Cross-Shareholding Voting Limits in South Korea
Lessons from the Korea Zinc Dispute
Table of Contents
- 1. What is the cross-shareholding voting ban under Korean law?
- 2. Why did subsidiary status decide the outcome?
- 3. Can a foreign company be a subsidiary under the Korean Commercial Act?
- 4. Why did the courts refuse to treat SMC as a subsidiary?
- 5. As of what date is cross-shareholding tested?
- 6. Why did the two shareholder meetings end differently?
- 7. What liability follows from a wrongful voting restriction?
- 8. What should companies in South Korea check in practice?
- 9. What does this mean for foreign-invested companies in Korea?
- Frequently Asked Questions (FAQ)
January 23, 2025. At an extraordinary general meeting (EGM) of Korea Zinc, one of South Korea’s largest non-ferrous metal producers, the voting rights of its largest shareholder — Young Poong, holding roughly 25% — were denied on the spot. The sole basis: the day before the meeting, an Australian entity called Sun Metals Corporation (SMC) had acquired 10.3% of Young Poong’s shares.
Korea Zinc declared that SMC was its subsidiary, so the cross-shareholding rule in Article 369(3) of the Korean Commercial Act stripped Young Poong of its votes. The Korean courts disagreed. An injunction panel suspended the key EGM resolutions, finding it unproven that SMC qualified as a subsidiary, and on July 13, 2026 the merits court ordered the meeting’s chairman — Korea Zinc’s CEO — personally to pay KRW 100 million in damages. Yet two months after the EGM, a similar voting restriction at the annual general meeting (AGM) of March 28, 2025 was upheld all the way to the Supreme Court of Korea. This article maps the dividing line drawn by the confirmed case law — a line that any company or investor involved in a Korean management rights dispute needs to know.
What is the cross-shareholding voting ban under Korean law?
Under Article 369(3) of the Korean Commercial Act, if a company, its parent and subsidiary together, or its subsidiary alone holds more than one-tenth of the issued shares of another company, the shares of the first company (or its parent) held by that other company carry no voting rights.
For example, if Company A — or A’s subsidiary — holds more than 10% of Company B, then B’s shares in A lose their votes at A’s shareholders’ meeting. The Supreme Court of Korea explains the purpose as preventing “persons without real capital contribution from exercising voting rights through cross-held shares, thereby distorting shareholder resolutions and corporate governance” (Supreme Court Judgment 2006Da31269, January 30, 2009).
Shares that lose voting rights are excluded from the total issued shares for quorum purposes (Article 371(1) of the Korean Commercial Act), so the approval thresholds themselves are recalculated. The rule can flip the outcome of a shareholders’ meeting — which is exactly why it has become a weapon in Korean management rights disputes.
Note that these are the only three holding patterns that restrict B’s shares in Company A. In the statutory phrase “parent company and subsidiary,” the parent refers to A itself. If A and A’s own parent together cross the 10% line, it is the parent’s shares held by B that lose votes — not B’s shares in A, which must be tested separately against the three patterns above.
Why did subsidiary status decide the outcome?
Korea Zinc itself never held more than 10% of Young Poong. The 10.3% stake was acquired by SMC, an Australian second-tier subsidiary — so the voting ban could apply only if SMC qualified as a “subsidiary” under the Korean Commercial Act.
Article 342-2(1) defines a parent company as one holding more than 50% of another company’s issued shares, and that other company as its subsidiary. Article 342-2(3) extends the concept: a company more than 50% owned by a parent and its subsidiary together, or by a subsidiary alone, is also deemed a subsidiary of the parent — capturing second-tier subsidiaries.
Korea Zinc owned 100% of an Australian holding company (SMH), which in turn owned 100% of SMC. On the numbers alone, the deemed-subsidiary requirement looked satisfied. The problem was that SMC was a foreign entity — and specifically an Australian proprietary company (Pty Ltd).
Can a foreign company be a subsidiary under the Korean Commercial Act?
Yes — but with a condition. The Supreme Court of Korea set the standard for the first time in this very dispute.
The Court held that where the company whose meeting is at issue is a Korean company, the voting restriction is a matter of internal governance of that Korean company, so “it makes no difference that the subsidiary holding the other company’s shares is a foreign company” — the term subsidiary in Article 369(3) is not limited to Korean companies. But the Court drew a limit: because the provision presupposes a share-issuing stock company, “a foreign company qualifies as a subsidiary under Article 369(3) only if it is at least of the same kind as, or most closely comparable to, a stock company under the Korean Commercial Act” (Supreme Court Decision 2025Ma6793, April 2, 2026).
In short, being incorporated abroad is no escape from the Korean cross-shareholding regime — but each foreign entity must be individually examined against the substance of a Korean stock company (jusik hoesa).
Why did the courts refuse to treat SMC as a subsidiary?
