In a pivotal Korean Corporate Governance precedent, the Supreme Court of Korea ruled that if a company violates a “voting rights agreement” and appoints additional directors in violation of that agreement, the other party’s request to dismiss the additional directors appointed in violation of the agreement should be accepted by Korean courts. The Korean Supreme Court further noted that indirect enforcement is also available to the moving party if the company fails to follow the court order. For articles on drafting shareholder agreements, please see “Forming a Joint Venture/Partnership in Korea.” For articles on Korean Business Law, please see: IPG Legal’s Business Law Archive and Korean Contract Law Archive.
Enforcement of Korean Corporate
Voting Rights Agreements
Facts
- In 2016, Mr. A and Mr. B entered into a joint venture agreement and established a company. They entered into an agreement whereby Mr. A would hold 45% of the total number of issued shares and Mr. B would hold 55%, while the number of directors would be four, and each would designate two directors.
- Mr. B obtained a Korean court order to convene a temporary shareholders’ meeting in 2018, and a resolution was passed to appoint three additional directors. As a result, the company’s board of directors expanded to a total of seven members in violation of the agreement between the parties.
- Mr. A claimed that Mr. B had breached the agreement and requested that Mr. A exercise his voting rights at the shareholders’ meeting in favor of the motion to dismiss 3 out of 5 directors nominated by Mr. B, while also demanding indirect enforcement in the form of a fine.
- The court of first instance and the appellate court adjudged that Mr. B’s act constituted a breach of contract and ruled that Mr. B must vote in favor of the motion to dismiss three out of five directors he had recommended in order to restore the status quo. In addition, to enforce this, the court ruled that if B did not fulfill the relevant obligation, he would be required to pay Mr. A 1 million won per day in indirect enforcement damages.
Issue
Whether a “voting rights agreement” in a joint venture/shareholder agreement restricts the exercise of voting rights at the shareholders’ meeting is valid between the parties to the agreement.
Korean Supreme Court Decision
The Korean Supreme Court agreed with the conclusion of the lower courts and dismissed the appeal. This is the first holding by the Supreme Court of Korea, ruling that contractual rights can be exercised against the party that violated the agreement.
The Korean Supreme Court stated that:
“The provisions of this case are a voting rights agreement that stipulates matters regarding the composition of the company’s organizations, such as the total number of directors and the right to elect directors, which should be stipulated in the articles of incorporation, through a contract between shareholders and aims to achieve such a state by restricting the exercise of voting rights at the general shareholders’ meeting . . . Therefore, both the plaintiff and the defendant have an obligation to exercise their voting rights with respect to the other party so that the composition of the board of directors complies with the provisions of this case. Since the defendant exercised its voting rights in favor of the agenda to additionally elect three directors as described above, resulting in the election of three additional directors, which went against the total number of directors and composition stipulated in this case, the plaintiff can request the defendant to exercise its voting rights in favor of the agenda to dismiss three of the five directors recommended and elected by the defendant.”
The Supreme Court also ruled that indirect enforcement via a fine was justified and upheld the holding of the lower courts.
by Sean Hayes
Sean Hayes is the first non-Korean attorney to have worked for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty. He assists clients with their contentious, non-contentious, and business development needs, and is regularly quoted by leading media sources on Asia’s legal and business issues. Sean is rated a Top 100 attorney, and his firm was rated a top dispute resolution law firm in Korea.
If you would like a consultation with Sean Hayes from IPG Legal, please schedule a call at: Schedule a Call with Attorney Sean Hayes. This article was written for the Korean language Legal Times.
