Voting Rights Restrictions for Special Interest Shareholders in Director Remuneration Limit Approval – South Korea Supreme Court Analysis

1. Concept of Director Remuneration Limit Approval and Special Interest

When a director of a corporation is simultaneously a shareholder, can they exercise voting rights in shareholder meeting resolutions related to their own remuneration? This has been a long-standing controversial issue in corporate legal practice in South Korea.

Article 368(3) of the Commercial Act stipulates that “a person who has a special interest in the resolution of the general meeting shall not exercise voting rights.” Here, ‘special interest’ means personal and direct interest that is distinct from general shareholders.

Domestic corporations have not directly determined the specific remuneration of individual directors at shareholder meetings, but have taken the approach of approving only the remuneration limit for directors and then having the board of directors decide individual remuneration within that range. Due to this practical custom, the legal judgment on whether director remuneration limit approval constitutes personal interest was not clear.

2. Legal Basis and Meaning of Commercial Act Article 368(3)

The voting rights restriction provision for special interest parties in Article 368(3) of the Commercial Act is a system to ensure the fairness of shareholder meeting resolutions. The related provisions are as follows:

Commercial Act Article 368(3): “A person who has a special interest in the resolution of the general meeting shall not exercise voting rights.”

Commercial Act Article 371(2): “Regarding resolutions of the general meeting, the number of voting rights of shares that cannot be exercised under Article 368(3) shall not be included in the number of voting rights of attending shareholders.”

Commercial Act Article 388: “The remuneration of directors shall be determined by resolution of the general meeting of shareholders when not specified in the articles of incorporation.”

The criteria for determining special interest parties have been established through Supreme Court precedents. The Supreme Court interprets “a person who has a special interest” as “a person who is in a position to gain special benefits or suffer losses different from other shareholders due to the resolution” (Supreme Court Decision 2007Da40000, September 6, 2007).

3. Facts and Issues of the Supreme Court Decision

The facts of the case recently decided by the Supreme Court are as follows:

A, who was both a director and major shareholder of a corporation, exercised voting rights on “Approval of 2023 Director Remuneration Limit” at the regular shareholder meeting held on March 31, 2023, and the agenda was approved. In response, the company’s auditor filed a lawsuit for cancellation of the shareholder meeting resolution on May 30, 2023, based on Article 368(3) of the Commercial Act.

The key issue was whether a director-shareholder constitutes a special interest party in shareholder meeting resolutions that determine the remuneration limit for all directors, including themselves. In particular, the core point was whether special interest is recognized even when determining the remuneration limit for all directors rather than the specific remuneration of individual directors.

4. Lower Court and Supreme Court Judgments

Lower Court Judgment

Seoul Central District Court and Seoul High Court consistently judged director-shareholders as special interest parties.

Seoul Central District Court (Decision 2023Gahap66328, May 31, 2024) and Seoul High Court (Decision 2024Na2027590, 2024Na2051821, January 22, 2025) ruled as follows:

“The director remuneration limit amount determined at the shareholder meeting inevitably has a significant impact on determining specific remuneration amounts for individual directors in the future. Since the remuneration of director-shareholders is closely related to the personal interests of the relevant shareholders rather than interests related to company control, the relevant shareholders should be judged as special interest parties under Article 368(3) of the Commercial Act.”

Supreme Court’s Final Judgment

The Supreme Court concluded the case with dismissal without examination, considering the lower court’s judgment as appropriate. This established the legal principle that director-shareholders are restricted from exercising voting rights in shareholder meetings that determine their remuneration limits, and violations of this would make shareholder meeting resolutions illegal.

5. Significance of the Decision and Impact on Practice

Jurisprudential Significance

This decision is the Supreme Court’s first clear judgment on whether director-shareholders have special interests in director remuneration limit approval resolutions. Previously, lower court decisions were divided.

Previous precedent denying special interest: Seoul High Court Decision 2010Na103118 (January 19, 2012) ruled that “when approving the upper limit of total director remuneration at a shareholder meeting, it is impossible to separate individual director interests from the interests of all directors, so voting rights cannot be restricted on the grounds of being a special interest party.”

Previous precedents recognizing special interest: Seoul High Court Decision 2014Na2035141 (April 23, 2015), Seoul Southern District Court Decision 2021Gahap101384 (October 15, 2021), and others judged that special interest is recognized even in director remuneration limit approval.

Impact on Practice

Due to this decision, the following matters must be considered in future shareholder meeting practice:

1. Restriction on voting rights exercise of director-shareholders: Director-shareholders cannot exercise voting rights on director remuneration limit approval agenda items.
2. Specification in shareholder meeting convocation notice: The fact of voting rights restriction for special interest parties must be specified in the convocation notice.
3. Caution in preparing minutes: It must be clearly stated in the minutes that special interest parties did not exercise voting rights.

