Supreme Court Decision on the Validity of Provisions on Restricting Voting Rights and Methods of Exercising Such Rights under a Shareholders’ Agreement

As mentioned in our previous newsletters (Link 1, Link 2), on July 13, 2023, the Supreme Court reversed and remanded a lower court’s decision (Seoul High Court Decision 2020Na2049059, October 28, 2021), which invalidated provisions on shareholders’ rights to consent to major management decisions of a company under a share subscription agreement, on the basis that the relevant provisions contravened the principle of shareholder equality. The Supreme Court instead ruled that the validity of shareholders’ consent right provisions may be recognized depending on relevant factual circumstances (Supreme Court Decision 2021Da293213, July 13, 2023). In addition, approximately two weeks thereafter, on July 27, 2023, the Supreme Court issued a ruling on the validity of a provision guaranteeing the redemption of invested capital (hereby referred to as the “Investment Redemption Provision”) in relation to an investment agreement executed between a company and certain shareholders via issuance of new shares. In the decision, the Supreme Court ruled that the Investment Redemption Provision was invalid in relation to the company and the new shareholders, finding that the Investment Redemption Provision guaranteed the absolute redemption of the invested capital and thereby conferred upon said shareholders a right that is superior and not extended to other shareholders in violation of the principle of shareholder equality; by contrast, the same provision could be valid between such new shareholders and the other shareholders, as the principle of shareholder equality did not directly apply between the shareholders (Supreme Court Decision 2022Da290778, July 27, 2023).

The above Supreme Court decisions in 2023, attracted attention from market participants, as these decisions substantially established legal principles on the validity of certain provisions in the shareholders’ agreement or investment agreements in the joint stock companies, such as the right to consent to certain managerial matters, or the loss compensation clauses, that had been commonly included in minority equity investments or M&A transactions.

The Supreme Court issued a clear decision on June 12, 2025, regarding the validity of provisions on restricting the voting rights related to the appointment and composition of executives, as well as the methods of exercising such rights (Supreme Court Decision 2020Da219577, hereby referred to as the “Subject Decision”) of the shareholders agreement. Therefore relevant parties should take into account both the Supreme Court decisions in 2023, and this Subject Decision when considering the validity of provisions regarding shareholders’ rights in an investment agreement or shareholders agreement.

According to the above Supreme Court decisions, voting agreements among shareholders, that is, the agreements that restrict shareholders’ rights to vote at shareholders’ meetings, are, in principle, valid among the parties to such agreements, provided that their content and purpose do not violate mandatory laws or public order. However, the Supreme Court has clearly held that the validity of such agreements cannot affect the provisions of internal organizational rules of the company, such as the rights of shareholders. Accordingly, if a shareholder exercises voting rights at a shareholders’ meeting in breach of such an agreement, and a resolution is adopted thereby, the other party to the agreement cannot challenge the resolution as defective against the company on the grounds of such breach.

However, in the Subject Decision, the Supreme Court ruled that a party may exercise its contractual rights against the party who has breached the agreement, and the plaintiff may bring a claim against the defendant to vote in favor of the dismissal of three out of five directors, who had been appointed pursuant to the defendant’s recommendation. Furthermore, the Supreme Court held that, as an indirect means of enforcement, if the defendant fails to fulfill its obligation, the court may order the defendant to pay the plaintiff compensation calculated at the rate of KRW 1 million per day from the date the relevant judgment becomes final, until the obligation is performed.

This decision is significant in that the Supreme Court affirmed the existing legal theory that, although the shareholders’ agreements restricting voting rights cannot be considered valid as internal organizational rules, their obligatory effect between the parties may be recognized, and that it is possible for a party to enforce the other party to exercise its rights through indirect means, such as by filing for enforcement orders or seeking enforcement fines.

As such, relevant parties should keep the above Supreme Court decisions in mind when entering into minority investment agreements, or during M&A transactions, as well as when conducting shareholders’ meetings in a joint stock company.

The details of the Subject Decision are as outlined below.

Case Overview

The joint investment agreement between the plaintiff and the defendant, executed on October 16, 2016, regarding the establishment and operation of the company in this case (hereby referred to as the “Company”), provides that “the board of directors shall consist of four members, and the plaintiff and the defendant shall each designate two members.” Pursuant to this provision, the Company was obligated to maintain a board of four directors not only at the time of its establishment, but also thereafter. However, at the extraordinary general meeting of shareholders held on August 6, 2018, the defendant breached this provision by exercising its voting rights to appoint three additional directors. As a result, although each party was allowed to appoint only two directors, the defendant appointed five directors while the plaintiff appointed only two, consequently letting the defendant appoint the majority of the board of directors.

In response, the plaintiff convened a shareholders’ meeting with the agenda of dismissing three out of the five directors who had been appointed upon the defendant’s recommendation, and requested that the defendant exercises its voting rights in favor of this agenda.

Court’s Decision

In accordance with the legal principle mentioned above, the Supreme Court ruled that an agreement among shareholders restricting their voting rights is, in principle, valid among the parties to such agreement, but the validity of such agreement cannot affect the provisions of the organizational rules of the company, such as the rights of shareholders. Accordingly, if a shareholder exercises voting rights at a shareholders’ meeting in breach of such an agreement, and a resolution is adopted thereby, the other party to the agreement cannot challenge the resolution as defective against the company on the grounds of such breach, and can only exercise its rights against the party who has breached the agreement.

Accordingly, the plaintiff cannot dispute the validity of the resolution appointing the directors at the extraordinary shareholders’ meeting held on August 6, 2018. However, the Supreme Court ruled that, the defendant does have the obligation to hold the general shareholders’ meeting to exercise its voting rights in favor of dismissing three out of the five directors who were appointed based on the defendant’s recommendation, in order to rectify the outcome caused by the defendant’s non-fulfillment of its obligations.

The Supreme Court also outlined the general legal principles regarding the requirements for imposing indirect enforcement of a judgment to perform obligations and for ordering compensatory payments. The Court ruled that, considering the circumstances of the case, the parties’ characteristics and financial resources, the nature and specifics of the obligation, the difficulty of its performance, the obligor’s attitude and degree of breach, any expected benefit to the obligor from the breach, the damage incurred by the obligee, and the difficulty of remedying such damage, it was reasonable for the lower court to order, as an indirect means of enforcing judgment to perform an obligation, that if the defendant failed to comply with the obligation, compensation should be paid at a rate of KRW 1 million per day from the date the judgment becomes final until the obligation is fulfilled. The Supreme Court further found that there were no errors in the lower court’s understanding of the relevant legal principles regarding the requirements and scope of indirect enforcement that would have affected the judgment.

[Korean Version]

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