In the injunction case over the EGM, the Seoul Central District Court began from the premise that voting rights are a shareholder’s fundamental, constitutionally protected property right, so Article 369(3) must be construed strictly.
The court focused on three features of SMC as an Australian Pty Ltd: share transfers are restricted as a rule, non-employee shareholders may not exceed 50, and listing requires conversion into a public company. These features, the court found, place a Pty Ltd closer to a Korean limited company (yuhan hoesa) than to a stock company, where free transferability of shares is the default and no cap on shareholder numbers exists.
The court therefore held that SMC was not shown to be a stock company under the Korean Commercial Act, and that Korea Zinc — as the party restricting a shareholder’s votes — had failed to discharge its burden of proof. The conclusion was blunt: the voting restriction was unlawful, and the key EGM resolutions were suspended until the merits judgment (Seoul Central District Court Decision 2025KaHap20144 et al., March 7, 2025).
The merits court reached the same conclusion. According to Korean press reports, on July 13, 2026 the Seoul Central District Court held that SMC was not a subsidiary under the Korean Commercial Act, found that the chairman had unfairly infringed the largest shareholder’s voting rights to defend incumbent management, and ordered him to pay Young Poong KRW 100 million in damages (Judgment 2025GaHap9268; the written judgment has not yet been published).
As of what date is cross-shareholding tested?
The 10% threshold is tested as of the shareholders’ meeting date; the shareholders whose votes are restricted are identified as of the record date. This two-track standard produced opposite outcomes within the same dispute.
The Supreme Court long ago held that even if the cross-shareholding requirement is not met on the record date, shares lose their votes if the requirement is met on the meeting date, and that the 10% test turns on actual ownership regardless of registration in the shareholder registry (Supreme Court Judgment 2006Da31269, January 30, 2009).
Ahead of Korea Zinc’s AGM of March 28, 2025, Young Poong tried to defuse the rule by contributing its entire Korea Zinc stake in kind to a wholly-owned entity. The Supreme Court rejected the maneuver: since the persons entitled to exercise rights are fixed on the record date, shares held on the record date remain vote-less even if disposed of before the meeting (Supreme Court Decision 2025Ma6793, April 2, 2026). Post-record-date share shuffling cannot undo the cross-shareholding restriction.
Why did the two shareholder meetings end differently?
The same Article 369(3) applied to both meetings, yet their fates were opposite. The decisive differences were which company held the 10% stake in Young Poong, and whether that company was proven comparable to a Korean stock company.
At the EGM (January 23, 2025), the restriction rested on SMC, the second-tier subsidiary. The courts found SMC’s comparability to a Korean stock company unproven, denied its subsidiary status, suspended the resolutions, and ultimately imposed personal damages liability on the chairman.
By the AGM (March 28, 2025), the holder had changed. SMC had transferred the Young Poong shares to SMH — Korea Zinc’s directly-owned Australian holding company — by dividend in kind on March 12, 2025, and SMH topped up its stake to 10.03% just before the meeting (facts found in Supreme Court Decision 2025Ma6793). This time the courts were satisfied that SMH was of the same kind as, or most closely comparable to, a Korean stock company, recognized its subsidiary status, and upheld the voting restriction.
The lesson: under the same statute, outcomes turned on which entity held the stake and what evidence proved its legal character.
| Item | EGM — January 23, 2025 | AGM — March 28, 2025 |
|---|---|---|
| Holder of 10%+ of Young Poong | SMC (Australian Pty Ltd, second-tier subsidiary) | SMH (Australian holding company, subsidiary) |
| Comparability to a Korean stock company | Not proven | Recognized |
| Lawfulness of the voting restriction | Unlawful — resolutions suspended, KRW 100 million damages | Lawful — injunction denied, confirmed by the Supreme Court |
| Key decisions | Seoul Central District Court 2025KaHap20144 et al., 2025GaHap9268 | Supreme Court of Korea 2025Ma6793 |
What liability follows from a wrongful voting restriction?
Three layers of exposure materialized in this dispute: invalidation risk for the resolutions, business uncertainty from injunctions, and personal damages liability for the chairman.
A resolution passed while denying lawful voting rights is defective in its method and subject to revocation under Article 376(1) of the Korean Commercial Act; as here, its effect can be suspended by preliminary injunction, and the directors elected at the meeting were barred from performing their duties.
Beyond that, the merits court recognized tort liability of the meeting’s chairman personally and ordered KRW 100 million in consolation damages. Even a decision taken in the name of corporate organs can expose the chairman individually where a shareholder’s votes are denied without legal basis — a tangible warning for management-defense tactics in South Korea. The judgment is a first-instance decision and may be appealed.
What should companies in South Korea check in practice?
Whether you plan to deploy the cross-shareholding card or defend against it, the case law sets the evidentiary bar to work from.
