Director’s Right to Claim Compensation in South Korea

1. Legal Foundation and Importance of Directors’ Right to Claim Compensation

Directors’ right to claim compensation is a crucial area of corporate law, extending beyond mere personal income matters to become a vital element of corporate governance in South Korea. Under Article 388 of the Commercial Code of South Korea, directors’ compensation must be determined by shareholder resolution if not specified in the articles of incorporation. This system serves as an important mechanism to prevent conflicts of interest arising from directors determining their own compensation and to protect the interests of the company and shareholders.

The right to claim compensation is directly linked to the company’s capital adequacy, shareholder protection, and prevention of management’s pursuit of self-interest. Recently, with active discussions on improving corporate governance in South Korea, social attention to the transparency and appropriateness of executive compensation has significantly increased.

2. Requirements and Legal Basis for Directors’ Compensation Claims

Compensation Decision Authority under Commercial Code

According to Article 388 of South Korea’s Commercial Code, directors’ compensation is determined in the following ways:

• When compensation amount is specified in articles of incorporation: Follow the provisions of the articles
• When compensation amount is not specified in articles of incorporation: Determined by shareholder resolution (In practice, it is common for shareholder meetings to determine the total or maximum amount of compensation, with specific allocation delegated to the board of directors)

These provisions are mandatory, restricting directors from arbitrarily determining their own compensation.

Prerequisites for Compensation Claims

For directors’ right to claim compensation to arise, one of the following must be fulfilled:

• Specific compensation amount specified in articles of incorporation
• Specific shareholder resolution regarding compensation amount, payment method, timing, etc.

Simple formal provisions alone do not establish the right to compensation; substantive and specific determinations must exist.

Burden of Proof for Shareholder Resolution

According to precedent (Supreme Court of Korea, December 10, 2004, 2004da25123), the burden of proving the existence of a shareholder resolution lies with the director claiming compensation. This reflects that directors’ right to claim compensation is an exceptional right.

3. Scope and Types of Directors’ Compensation

General Definition of Compensation

South Korea’s Commercial Code does not provide a clear definition of directors’ compensation. However, legal scholars and case law view directors’ compensation as “all economic benefits paid by the company as consideration for directors’ performance of duties, whether regular or irregular.”

Items Included in Compensation

The following items are generally included in directors’ compensation:

1. Bonuses: Monetary compensation for directors’ performance of duties
2. Retirement allowances and retirement gratuities: Compensation paid as consideration for duty performance during tenure
3. Stock options: The most typical form of equity-based compensation

Items Subject to Debate Regarding Inclusion

Salaries of Directors Who Are Also Employees

• Cases where individuals serve as both directors and employees (e.g., branch managers)
• Scholarly debate on whether employee salaries fall under Article 388 compensation
• Currently, the exclusion theory predominates in South Korea

Dismissal Compensation

• According to Supreme Court, November 23, 2006, 2004da49570
• Dismissal compensation also requires shareholder resolution by analogy to Article 388

4. Recognition of Nominal Directors’ Right to Claim Compensation

Attitude of Precedent

Supreme Court, September 10, 2015, 2015da213308 presented important guidance on nominal directors’ right to claim compensation:

• Directors appointed through due process can in principle exercise their right to compensation regardless of actual duty performance
• Nominal directors also possess legal authority and obligations under commercial law and bear legal responsibility

Basis for Recognition of Compensation Rights

Nominal directors are recognized as having compensation rights for the following reasons:

• Contributing to the company’s social entity establishment as corporate organs
• Bearing legal responsibilities under Articles 399, 401, 414, etc. of Commercial Code
• Legitimate appointment process through shareholder meetings

5. Reasonableness and Limitations of Compensation

Principle of Reasonable Proportion

Directors’ compensation must maintain reasonable proportion with the following elements:

• Content and degree of duty performance
• Company’s financial status
• Company’s business performance

Supreme Court, January 28, 2016, 2014da11888 ruled that actions by directors facing loss of control who exercised influence over shareholder meetings to receive excessive compensation constituted breach of fiduciary duty.

Legal Effect of Excessive Compensation

Excessive compensation may be limited for the following reasons:

• Violation of capital adequacy principle
• Violation of shareholder equality principle
• Harm to company and creditor interests

Criteria for Judging Compensation Reasonableness

The reasonableness of compensation is judged by comprehensively considering:

• Content and degree of duty performance
• Compensation amount and company’s financial status
• Compensation differences with directors performing actual duties
• Purpose and necessity of director appointment

6. Law Firm K&P’s Practical Experience in Directors’ Compensation Matters

Law Firm K&P has achieved successful outcomes in recent corporate executive compensation dispute cases in South Korea. Particularly in shareholder derivative lawsuits related to excessive compensation payments by listed companies and unjust enrichment return claims against nominal directors, we have successfully protected our clients’ interests.

Our law firm provides the following professional legal services regarding directors’ right to claim compensation:

• Legal review of shareholder resolution validity
• Unjust enrichment return claims for excessive compensation payments
• Advisory services for establishing compensation policies to improve corporate governance
• Strategic consulting for prevention and resolution of executive compensation disputes

Conclusion

Directors’ right to claim compensation is an important legal issue in corporate management. An appropriate compensation system is essential for sound corporate development and protection of stakeholder interests. Law Firm K&P contributes to enhancing corporate value by providing customized legal services tailored to client needs.

Should you require legal consultation regarding directors’ right to claim compensation in South Korea, please contact Law Firm K&P.

7. Related Case Law in South Korea

1. Regarding Nominal Directors’ Right to Claim Compensation

• Supreme Court, September 10, 2015, 2015da213308: Recognition of compensation rights as nominal directors also bear legal responsibility
• Supreme Court, July 23, 2015, 2014da236311: Recognition of nominal directors’ right to claim compensation

2. Regarding Requirements for Directors’ Compensation

• Supreme Court, December 10, 2004, 2004da25123: Directors’ compensation requires shareholder resolution as mandatory provision
• Supreme Court, May 29, 2014, 2012da98720: Burden of proof for shareholder resolution lies with claiming director

3. Regarding Scope of Directors’ Compensation

• Supreme Court, November 22, 1977, 77da1742: Retirement allowances also included in directors’ compensation
• Supreme Court, May 25, 2006, 2003da16092: Bonuses and retirement gratuities also included in compensation

4. Regarding Dismissal Compensation

• Supreme Court, November 23, 2006, 2004da49570: Dismissal compensation also requires shareholder resolution

5. Regarding Distinction Between Directors and Employees

• Supreme Court, September 26, 2003, 2002da64681: Directors are not employees, so compensation subject to Commercial Code
• Supreme Court, December 22, 1992, 92da28228: Directors with executive authority generally not employees

6. Regarding Reasonableness of Compensation

• Supreme Court, January 28, 2016, 2014da11888: Excessive compensation must be proportional to business performance; void if constituting breach of duty
• Supreme Court, March 29, 2012, 2012da1993: Board delegation possible after determining total compensation amount