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.
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Case Overview |
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Court’s Decision |