6. Changes in Shareholder Meeting Resolution Requirement Calculation

The Commercial Act stipulates as follows:

Practical Application of Calculation Method

For example, assume a company with 10,000 total issued shares where director-shareholder A holds 4,000 shares. Suppose shareholders with a total of 7,000 voting rights attend the shareholder meeting to decide on director A’s remuneration. A is excluded from voting, and shareholders with the remaining 3,000 shares vote, resulting in 1,700 votes in favor and 1,300 votes against.

When Article 371 of the Commercial Act is applied, A’s remuneration agenda would be rejected. However, if Article 371 is not applied, A’s remuneration agenda would be approved.

A. Application of Commercial Act Article 371

Calculation of majority of attending shareholders’ voting rights:

• Total attending voting rights: 7,000 shares
• Excluding special interest party voting rights: 7,000 shares – 4,000 shares = 3,000 shares
• Majority standard: Majority of 3,000 shares = 1,501 shares or more

Calculation of one-fourth of total issued shares:

• Total issued shares: 10,000 shares
• One-fourth standard: 2,500 shares or more

B. Exclusion of Commercial Act Article 371 Application

Calculation of majority of attending shareholders’ voting rights:

• Total attending voting rights: 7,000 shares
• Excluding special interest party voting rights: 7,000 shares – 4,000 shares = 3,000 shares
• Majority standard: Majority of 3,000 shares = 1,501 shares or more

Calculation of one-fourth of total issued shares:

• Total issued shares: 10,000 shares
• Excluding special interest party shares: 10,000 shares – 4,000 shares = 6,000 shares
• One-fourth standard: 6,000 shares × 1/4 = 1,500 shares or more

Therefore, in this case, 1,501 shares or more of approval must be obtained for the resolution to be established.

C. Conclusion

Seoul Central District Court (Decision 2023Gahap66328, May 31, 2024) and Seoul High Court (Decision 2024Na2027590, 2024Na2051821, January 22, 2025) excluded A’s shares when calculating issued shares. That is, in the above case, the company’s total issued shares were calculated as 4,000 shares.

In Supreme Court Decision 2016Da222996 (August 17, 2016), regarding auditor appointment, shares with restricted voting rights were excluded from issued shares for calculation.

7. Future Commercial Act Amendment and Legislative Tasks

Problems with Single-Shareholder Companies

When there is only one shareholder who also serves as a director, the problem arises that there is no entity to determine director remuneration under the current Commercial Act system. In such cases, exceptional provisions need to be prepared through legislation.

Limitations of Voting Rights Restriction Ratio

If the total number of shares restricted from voting due to special interests exceeds one-fourth of the total issued shares, it becomes fundamentally impossible to meet the requirement of “at least one-fourth of the total issued shares” in Article 368(1) of the Commercial Act.

The Supreme Court has also pointed out this problem. “If shares exceeding 3% are included in the ‘total issued shares’ mentioned in Article 368(1) of the Commercial Act, when a shareholder owns more than 78% of the total issued shares, such as when shares exceeding 3% exceed 75% of the total issued shares, it becomes fundamentally impossible to meet the requirement of ‘at least one-fourth of the total issued shares’ mentioned in Article 368(1) of the Commercial Act” (Supreme Court Decision 2016Da222996, August 17, 2016).

Need for Amendment of Commercial Act Article 371

The current Commercial Act Article 371 was enacted based on the resolution requirements before the 1995 Commercial Act amendment, but in the current situation where the concept of meeting quorum has been abolished, revision of the provision is necessary.

8. Conclusion and Practical Response Measures

This Supreme Court decision is expected to bring significant changes to future shareholder meeting practice by clearly recognizing the special interest of director-shareholders in director remuneration limit approval.

Practical Response Measures

1. Shareholder Meeting Preparation Stage:
   • Identify director-shareholder status in advance and clarify voting rights restriction targets
   • Specify the fact of voting rights restriction for special interest parties in the convocation notice
2. Shareholder Meeting Conduct Stage:
   • The chairperson should announce voting rights restrictions for special interest parties when presenting director remuneration limit agenda
   • Calculate resolution requirements excluding special interest party voting rights
3. Post-Management Stage:
   • Record in detail the voting rights restriction facts for special interest parties and resolution requirement fulfillment details in the minutes
   • Accurately reflect resolution contents in related documents such as corporate registry

Future Precautions

Companies should consider that director remuneration limit resolutions themselves may become impossible when director-shareholders have high shareholding ratios, and should review such legal constraints in advance when considering shareholder composition or director appointment.

Additionally, until issues such as methods for determining director remuneration in single-shareholder companies or limitations on voting rights restriction ratios are resolved through Commercial Act amendments, careful legal review is necessary for individual cases.

K&P Law Firm has recent experience successfully handling multiple shareholder meeting-related dispute cases and is recognized for its expertise in legal advice related to shareholder meeting operations for companies with complex governance structures. If you need legal advice on the legality of shareholder meeting resolutions or determination of special interest parties, please feel free to request consultation at any time.