Legal Analysis of Changes and Reduction of Director’s Compensation in South Korea

1. Overview of Director’s Right to Claim Compensation in South Korea

The right of directors to claim compensation in South Korea is established under Article 388 of the Commercial Code. This article provides that when the compensation amount is not determined in the articles of incorporation, it shall be determined by resolution of the general meeting of shareholders. This is a procedural regulation, and the Commercial Code itself does not stipulate specific monetary amounts for compensation.

Korean court precedents interpret Article 388 of the Commercial Code as designed to prevent directors from pursuing private interests to the detriment of the company, shareholders, and creditors. The relationship between a company and its directors is governed by the principles of mandate under the Civil Code, and in corporate practice, it is common to pay directors compensation. Therefore, it is interpreted that there exists an explicit or implicit agreement regarding compensation payment, thereby giving directors an abstract right to claim compensation.

When the general meeting of shareholders, the board of directors delegated authority by the general meeting, or the representative director determines the specific compensation amount for directors in South Korea, such confirmed compensation amount is incorporated into the substance of the appointment contract between the company and the director. Consequently, the director obtains a concrete right to claim compensation corresponding to the confirmed amount, and the company bears the corresponding obligation.

2. Commercial Code Provisions on Changes to Director’s Compensation

Regarding changes to director’s compensation, Article 388 of the Commercial Code in South Korea provides:

“The compensation of directors shall be determined by the articles of incorporation, and if not determined in the articles of incorporation, it shall be determined by resolution of the general meeting of shareholders.”

This provision governs the procedural requirements for determining director’s compensation, and the same procedures apply to changes in compensation. Particularly in the case of reducing director’s compensation, merely a general meeting resolution is insufficient, and in principle, the consent of the affected director is required.

This is because the right to claim compensation has been incorporated into the appointment contract between the company and the director. Therefore, to change compensation that has already been established requires the consent of the director as the contracting party, which is the established view in Korean court precedents.

3. Legal Requirements and Procedures for Reducing Director’s Compensation

The most important legal principle regarding reduction of director’s compensation in South Korea is the application of contract law principles. Once a director’s specific compensation amount has been determined through the articles of incorporation or general meeting resolution and incorporated into the appointment contract, the general principle of contract law requires that reducing such compensation necessitates, in principle, the consent of the affected director.

A resolution of the general meeting (or shareholders’ meeting) alone cannot affect the director’s right to claim compensation. A general meeting resolution deciding to reduce compensation merely establishes the company’s internal decision, and without the consent of the director as the contracting party, such resolution cannot take effect on the director according to the principles of contract law.

4. Application of Contract Law to Director’s Compensation Reduction

The basis for applying contract law principles to changes in director’s compensation in South Korea includes:

1. Director’s compensation constitutes an essential element of the appointment contract
2. The company, as one party to the contract, cannot unilaterally change the contractual terms
3. Modification of the contract requires mutual agreement between both parties

Therefore, reduction of director’s compensation is not merely a corporate law issue but a contract law matter that fundamentally requires agreement between the contracting parties. This is because the director’s right to claim compensation has already been established as a concrete claim.

5. Cases Where Implicit Consent is Recognized

Even when there is no explicit consent from the director, if there are special circumstances that suggest implicit consent, the effectiveness of the compensation reduction resolution may be recognized by Korean courts.

For example, if a director accepts their position knowing that the company has internal regulations or practices for differentiating compensation based on job duties or providing no compensation under certain circumstances, such circumstances may constitute “implicit consent.”

Since directors’ duties may change according to the company’s operational needs, and when a company operates on a system of differentiating compensation based on job content, a person accepting a directorship position may be presumed to have implicitly consented to the possibility that their compensation could change following changes in their duties during their term of office.

6. Legal Standing for Actions to Declare Compensation Reduction Resolutions Void

The Korean Supreme Court in its decision of March 30, 2017 (2016Da21643) made an important ruling regarding actions to declare compensation reduction resolutions void.

