Shareholder Derivative Suit: Full Recovery of Director Compensation | Songdo South Korea

1. Executive Summary: Complete Victory in Shareholder Derivative Suit

Atlas Legal successfully represented a shareholder in a derivative lawsuit against a company’s representative director, recovering the full amount of improperly paid compensation. The Seoul Nambu District Court ordered the return of 99,668,840 KRW plus accrued interest, based on Article 388 of the Commercial Act, which requires shareholder resolution for director compensation when not specified in the articles of incorporation.

This judgment represents a significant case demonstrating the strict application of Commercial Act provisions regarding director compensation determination and the importance of protecting shareholder rights in South Korea. The ruling clarifies that informal agreements or verbal promises cannot substitute for shareholder resolutions, and resolutions not recorded in meeting minutes have no legal effect.

The significance of this judgment includes four key points. First, it reaffirms that Article 388 of the Commercial Act is a mandatory provision. Director compensation must be determined by the articles of incorporation or shareholder resolution. Second, informal discussions among some shareholders cannot replace shareholder meetings. Third, resolutions not recorded in minutes are difficult to prove. Fourth, it demonstrates that even minority shareholders can effectively protect company and shareholder interests through derivative suits.

2. What is a Shareholder Derivative Suit?

A shareholder derivative suit is a lawsuit filed by shareholders on behalf of the company to pursue directors’ liability. Article 403 of the Commercial Act stipulates that shareholders holding at least 1% of total issued shares can request in writing that the company file suit against directors for their liability. If the company does not file suit within 30 days of receiving the shareholder’s request, the shareholder may file suit on behalf of the company.

Key differences from regular lawsuits include: the plaintiff is a shareholder but files on behalf of the company; defendants are directors, representative directors, or auditors; if successful, damages are paid to the company, not individual shareholders. This system exists to protect the interests of the company and all shareholders.

Requirements for filing a shareholder derivative suit include three elements. First, share ownership requirements: unlisted companies require holding at least 1% of total issued shares; listed companies require 0.01% held continuously for at least 6 months. Second, filing request procedure must be followed: shareholders must first request the company to file suit and wait 30 days. Third, the company must have suffered damages due to directors’ violations of law or articles of incorporation.

This case represents a typical shareholder derivative suit where a shareholder filed on behalf of the company against the representative director. It serves as a model example of shareholder rights exercise, as the shareholder sought compensation for company losses rather than direct personal damages.

3. Legal Basis and Requirements for Director Compensation

Article 388 of the Commercial Act stipulates that when director compensation is not specified in the articles of incorporation, it shall be determined by shareholder resolution. This provision is interpreted as mandatory law in South Korea.

The Supreme Court considers Article 388 mandatory for four reasons. First, to prevent conflicts of interest where directors determine their own compensation. Second, to prevent company asset depletion through excessive compensation payments. Third, to guarantee shareholders’ rights to participate in director compensation decisions. Fourth, to protect creditors by maintaining the company’s financial soundness.

The Supreme Court Decision 2018Da290436 provided clear standards for the scope of director compensation. Monthly salary, bonuses, performance pay, special performance bonuses, and all monetary payments made as consideration for directors’ performance of duties are included, regardless of nomenclature. Conversely, business-related expense reimbursements, travel expenses, entertainment expenses, and other expenditures for company business do not constitute compensation.

There are two methods for determining director compensation. First, establishing director compensation provisions in the articles of incorporation. Director compensation or severance pay provisions are part of the articles of incorporation and must be implemented through article amendments at shareholder meetings. Second, determination by shareholder resolution. When there are no provisions in the articles of incorporation, shareholder resolution is mandatory.

When determining director compensation at shareholder meetings, specific amounts can be set, or ranges can be established with delegation to the board of directors for specific details. However, comprehensive delegation to the board without establishing any total amount or range is not permitted.

4. Case Background and Key Issues

The plaintiff shareholder filed a derivative suit on behalf of the company against the defendant representative director, seeking return of improperly received compensation. The defendant received compensation over a certain period, but there was no lawful shareholder resolution approving such compensation, which was the core issue.

