Voting Rights Restriction for Specially Interested Parties in Director Compensation Limit Approval – Supreme Court Case Analysis

1. Concept of Director Compensation Limit Approval and Special Interest

When a director of a corporation is simultaneously a shareholder, can they exercise voting rights in shareholder meeting resolutions related to their own compensation? This has been a contentious issue in corporate legal practice for a long time.

Article 368(3) of the Commercial Act stipulates that “a person who has a special interest in the resolution of the meeting shall not exercise voting rights.” Here, ‘special interest’ refers to personal and direct interests that are distinct from those of general shareholders.

Korean corporations have traditionally adopted a practice of not directly determining specific compensation for individual directors at shareholder meetings, but rather approving only director compensation limits and then having the board of directors decide individual compensation within that range. Due to this practical convention, the legal determination of whether director compensation limit approval constitutes personal interest was not clear.

2. Legal Basis and Meaning of Commercial Act Article 368(3)

The provision restricting voting rights of specially interested parties under Article 368(3) of the Commercial Act is a system designed to ensure fairness in shareholder meeting resolutions. The relevant provisions are as follows:

Commercial Act Article 368(3): “A person who has a special interest in the resolution of the meeting shall not exercise voting rights”

Commercial Act Article 371(2): “For resolutions of the meeting, the number of voting rights of shares that cannot be exercised under Article 368(3) shall not be included in the number of voting rights of attending shareholders”

Commercial Act Article 388: “When director compensation is not specified in the articles of incorporation, it shall be determined by resolution of the shareholder meeting”

The criteria for determining specially interested parties have been established through Supreme Court precedents. The Supreme Court interprets “persons with special interests” as “cases where they have personal interests apart from their position as shareholders” (Supreme Court Decision 2007Da40000, decided September 6, 2007).

3. Facts and Issues of the Supreme Court Decision

The facts of the case recently decided by the Supreme Court are as follows:

Person A, who is both a director and major shareholder of a corporation, exercised voting rights on “Approval of 2023 Director Compensation Limit” at the regular shareholder meeting held on March 31, 2023, and the agenda was approved. In response, the company’s auditor filed a lawsuit to cancel the shareholder meeting resolution on May 30, 2023, based on Article 368(3) of the Commercial Act.

The core issue was whether a director-shareholder constitutes a specially interested party in shareholder meeting resolutions determining the compensation limit for all directors including themselves. Particularly, the key point of contention was whether special interest is recognized even when determining the compensation limit for all directors rather than specific compensation for individual directors.

4. Lower Court and Supreme Court Rulings

Lower Court Rulings

Seoul Central District Court and Seoul High Court determined that director-shareholders are specially interested parties.

Seoul Central District Court (Decision 2023Gahap66328, decided May 31, 2024) and Seoul High Court (Decisions 2024Na2027590, 2024Na2051821, decided January 22, 2025) ruled as follows:

“The director compensation limit determined at the shareholder meeting inevitably has a significant impact on determining specific compensation amounts for individual directors in the future. Since the compensation of director-shareholders is closely related to the personal interests of the shareholders rather than interests related to corporate control, such shareholders should be judged as specially interested parties under Article 368(3) of the Commercial Act.”

Supreme Court’s Final Ruling

The Supreme Court concluded the case with dismissal without review, considering the lower court’s judgment to be appropriate. This established the legal principle that director-shareholders are restricted from exercising voting rights in shareholder meetings determining their compensation limits, and that shareholder meeting resolutions are illegal if this restriction is violated.

5. Significance of the Ruling and Impact on Practice

Precedential Significance

This ruling represents the Supreme Court’s first clear judgment on whether director-shareholders have special interests in director compensation limit approval resolutions. Previously, lower court decisions had been inconsistent.

Previous precedents denying special interest: Seoul High Court Decision 2010Na103118 (decided January 19, 2012) ruled that “when approving the upper limit of total director compensation at a shareholder meeting, it is impossible to separate individual directors’ interests from the interests of all directors, so voting rights cannot be restricted on the grounds of being specially interested parties.”

Previous precedents recognizing special interest: Seoul High Court Decision 2014Na2035141 (decided April 23, 2015), Seoul Nambu District Court Decision 2021Gahap101384 (decided October 15, 2021), and others determined that special interest is recognized even in director compensation limit approval.

Impact on Practice

Due to this ruling, the following matters must be considered in future shareholder meeting practice:

1. Restriction of voting rights for director-shareholders: Director-shareholders cannot exercise voting rights on director compensation limit approval agenda items.
2. Specification in shareholder meeting notices: The fact of voting rights restriction for specially interested parties must be specified in meeting notices.
3. Caution in minute preparation: The fact that specially interested parties did not exercise voting rights must be clearly recorded in the minutes.

