This is a case commentary on a matter in which Atlas Legal successfully obtained a court-ordered director dismissal under Article 385(2) of the Korean Commercial Act — removing a director who had drawn unauthorized compensation for nine years and falsified the company’s share register.
Case Overview
Director Y2, the controlling shareholder and sole inside director of Company Y1, collected salary for approximately nine years without the required shareholder or board resolution, in violation of the company’s articles of incorporation and Article 388 of the Korean Commercial Act. Our client X, holding 10% of Y1’s shares, obtained two separate derivative-suit judgments on final appeal ordering repayment of approximately KRW 460 million — yet Y2 returned nothing. Y2 further deleted minority shareholders’ names from the share register and falsified supporting documents, conduct that led to a criminal referral by police to the prosecutor’s office on charges of document forgery. After the shareholders’ meeting rejected a removal resolution, the Atlas Legal litigation team filed a director dismissal lawsuit and secured a judgment removing Y2 from the board.
The Director Dismissal Lawsuit vs. Shareholders’ Meeting Removal
Under Article 385(1) of the Korean Commercial Act, directors may be removed by a supermajority shareholders’ resolution — meaning a controlling shareholder holding just over one-third of voting rights can block any removal. Article 385(2) addresses this structural problem by allowing a shareholder holding 3% or more of total issued shares to petition the competent district court to order a director’s dismissal directly, where the director has committed misconduct or materially violated applicable law or the articles of incorporation, and the shareholders’ meeting has rejected removal. Once a dismissal judgment becomes final and conclusive, the director is removed by operation of law — no separate company resolution is required, and the dismissed director has no damages claim against the company.
Filing Requirements — 3% Shareholding, Rejection, One-Month Deadline
Three requirements must all be satisfied. First, the plaintiff must hold 3% or more of total issued shares and maintain that threshold until the judgment becomes final. Second, the shareholders’ meeting must have failed to pass a removal resolution; the Supreme Court of Korea has confirmed that a shareholders’ meeting that could not proceed due to insufficient quorum also constitutes a “rejection” for this purpose (Supreme Court of Korea, April 9, 1993, 92Da53583). Third, the lawsuit must be filed within one month of the shareholders’ resolution under Article 385(3) of the Korean Commercial Act — a strict, non-extendable deadline. Because new grounds for dismissal cannot be added after this period, all available grounds must be pleaded at the outset.
Grounds for Dismissal — Misconduct and Material Violation
Two grounds exist under Article 385(2): misconduct in the performance of duties, and material violation of law or the articles of incorporation. “Misconduct” means an intentional act by which the director breaches an obligation causing damage to the company — negligence alone does not qualify. In this matter, the court found that Y2’s nine-year collection of unauthorized compensation constituted misconduct, and that the falsification of the share register — designed to gain advantage in a management dispute — constituted an additional ground. South Korea’s Supreme Court has also held that a director who establishes a competing company without shareholder approval commits a material violation of the non-compete obligation under Article 397(1) of the Korean Commercial Act (Supreme Court of Korea, April 9, 1993, 92Da53583).
Term Expiry Risk and Parallel Injunction Strategy
If the director’s term expires during litigation, the lawsuit loses its legal interest and will be dismissed — even if the director is subsequently re-elected (Suwon District Court, April 8, 2021, 2018Gahap26546; Seoul Central District Court, October 20, 2016, 2015Gahap564964). Where the remaining term is short, practitioners advise filing an application for an interim injunction suspending the director’s duties in parallel with the main action. Note also that both the company and the director must be named as co-defendants in the main lawsuit, while only the director is the respondent in injunction proceedings.
Atlas Legal’s Expertise
Atlas Legal has successfully obtained a court-ordered director dismissal in a case involving unauthorized compensation and share register manipulation — handling the matter from the derivative suits through the final dismissal judgment. The firm advises on management disputes, derivative actions, and minority shareholder rights under Korean law, with particular experience serving foreign-invested companies and joint ventures operating in South Korea. As the one-month filing window runs from the date the shareholders’ meeting rejects removal, prompt action is essential.