Article 40 of the company’s articles of incorporation stipulated that compensation and severance pay for directors and auditors shall be determined by the board of directors within the range determined by shareholder meetings. This requires a two-step procedure: first, the shareholder meeting determines the compensation range, then the board of directors determines specific amounts.

The key issues in this case were four-fold. First, whether there actually was a shareholder resolution regarding director compensation. Second, whether shareholder meetings can comprehensively delegate compensation determination to the board without establishing a range. Third, whether informal agreements among some shareholders can substitute for shareholder meetings. Fourth, whether resolutions not recorded in minutes are valid.

5. Defendant Director’s Arguments and Rebuttals

The defendant presented four main arguments.

Implicit Approval Argument

The defendant claimed that at the February 16, 2021 extraordinary shareholder meeting and March 8, 2021 regular shareholder meeting, shareholders agreed to maintain and guarantee director compensation at February 2021 levels under agenda items regarding director and auditor compensation and measures for management rights stability.

However, the court did not accept this argument. The shareholder meeting minutes contained no record of compensation-related resolutions, no specific amounts or ranges were resolved, no scope or limits of delegation to the board were specified, and a vague agreement to maintain February 2021 levels was insufficient.

Substantive Approval Argument

The defendant argued that although there was no formal shareholder resolution, compensation claim rights should be recognized as the situation could be normatively evaluated as equivalent to a shareholder resolution.

The court cited Supreme Court Decision 2015Da213308 (September 10, 2015), which held that shareholder meetings can only resolve matters stipulated by law or articles of incorporation, such matters must be determined by shareholder meetings, and cannot be delegated to other bodies or third parties even through articles of incorporation or shareholder resolutions. Therefore, consent of shareholders meeting quorum requirements cannot substitute for shareholder resolutions.

Substantive Shareholder Meeting Function Argument

The defendant claimed that key shareholders met and discussed results were reflected in shareholder meetings, so the shareholder meeting substantially functioned.

The court distinguished between single-shareholder companies and general companies. Single-shareholder companies can make resolutions through one shareholder’s declaration of intent, but general companies must have shareholder resolutions following statutory procedures. Supreme Court Decision 2016Da251215 (en banc) held that even with all shareholders’ consent in non-single-shareholder companies, comprehensively delegating specific matters to the board after only determining total compensation amounts or limits is not permitted.

Abuse of Rights Argument

The defendant argued that the plaintiff’s filing of litigation based on minutes after participating in past board meeting minute preparation constituted abuse of rights.

The court rejected this. The burden of proving that director compensation was established through articles of incorporation or shareholder resolution lies with the defendant making such claims, there was no objective evidence proving existence of resolutions not recorded in minutes, and Article 388 of the Commercial Act is mandatory law that cannot be excluded by parties’ agreement.

6. Plaintiff Shareholder’s Claims and Legal Grounds

The plaintiff presented four core arguments.

Violation of Articles of Incorporation Provisions

Article 40 of the company’s articles of incorporation states that compensation and severance pay for directors and auditors shall be determined by the board of directors within the range determined by shareholder meetings. However, shareholder meetings never established any total compensation amount or range, the board never determined specific compensation, and no lawful procedures were followed until September 2024.

Non-Compliance with Legal Procedures

According to Article 388 of the Commercial Act and company articles of incorporation, a two-step procedure must be followed: first, shareholder meetings determine total compensation amounts or ranges, then the board determines individual directors’ specific compensation. However, in this case, the first step of shareholder resolution was completely absent.

Denial of Informal Meetings’ Legal Effect

The February and March 2021 meetings claimed by the defendant have no legal effect as shareholder meetings because: notice procedures were not followed, quorum satisfaction is unclear, resolution content was not recorded in minutes, and specific compensation amounts or ranges were not determined.

Strict Application of Mandatory Provisions

Article 388 of the Commercial Act is mandatory law for preventing director conflicts of interest, protecting company assets, protecting shareholder interests, and protecting creditors. Therefore, this provision cannot be excluded merely through parties’ agreements or implicit approval.

