Director Compensation Caps in South Korea
Voting Rights of Shareholder-Directors and Total Issued Shares
Table of Contents
- 1. Why does this ruling matter?
- 2. What is a director compensation cap approval?
- 3. Why is a shareholder-director a specially interested party?
- 4. Are those shares counted in the total issued shares?
- 5. How is the quorum recalculated in practice?
- 6. On which agenda items is voting restricted?
- 7. What should companies and foreign investors do?
- Frequently Asked Questions
A representative director set the ceiling on his own compensation at a shareholders’ meeting and, as the largest shareholder, cast his own shares in favor. The resolution passed, but the auditor sued to cancel it, arguing that those shares should never have been counted in the first place.
The Supreme Court of Korea settled the dispute in April 2026. In decision 2025Da219931 (April 2, 2026), the Court reaffirmed that a shareholder who is also a director cannot vote as a specially interested party on a director compensation resolution, and went one step further by confirming that such shares are also excluded from the total issued shares that form the basis for the quorum.
Until this ruling, Korean practice was divided on whether a specially interested party’s shares should be removed only from the votes of shareholders present, or also from the total issued shares in the denominator of the quorum. This decision clarifies, at the Supreme Court level, that the denominator must be adjusted as well – a point that directly changes how quorum is calculated and how minutes should be drafted.
1. Why does this ruling matter?
The core of the decision is that a specially interested party’s shares are removed from both the numerator and the denominator – the voting restriction is carried consistently through to the quorum calculation.
Under Article 368(1) of the Korean Commercial Act, an ordinary resolution requires both a majority of the voting rights of shareholders present (the numerator) and at least one quarter of the total issued shares (the denominator). How the restricted shares are treated in each of these two figures can determine whether the resolution passes.
The Supreme Court held that the shares of a specially interested party are excluded not only from the number of voting rights of shareholders present (Article 371(2)), but also from the total issued shares that form the basis for the quorum under Article 368(1). This applies the reasoning of Supreme Court decision 2006Da3585 (July 12, 2007) to a director compensation cap resolution.
2. What is a director compensation cap approval?
If not fixed in the articles of incorporation, director compensation is determined by a shareholders’ meeting resolution (Article 388). In practice, companies typically approve a ceiling on the total compensation payable to all directors, rather than setting each director’s salary individually.
Within that approved ceiling, the specific allocation to each director is then delegated to the board of directors or the representative director. The shareholders’ meeting fixes the overall cap; the board handles the individual allocation.
The difficulty is that this “overall cap” directly determines the range of compensation each individual director will receive. Because the cap is tied to their own pay, a person who is both a shareholder and a director faces a direct conflict between the company’s interest and their personal interest when voting on that resolution.
3. Why is a shareholder-director a specially interested party?
Article 368(3) of the Korean Commercial Act provides that a person with a special interest in a resolution may not exercise voting rights. A special interest means a relationship in which the shareholder receives a direct personal benefit or detriment from the resolution, unlike other shareholders.
The Court held that, on a resolution setting the director compensation cap, a person who is both a shareholder and a director is a specially interested party and cannot vote. Casting a vote to set the ceiling on one’s own compensation carries a high risk that personal interest will prevail over the company’s interest.
The Court also confirmed a clear exception. Where all shareholders are directors, or where excluding specially interested parties would leave no shareholder able to vote, a shareholder-director may exercise voting rights. This accommodates small closely held companies in which shareholders and directors substantially overlap.
4. Are those shares counted in the total issued shares?
No. This is the most notable point of the ruling. A specially interested party’s shares are counted in neither the votes present (the numerator) nor the total issued shares (the denominator).
Article 371(2) provides that a specially interested party’s voting rights are not counted in the number of voting rights of shareholders present. That much was rarely disputed. The real question was whether, in calculating the “at least one quarter of the total issued shares” required by Article 368(1), those shares must also be removed from the total issued shares.
The Court held that they must. If shares that cannot be voted remained in the total issued shares used for the quorum, a resolution that in reality could never pass would result – an unreasonable outcome. The restricted shares are therefore excluded consistently from both the numerator and the denominator.
5. How is the quorum recalculated in practice?
Removing the specially interested party’s shares from the total issued shares makes the denominator of the quorum smaller. As a result, the remaining shareholders alone can validly pass the resolution.
Suppose a company has 100 total issued shares and the representative director holds 70 shares as a specially interested party. If those 70 shares were removed only from the votes present but kept in the total issued shares, the quorum structure could be distorted depending on the case.
Under the Supreme Court’s reasoning, the 70 shares are excluded from the total issued shares as well, so the quorum is assessed against the remaining 30 shares. Attendance and approval requirements are measured against those 30 shares, so the intent of the remaining minority shareholders is properly reflected. Conversely, miscalculating this figure exposes the resolution to cancellation for failure to meet the quorum.