In this case, the general meeting of a limited liability company resolved to reduce the compensation of plaintiff directors, and the plaintiffs filed a lawsuit seeking declaration of invalidity, claiming the reduction resolution was improper.

The Supreme Court determined that in this case, the plaintiff directors had no legal standing. The reasoning was as follows:

• A general meeting resolution to reduce director’s compensation cannot affect the director’s contractual right to claim compensation without the director’s consent
• Even if the reduction resolution itself contains grounds for invalidity under corporate law, regardless of whether the resolution is valid or invalid, the director’s right to claim compensation remains unaffected

Legal standing for declaratory judgments is only recognized when there exists a current uncertainty or danger to the plaintiff’s rights or legal position, and when obtaining a declaratory judgment is the most effective and appropriate means of removing such uncertainty or danger. The plaintiff directors in this case had no legal standing because the general meeting’s compensation reduction resolution legally had no effect on their compensation rights.

7. Practical Considerations in South Korean Practice

Important practical considerations regarding changes to director’s compensation in South Korea include:

1. Obtaining Explicit Consent: When seeking to reduce a director’s compensation, securing the affected director’s explicit written consent is the safest approach.
2. Utilizing Articles of Incorporation: Pre-establishing procedures or conditions for compensation changes in the articles of incorporation can be helpful.
3. Clarifying Internal Regulations: When implementing systems for differentiating compensation based on duties, it is important to clearly establish internal regulations and inform directors of these at the time of appointment.
4. Documentation: All procedures related to compensation changes should be documented and retained.
5. Prohibition Against Reduction Without Consent: Recognition that director’s compensation cannot be reduced through unilateral company decisions alone.

8. Conclusion

Changes to director’s compensation, particularly reductions, are not merely internal corporate decisioning matters but fall within the domain of contract law principles. Since compensation already established for directors constitutes an important part of the appointment contract, changing such compensation requires the consent of the affected director.

Neither shareholders’ meeting nor general meeting resolutions alone can affect a director’s right to claim compensation, and compensation reduction resolutions made without director consent are inherently ineffective. Therefore, when companies seek to change director’s compensation, they must proceed through agreement with the affected directors.

KiM & PARK Law Firm has recently provided counsel on several corporate executive compensation matters and has delivered practical guidelines for preventing legal disputes during the process of adjusting director’s compensation for publicly listed companies in South Korea. Should you require legal consultation regarding changes to director’s compensation, please feel free to contact us at any time.

Analysis of Relevant Court Precedents

Supreme Court Decision March 30, 2017 (2016Da21643)

Facts

• Directors who were also members of a limited liability company received KRW 5 million monthly compensation from 2005, but faced reduction to KRW 1.2 million through a 2014 extraordinary members’ meeting resolution
• The plaintiffs held 23% equity each, while Representative Director A’s faction held 54% of shares, enabling them to exercise control over meeting resolutions
• During the reduction resolution, plaintiffs’ titles were also changed from Executive Director/Managing Director to regular Director status

Supreme Court’s Key Holdings

1. Director’s compensation determined through articles of incorporation or general meeting resolutions becomes part of the appointment contract binding both the company and directors
2. Unilateral reduction is impossible without either explicit consent or implicit consent arising from differentiated compensation systems based on duties
3. General meeting resolutions for compensation reduction have no effect on directors’ compensation rights
4. Therefore, there is no legal standing to seek declaration of invalidity

Practical Implications

This precedent clarifies that changes to director’s compensation fall within the domain of contract law and that general meeting resolutions alone cannot infringe upon directors’ vested rights.

Supreme Court Decision November 22, 1977 (77Da1742)

Key Holding

Retirement bonuses and other director compensation, once determined through articles of incorporation or shareholders’ meeting resolutions, cannot be reduced or revoked through unilateral shareholders’ meeting resolutions without effect.

Significance

This precedent from 40 years ago demonstrates that Korea’s Supreme Court has long recognized the vested nature of directors’ compensation rights, forming the legal foundation for the 2017 precedent.