7. In-Depth Analysis of Related Precedents

Supreme Court Decision 2016Da241515, 241522 (June 4, 2020)

This decision established the most important legal principles regarding director compensation determination.

This decision held that while it is possible for articles of incorporation or shareholder meetings to establish only total compensation amounts or limits and delegate specific matters such as individual directors’ payment amounts to the board of directors, comprehensive delegation of director compensation matters to the board is not permitted. For example, it is lawful for a shareholder meeting to resolve that 2025 director compensation total shall be within 300 million KRW with specific payment amounts for individual directors to be determined by the board, and for the board to then determine CEO 180 million KRW, Director A 60 million KRW, Director B 60 million KRW.

Conversely, comprehensive delegation is prohibited. Comprehensive delegation of director compensation matters to the board is not permitted. It is illegal for shareholder meetings to merely resolve that director compensation shall be determined by the board. Without established totals or ranges, directors could determine their own compensation without limits and shareholders’ control rights would be completely lost.

The decision also distinguished between single-shareholder companies and general companies. In general corporations that are not single-shareholder companies, consent of shareholders meeting quorum requirements alone cannot substitute for shareholder resolutions.

Supreme Court Decision 2018Da290436 (April 9, 2020)

This decision held that Article 388 of the Commercial Act is mandatory law to prevent directors from seeking personal benefits related to their own compensation, thereby protecting the interests of companies, shareholders, and company creditors.

It also clarified that director compensation includes all consideration paid as compensation for directors’ performance of duties, regardless of nomenclature such as monthly salary or bonuses. Monthly salaries, regular bonuses, performance pay, and severance pay constitute compensation, but business-related expense reimbursements, travel expenses, entertainment expenses, and other expenditures for company business do not.

Regarding burden of proof, when articles of incorporation stipulate that director compensation shall be determined by shareholder resolution, the burden of proving that shareholder resolutions existed regarding amounts, payment timing, and payment methods lies with the party making such claims.

Supreme Court Decision 2004Da25123 (December 10, 2004)

This decision held that since this is mandatory law to prevent directors from seeking personal benefits related to their own compensation and thereby protect companies, shareholders, and company creditors, when articles of incorporation state that director compensation shall be determined by shareholder resolution, directors cannot claim compensation if there is no evidence proving shareholder resolutions existed regarding amounts, payment timing, and payment methods.

8. Court’s Final Judgment and Reasoning

The Seoul Nambu District Court ordered the defendant to pay the company 99,668,840 KRW plus interest calculated at 12% per annum from November 28, 2024 until full payment.

Non-Existence of Articles of Incorporation and Shareholder Resolutions

The court found that director compensation amounts were not established in the company’s articles of incorporation, and there were no shareholder resolutions during the period from January 2023 to August 2024.

Failure to Prove Existence of Shareholder Resolutions

The court determined that although the defendant claimed resolutions were made at the February 16, 2021 extraordinary shareholder meeting and March 8, 2021 regular shareholder meeting to maintain and guarantee defendant’s compensation at February 2021 levels, as the defendant acknowledges, such resolutions were not recorded at all in the respective board minutes, making their existence difficult to recognize. Furthermore, there was no evidence confirming whether the plaintiff deliberately omitted such resolutions from minutes as the defendant claimed.

Illegality of Comprehensive Delegation

The court held that in light of the aforementioned legal principles and Article 40 of the company’s articles of incorporation, it is itself illegal for the company’s shareholder meetings to comprehensively delegate director compensation matters to the board without determining even minimum payment ranges. Therefore, compensation paid without shareholder resolutions constitutes legally groundless payments.

Unjust Enrichment Return Obligation

The court ordered the defendant representative director to return compensation received as unjust enrichment.

9. Practical Q&A

Are minutes required even if all shareholders verbally agreed?