6. On which agenda items is voting restricted?
Not every item is restricted. Voting is restricted as a specially interested party only on items where the director’s personal interest directly conflicts with the company.
The distinction recognized by Korean case law and the prevailing view can be summarized as follows. Items concerning the composition of corporate bodies or structural changes remain open to shareholder-directors, while items concerning a director’s own compensation or liability do not.
| Type of agenda item | Shareholder-director’s voting rights |
|---|---|
| Appointment and removal of directors and auditors | May vote |
| Mergers, divisions, business transfers | May vote |
| Director compensation cap and severance | May not vote (specially interested party) |
| Release or reduction of director liability | May not vote (specially interested party) |
| Approval of self-dealing between company and director | May not vote (specially interested party) |
The director compensation cap resolution at issue in this ruling falls in the lower part of the table – a classic example of an item on which voting rights are restricted. Missing this distinction puts the validity of the resolution itself at risk.
7. What should companies and foreign investors do?
The key is to identify who is restricted before the meeting, verify the resolution against the adjusted quorum, and record that analysis in the minutes. This is especially important for foreign-invested companies operating in the Incheon Free Economic Zone (IFEZ).
Practical steps, in order, include the following.
- Cross-check the shareholder register against the list of directors to identify who is a “shareholder-director” and on which items they become a specially interested party.
- Flag restricted items – compensation, severance, release of liability, self-dealing – separately from the notice-of-meeting stage.
- When tallying votes, calculate the quorum by excluding the specially interested party’s shares from both the votes present and the total issued shares.
- Record in the minutes the restricted shareholders and share count, the adjusted total issued shares, and the quorum satisfied on that basis.
- Where ownership is concentrated in a single shareholder, predefine compensation standards in the articles of incorporation or board rules to reduce the risk of disputes.
Foreign investors in the IFEZ – covering Songdo International Business District, Cheongna International City, and Yeongjong International City – should note that resolutions previously passed without restricting specially interested parties or without adjusting the total issued shares may now be subject to cancellation under this standard. A suit to cancel a resolution must, however, be filed within two months of the resolution (Article 376), so the merits and the filing deadline should be reviewed together. Atlas Legal advises on each stage, from quorum design to resolution-cancellation litigation, drawing on extensive experience with shareholders’ meeting defects and management disputes.
Frequently Asked Questions
Q. Can a director who is also a shareholder vote on a director compensation cap resolution in South Korea?
A. No. Under the Supreme Court of Korea decision 2025Da219931 (April 2, 2026), a person who is both a shareholder and a director is a specially interested party under Article 368(3) of the Korean Commercial Act and may not vote on a resolution setting the director compensation cap. An exception applies only where all shareholders are directors, or where excluding specially interested parties would leave no shareholder able to vote.
Q. Are the shares of a specially interested party counted in the total issued shares?
A. No. The Court held that such shares are excluded not only from the number of voting rights of shareholders present (Article 371(2)), but also from the total issued shares that form the basis for the quorum under Article 368(1). The shares are removed from both the numerator and the denominator.
Q. How does this 2025Da219931 ruling differ from earlier Korean case law?
A. The voting restriction itself was already recognized, but this decision confirms at the Supreme Court level that the specially interested party’s shares are also excluded from the total issued shares used to calculate the quorum. It applies the reasoning of Supreme Court decision 2006Da3585 (July 12, 2007) to a director compensation cap resolution.
Q. What happens to a resolution passed with an improper vote by a shareholder-director?
A. It becomes subject to cancellation. In this case the representative director voted his own shares despite being a specially interested party whose voting rights were restricted, and both the appellate court and the Supreme Court held that the shareholders’ meeting resolution was unlawful and should be cancelled. A suit to cancel a resolution must be filed within two months of the resolution (Article 376).
Q. Are shareholder-directors restricted from voting on every agenda item?
A. No. Shareholder-directors may vote on the appointment or removal of directors and auditors, mergers, and business transfers. They are restricted as specially interested parties only on items where the director’s personal interest conflicts with the company, such as director compensation and severance, release of director liability, and approval of self-dealing between the company and a director.
Q. What should foreign-invested companies in the IFEZ do to prevent these disputes?
A. Foreign-invested companies in the Incheon Free Economic Zone (IFEZ) – covering Songdo International Business District, Cheongna International City, and Yeongjong International City – should identify specially interested parties before the meeting, recalculate the quorum by excluding those shares from both the votes present and the total issued shares, and record the adjusted figures in the minutes. Predefining compensation standards in the articles of incorporation also reduces risk.
If you need advice on quorum design for shareholders’ meetings, the validity of director compensation resolutions, or resolution-cancellation litigation under South Korean law, please contact Atlas Legal. We review your ownership structure and agenda together to provide practical, actionable guidance.
