. Company A's side and the small shareholders who gave it proxies should be recognized as joint holders. The 5% reporting obligation under Article 147 of the FISCMA was therefore violated. Accordingly, the voting rights Company A's side exercised by proxy should be restricted for the portion exceeding 5%.
(ii) Solicitation defects. The Meeting was defective because the proxy solicitation procedures were violated. The proxy forms also contained errors under the rules on proxy format, such as missing or incorrect shareholder numbers, share counts, resident registration numbers, and proxy dates, and duplicate forms.
(iii) Forgery. The Meeting's resolutions were defective because votes were cast using forged proxies.

As primary relief, the plaintiffs sought a declaration that the resolutions were null and void or nonexistent, and, in the alternative, revocation of the resolutions. The court of first instance dismissed the plaintiffs' claims in part as inadmissible and rejected the rest on the merits (Suwon District Court, Seongnam Branch, Decision Nos. 2022Gahap406845 and 2023Gahap400158 (consolidated) rendered on July 26, 2024). The plaintiffs appealed.

Appellate Court Decision (Appeal Dismissed)

The appellate court dismissed the plaintiffs' appeal (Suwon High Court Decision Nos. 2024Na23329, 23336 (consolidated) and 30105 (joint litigation intervention) rendered on October 2, 2025).

Regarding the 5% reporting obligation, the appellate court considered the following factors together:

(i) The financial authorities have advised that merely obtaining small shareholders' proxies through proxy solicitation means obtaining proxies with a for/against vote marked on specific agenda items of a shareholders' meeting. On that view, no 5% report is required.
(ii) Delegating shareholders would find it hard to know whether the combined votes to be cast the same way exceed 5%, or exactly when a reporting obligation arises.
(iii) At the time, several solicitors were competing for proxies, and the proxies covered only voting at the Meeting. Proxies could be freely revoked, and in fact proxies were frequently granted and revoked.

On this basis, the court held that small shareholders who signed proxy forms in response to proxy solicitation could not, for that reason alone, be regarded as having agreed with Company A et al. to jointly exercise voting rights under the FISCMA. They therefore did not become subject to the 5% reporting obligation on an aggregated basis.

In relation to the proxy solicitation procedures and the defects in the proxy forms, the appellate court held as follows: A person from Company A’s side solicited and exercised proxies for the Meeting without being a publicly disclosed proxy solicitation agent; even so, the FISCMA provisions on proxy solicitation are merely regulatory provisions, and as such a procedural defect alone therefore does not directly constitute grounds for the nonexistence, nullity, or revocation of the resolution of the Meeting.

The proxy forms contained errors under the Act's rules on proxy format, such as missing or incorrect shareholder numbers, share counts, resident registration numbers, and proxy dates, and duplicate forms. The court held that, absent evidence that these errors caused shareholders' share counts to be incorrectly reflected in the voting, they alone do not make the Meeting's resolutions defective.

With respect to the forged proxies, the appellate court found that a person from Company A's side and the proxy agent of Shareholder B and others did destroy the existing proxies of Company C and its acquaintance shareholders, and prepared new proxies with different votes marked. However, there was no evidence that the company or the convening party knew of the forgery or actively took part in it. On the director-election items at issue, the resolution requirement was still met even after excluding the 3,907,214 shares the plaintiffs alleged were forged. The court therefore held that there were no grounds to revoke the Meeting's resolutions.

Supreme Court Decision (Appeal Dismissed)

On whether a 5% reporting obligation arises from a joint holding relationship, the Supreme Court held that the appellate court's judgment was correct and dismissed the plaintiffs' appeal. Below is an excerpt from the Supreme Court’s decision:

Under Article 147 of the FISCMA, "persons having a special relationship" who bear the reporting obligation means related persons and joint holders (Article 141(1) of the Enforcement Decree of the FISCMA). A person who has agreed with the principal, by agreement, contract, or otherwise, to jointly exercise voting rights (including the power to direct the exercise of voting rights) is also a joint holder (Article 141(2)(3) of the Enforcement Decree). Such an agreement need not be explicit and may be implied. However, to be a joint holder under Article 141(2)(3) of the Enforcement Decree, there must be more than the mere outward appearance of jointly exercising voting rights. There must be a meeting of the minds to jointly exercise voting rights or the power to direct their exercise. In addition, voting rights are an inherent and fundamental right of shareholders. Yet a shareholder who violates the reporting obligation suffers disadvantages, such as being unable to exercise voting rights on the violating portion of shares in excess of 5% of the total issued voting shares, for a period prescribed by Presidential Decree (Article 150(1) of the FISCMA). Considering this, a shareholder cannot be regarded as having agreed to jointly exercise voting rights merely because the shareholder, for a specific shareholders' meeting and on a temporary and revocable basis, had a third party exercise voting rights on its behalf, or delegated proxy voting to a proxy solicitor under Article 152 of the FISCMA

The Supreme Court, however, did not rule on the issue over whether the defect caused by the person soliciting proxies without publicly disclosing the proxy solicitation agent, thereby affects the private-law validity of the proxies; the Supreme Court did not rule on this issue because the issue was not raised as a ground of appeal.

On the forged proxy issue, the Supreme Court held that “although part of the appellate court's stated reasoning is inappropriate,” the appellate court's judgment was correct. The appellate court had found “no defect in the resolutions of the Meeting” and rejected the plaintiffs' claims. The Supreme Court held that in doing so, it “did not err in its understanding of the law regarding the validity of voting rights exercised through forged proxies.”

It had been legally unclear and subject to debate previously, whether the aggregated 5% reporting rules apply through a joint holding relationship when proxies are routinely obtained from small shareholders for a shareholders' meeting. The Supreme Court made its position clear now in the Subject Decision, holding that the 5% reporting obligation does not apply to ordinary proxy solicitation practice, on the premise that shareholders are basically free to revoke their proxies and vote differently from what the proxy form states. Listed companies should take this into account when conducting shareholders' meetings and soliciting proxies.

Also notable is the forged proxy issue. The Supreme Court stated that although part of the appellate court's reasoning was inappropriate, it would uphold the appellate court's conclusion that the Meeting's resolutions were not defective. This type of holding is sometimes used by the Supreme Court, when it finds the lower court’s rationale to be inappropriate, but nevertheless reached the correct legal conclusion. The Court, however, did not specify which portion of the appellate court’s rationale was inappropriate.

Lower courts have previously held that defects in some proxies submitted to a shareholders' meeting do not affect the meeting's resolutions if the resolution requirement is still met after excluding those proxies (e.g., Busan District Court, Eastern Branch, Decision 2021Gahap101832, rendered August 18, 2022; Changwon District Court Decision 2025Gahap10326, rendered January 8, 2026). The Court's judgment here may reflect the same approach. In this case, the resolution requirement was met even excluding the forged proxies, so the outcome of the vote would not have changed.
This can also be understood as consistent with discretionary dismissal under Article 379 of the Korean Commercial Code. Under that doctrine, there is no benefit in revoking a resolution when a defect in the resolution procedure did not affect its outcome. Going forward, when a resolution is challenged on the ground of a procedural defect, the key question will be not only whether a defect exists but also whether it affected the outcome.

The appellate court also held that violations of the FISCMA's rules on proxy solicitation procedures, disclosure, and proxy form are violations of regulatory provisions. On that view, they do not affect the private-law validity of proxies, and that judgment has effectively become final. This principle may also be disputed in many shareholders' meeting disputes and should be kept in mind.

[Korean Version]

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