- If the structure runs through foreign affiliates, verify first — with materials on the law of incorporation — whether each foreign entity is of the same kind as, or most closely comparable to, a Korean stock company (free transferability of shares, caps on shareholder numbers, listing eligibility).
- The party restricting voting rights bears the burden of proving the grounds. Shareholder registries and corporate registers are not enough; foreign corporate statutes, articles of association, and disclosure materials are needed.
- Disposing of or contributing shares after the record date will not avoid the restriction. Plan equity moves around the two-track standard: 10% tested on the meeting date, shareholders fixed on the record date.
- Forcing a voting restriction on uncertain grounds risks not only revocation and suspension of resolutions but personal damages liability for the chairman.
What does this mean for foreign-invested companies in Korea?
For foreign investors and foreign-invested companies operating in South Korea, this dispute is a reminder that offshore holding structures are read through the lens of Korean corporate law when governance battles erupt.
A foreign subsidiary that acquires shares in a Korean counterparty can trigger — or fail to trigger — the cross-shareholding voting ban depending on how its home-jurisdiction corporate form compares to a Korean stock company. Proprietary or closely-held forms with transfer restrictions may not qualify, while holding companies of a public-company character may. Before relying on such a structure in a Korean shareholder meeting, the entity-by-entity analysis and the evidence to support it should be prepared in advance.
Atlas Legal advises Korean and foreign-invested companies on shareholder meetings, management rights disputes, and corporate governance under South Korean law, drawing on extensive experience in corporate litigation. Our office is located in the Incheon Free Economic Zone (IFEZ), serving clients across Songdo International Business District, Cheongna International City, and Yeongjong International City, as well as the Seoul Metropolitan Area.
Frequently Asked Questions (FAQ)
Q. When does the cross-shareholding voting ban apply under Korean law?
A. Under Article 369(3) of the Korean Commercial Act, if a company, its parent and subsidiary together, or its subsidiary alone holds more than 10% of the issued shares of another company, the shares of the first company held by that other company carry no voting rights. The rule prevents circular shareholdings from distorting shareholder meetings and corporate governance.
Q. How does Korean law define a subsidiary?
A. Article 342-2(1) of the Korean Commercial Act defines a parent company as one holding more than 50% of another company’s issued shares, and that other company as its subsidiary. Under Article 342-2(3), a company more than 50% owned by a parent and its subsidiary together, or by a subsidiary alone, is also deemed a subsidiary — extending the concept to second-tier subsidiaries.
Q. Can a foreign company be a subsidiary under Article 369(3) of the Korean Commercial Act?
A. Yes. The Supreme Court of Korea held that the term subsidiary in Article 369(3) is not limited to Korean companies. However, a foreign company qualifies only if it is of the same kind as, or most closely comparable to, a stock company (jusik hoesa) under the Korean Commercial Act (Supreme Court Decision 2025Ma6793, April 2, 2026).
Q. Why did Korean courts refuse to treat SMC as a subsidiary in the Korea Zinc case?
A. The Seoul Central District Court held that Article 369(3) restricts fundamental shareholder rights and must be construed strictly. SMC, an Australian proprietary company (Pty Ltd), restricts share transfers, may not have more than 50 non-employee shareholders, and cannot list without converting to a public company — features closer to a Korean limited company than to a stock company. The court found the subsidiary status unproven and the voting restriction unlawful (Seoul Central District Court Decision 2025KaHap20144 et al., March 7, 2025).
Q. As of what date is the 10% cross-shareholding threshold tested in South Korea?
A. The 10% threshold is tested as of the date of the shareholders’ meeting, based on actual share ownership, while the shareholders whose voting rights are restricted are identified as of the record date. Disposing of or contributing shares after the record date does not avoid the restriction (Supreme Court Judgment 2006Da31269, January 30, 2009; Supreme Court Decision 2025Ma6793, April 2, 2026).
Q. What liability arises from wrongfully restricting a shareholder’s voting rights in South Korea?
A. A resolution passed while wrongfully denying voting rights is subject to revocation under Article 376 of the Korean Commercial Act, and its effect can be suspended by preliminary injunction. In the Korea Zinc case, the Seoul Central District Court went further on July 13, 2026, ordering the chairman of the meeting personally to pay KRW 100 million in damages to the excluded shareholder (Judgment 2025GaHap9268, as reported in the Korean press).
Q. What should foreign-invested companies in South Korea take away from this dispute?
A. Foreign-invested companies using offshore holding structures should verify, with corporate law materials from the relevant jurisdiction, whether each foreign entity is comparable to a Korean stock company before relying on it in a cross-shareholding strategy. The party restricting voting rights bears the burden of proof, and share transfers after the record date will not undo the restriction.
For advice on shareholder meetings, cross-shareholding issues, and management rights disputes under South Korean law, contact Atlas Legal at +82-32-864-8300 or info@atlaw.kr. Our corporate dispute attorneys advise in English and Korean from Songdo, Incheon.