Yes, absolutely required. Courts do not recognize resolutions not recorded in minutes. Even with all shareholders’ agreement, documentation in minutes is necessary for legal effect. This judgment clearly held that existence is difficult to recognize when nothing is recorded in minutes.

Must compensation paid historically also be returned retroactively?

The statute of limitations for unjust enrichment return claims is 10 years. Under Civil Act Article 162, all compensation received within 10 years from the time of claim may be subject to return. Therefore, compensation received over long periods may result in very large return amounts, requiring caution.

What about single-shareholder companies?

In single-shareholder companies, one shareholder’s declaration of intent can substitute for shareholder resolutions. However, even in such cases, minutes must be prepared and maintained. It is important to document formal procedures rather than omitting them.

Are shareholder resolutions unnecessary if director compensation is established in articles of incorporation?

Yes, if director compensation amounts or calculation standards are clearly established in articles of incorporation, payment can be made accordingly without separate shareholder resolutions. However, special resolutions at shareholder meetings are required for article amendments. Establishing compensation provisions in articles may be practically more convenient than obtaining shareholder resolutions annually.

10. Frequently Asked Questions

Must director compensation always be determined at shareholder meetings?

Yes, under Article 388 of the Commercial Act, if not established in articles of incorporation, shareholder resolutions are mandatory. This is mandatory law that cannot be excluded by parties’ agreement. The Seoul Nambu District Court ordered full return of compensation paid without shareholder resolutions.

Are minutes required even if shareholders verbally agreed?

Yes, absolutely required. The court held that existence is difficult to recognize when nothing is recorded in minutes. Verbal agreements or implicit approval have no legal effect; documentation in minutes is mandatory.

Can compensation determination be completely delegated to the board?

No, comprehensive delegation is impossible. According to Supreme Court Decision 2016Da241515, while shareholder meetings can establish total compensation amounts or ranges and delegate specific matters to the board, comprehensive delegation without establishing minimum ranges is not permitted.

How much must be returned as unjust enrichment?

The full amount of compensation received without shareholder resolutions must be returned. Additionally, interest at 12% per annum from service of complaint copy until full payment must also be paid. Burdens increase over time, making prompt resolution important.

Must historically received compensation also be returned?

The statute of limitations for unjust enrichment return claims is 10 years. Under Civil Act Article 162, compensation received within 10 years from time of claim may all be subject to return.

Who can file shareholder derivative suits?

In unlisted companies, shareholders holding at least 1% of total issued shares can file. Under Commercial Act Article 403, after requesting the company to file suit and 30 days elapsing, shareholders can file suit directly.

Must single-shareholder companies also hold shareholder meetings?

In single-shareholder companies, one shareholder’s declaration of intent can substitute for shareholder resolutions. However, even in such cases, minutes must be prepared and maintained; formal procedures cannot be omitted.

Are there criminal liabilities for improperly receiving director compensation?

Yes, criminal liability under breach of trust in business (Criminal Act Article 356) includes up to 10 years imprisonment or fines up to 30 million KRW. Directors handling company affairs who receive compensation without shareholder resolutions may constitute breach of duty.

Conclusion

This judgment represents a significant case demonstrating the strict application of Article 388 of the Commercial Act as mandatory law in South Korea. Director compensation must be determined through articles of incorporation or shareholder resolutions, and informal agreements or verbal promises have no legal effect. Resolutions not recorded in minutes are not recognized, comprehensive delegation is impossible with only range-specified delegation permitted, and violations result in full compensation return plus accrued interest.

Corporate management and boards of directors must thoroughly comply with legal procedures in compensation determination processes and recognize the importance of legal mechanisms protecting company and shareholder interests.

Atlas Legal provides various corporate legal services in Songdo, Incheon, South Korea, including shareholder derivative suits, corporate governance, and director liability disputes. We recently successfully handled a shareholder derivative suit for director compensation unjust enrichment return at Seoul Nambu District Court, obtaining judgment for full compensation return plus accrued interest. We provide systematic legal counsel from prevention to dispute resolution, with extensive experience in corporate governance review, article organization, shareholder meeting operation, and director liability matters.