Legal Guide to Shareholder Proposal Rights in South Korea: Practical Framework for Corporate Governance

1. Understanding Shareholder Proposal Rights in South Korea

South Korea’s shareholder proposal system was introduced following the 1997 IMF financial crisis as a mechanism to counter the board’s monopolistic control over setting meeting agendas and to realize the vision of “open shareholder meetings” driven by shareholders themselves.

Under Article 363-2, Paragraph 1 of the Commercial Act of South Korea, shareholders holding at least 3% of the total issued shares (excluding non-voting shares) may propose agenda items for shareholders’ meetings at the company’s expense. This system represents a balanced approach that maintains institutional authority while ensuring shareholders’ rights.

Shareholder proposal rights in South Korea include two categories:

• Agenda Proposal Right: Requesting specific matters to be included as meeting agenda items
• Resolution Proposal Right: Requesting detailed proposal content to be included in the meeting notice

2. Legal Nature and Requirements

The Supreme Court of South Korea adopts the strict relative effect theory regarding the legal nature of shareholder proposal rights (Supreme Court Decision 2008Da7109, June 11, 2009; Supreme Court Decision 2012Da47548, June 12, 2014). According to this doctrine, the cancellation of fraudulent acts only has relative effectiveness, and standing to sue exists only for beneficiaries or transferees.

Exercise Requirements

For Non-Listed Companies:

• Must hold at least 3% of total issued shares (excluding non-voting shares)
• Shareholding requirement must be met at the time of exercise
• Multiple shareholders may combine their holdings to meet the threshold

For Listed Companies in South Korea:

• Must hold at least 1% of total issued shares for 6 months continuously
• For companies with capital exceeding KRW 100 billion: 0.5% or more
• Non-voting shares excluded from both numerator and denominator
• Must submit proposal 6 weeks before the meeting date

Impact of 2020 Commercial Act Amendment

The 2020 amendment to South Korea’s Commercial Act allows listed company shareholders to choose between non-listed company criteria (no continuous holding requirement) or listed company criteria (6-month continuous holding). This change has enabled “surprise shareholder proposals” where shares can be acquired immediately before proposal submission, causing significant controversy in corporate governance circles in South Korea.

3. Procedures for Exercising Shareholder Proposal Rights

Exercising shareholder proposal rights in South Korea requires strict adherence to procedural requirements:

• Timing: Regular meetings: 6 weeks before corresponding date of previous year; Extraordinary meetings: 6 weeks before meeting date
• Method: Written or electronic document submission (oral proposals not accepted)
• Proxy Exercise: Non-shareholder proxies permitted with power of attorney
• Recipient: Must submit to directors who must report to the board of directors

If a director fails to report a lawful shareholder proposal to the board, this constitutes improper rejection and may serve as grounds for canceling the resolution. This reflects the recognition of shareholder proposal rights as fundamental shareholder rights in South Korea’s legal system.

4. Grounds for Company Rejection

Under Article 363-2, Paragraph 3 of the Commercial Act and Article 12 of the Enforcement Decree, South Korean companies may reject shareholder proposals in the following circumstances:

1. Violation of laws or company articles of incorporation
2. Resubmission within 3 years of identical proposals rejected with less than 10% support
3. Matters concerning individual shareholder grievances
4. Matters related to minority shareholder rights
5. Dismissal of incumbent directors (listed companies only)
6. Impossible to implement, false, or defamatory matters

Advisory and Counter Proposals

Proposals contradicting laws or articles in an advisory form are generally considered inadmissible under interpretative doctrine in South Korea. However, counter-proposals opposing company proposals are deemed acceptable as they align with the shareholder proposal system’s objectives of promoting communication and dialogue.

5. Special Rules for Listed Companies

Listed companies in South Korea must select directors and auditors only from pre-notified candidates, prohibiting last-minute proposals at shareholder meetings.

6. Legal Remedies Against Rejection

When South Korean companies improperly reject lawful shareholder proposals, available remedies include:

1. Preliminary Injunction for Agenda Inclusion: Court application before shareholder meeting to mandate agenda inclusion
2. Shareholder Meeting Resolution Cancellation: Lawsuit claiming procedural defects in meeting convocation or resolution method
3. Director Liability Claims: Damage compensation for improper rejection

7. Successful Preliminary Injunction Case

Kim & Park Law Firm recently achieved victory in a preliminary injunction case for agenda inclusion in South Korea. When a shareholder exercised proposal rights for “director dismissal” but the company failed to include this in the meeting notice, Kim & Park Law Firm successfully obtained a court order requiring the company to include “director dismissal” as a meeting agenda item.

This case exemplifies the importance of shareholder proposal rights and the effectiveness of legal remedies protecting these rights in South Korea’s legal system.

8. Practical Points for Corporate Compliance

South Korean companies must consider the following when managing shareholder proposal systems:

Upon Receipt of Shareholder Proposals:

• Immediately review legal requirements
• Carefully evaluate grounds for rejection
• Confirm proposing shareholder’s intent for unclear proposals

Board Response:

• Strictly comply with directors’ duty to report to the board
• Seek legal counsel when determining rejection
• Include lawful shareholder proposals in meeting notices

Listed Company Special Considerations:

• Review relationship with large shareholding reporting system (5% rule)
• Clarify nominee types and selection methods for director/auditor appointments
• Coordinate with outside director nomination rights

Kim & Park Law Firm possesses extensive experience in corporate law matters in South Korea, particularly specialized expertise in resolving shareholder proposal disputes. We are available for consultation regarding shareholder proposal rights exercise or corporate responses to such proposals in South Korea’s legal framework.