6. Changes in Calculation Method for Shareholder Meeting Resolution Requirements

The Commercial Act provides as follows:

Practical Application of Calculation Method

For example, assume a company with 10,000 total issued shares where director-shareholder A holds 5,000 shares. Suppose shareholders holding a total of 8,000 voting rights attend the shareholder meeting to decide on director A’s compensation. A is excluded from voting, and the remaining shareholders with 3,000 shares vote, resulting in 1,700 votes for approval and 1,300 votes against.

Applying Article 371 of the Commercial Act, A’s compensation agenda would be rejected (requiring 2,500 or more votes). Conversely, without applying Article 371 of the Commercial Act, A’s compensation agenda would be approved (requiring 1,501 or more votes).

A. Application of Commercial Act Article 371

Calculation of majority of attending shareholder voting rights:

• Total attending voting rights: 8,000 shares
• Excluding specially interested party voting rights: 8,000 shares – 5,000 shares = 3,000 shares
• Majority standard: Majority of 3,000 shares = 1,501 shares or more

Calculation of one-fourth of total issued shares:

• Total issued shares: 10,000 shares
• One-fourth standard: 2,500 shares or more

B. Non-application of Commercial Act Article 371

Calculation of majority of attending shareholder voting rights:

• Total attending voting rights: 8,000 shares
• Excluding specially interested party voting rights: 8,000 shares – 5,000 shares = 3,000 shares
• Majority standard: Majority of 3,000 shares = 1,501 shares or more

Calculation of one-fourth of total issued shares:

• Total issued shares: 10,000 shares
• Excluding specially interested party shares: 10,000 shares – 5,000 shares = 5,000 shares
• One-fourth standard: 5,000 shares × 1/4 = 1,250 shares or more

Therefore, in this case, approval of 1,250 shares or more is required for the resolution to be valid.

C. Conclusion

Seoul Central District Court (Decision 2023Gahap66328, decided May 31, 2024) and Seoul High Court (Decisions 2024Na2027590, 2024Na2051821, decided January 22, 2025) also excluded A’s shares when calculating issued shares. That is, in the above case, the company’s total issued shares were calculated as 5,000 shares.

In Supreme Court Decision 2016Da222996 (decided August 17, 2016), regarding auditor appointment, shares with restricted voting rights were also excluded from issued shares in the calculation.

7. Future Commercial Act Amendments and Legislative Tasks

Issue of Single-Shareholder Companies

When there is only one shareholder who also serves as a director, the current Commercial Act framework creates a problem where there is no entity to determine director compensation. In such cases, exception provisions need to be established through legislation.

Limitations of Voting Rights Restriction Ratios

If the total number of shares with restricted voting rights due to special interests exceeds one-fourth of the total issued shares, it becomes fundamentally impossible to meet the requirement of “at least one-fourth of the total issued shares” under Article 368(1) of the Commercial Act.

The Supreme Court has also pointed out this problem. It ruled that “if shares exceeding 3% are included in the ‘total issued shares’ referred to in Article 368(1) of the Commercial Act, when any one shareholder owns more than 78% of the total issued shares, such as when the number of shares exceeding 3% exceeds 75% of the total issued shares, it becomes fundamentally impossible to meet the requirement of ‘at least one-fourth of the total issued shares’ referred to in Article 368(1) of the Commercial Act” (Supreme Court Decision 2016Da222996, decided August 17, 2016).

Need for Amendment of Commercial Act Article 371

The current Article 371 of the Commercial Act was enacted based on resolution requirements before the 1995 Commercial Act amendment, but revision of the provision is necessary in the current situation where the concept of meeting quorum has been abolished.

8. Conclusion and Practical Response Measures

This Supreme Court ruling clearly recognizes the special interests of director-shareholders in director compensation limit approval, and is expected to bring significant changes to future shareholder meeting practice.

Practical Response Measures

1. Shareholder Meeting Preparation Stage:
   • Identify the status of director-shareholders in advance and clarify subjects for voting rights restriction
   • Specify the fact of voting rights restriction for specially interested parties in meeting notices
2. Shareholder Meeting Proceedings Stage:
   • The chairperson should announce voting rights restriction for specially interested parties when presenting director compensation limit agenda
   • Calculate resolution requirements excluding specially interested party voting rights
3. Post-Management Stage:
   • Record in detail the fact of voting rights restriction for specially interested parties and resolution requirement fulfillment in the minutes
   • Accurately reflect resolution contents in related documents such as corporate registration certificates

Future Precautions

Companies should consider that director compensation limit resolutions themselves may become impossible when director-shareholders have high shareholding ratios, and should review such legal constraints in advance when considering shareholder composition or director appointments.

Additionally, until issues such as methods for determining director compensation in single-shareholder companies or limitations on voting rights restriction ratios are resolved through Commercial Act amendments, careful legal review is required for individual cases.

Having successfully handled numerous shareholder meeting-related dispute cases recently, particularly recognized for expertise in legal advice related to shareholder meeting operations for companies with complex governance structures. Please feel free to request consultation if you need legal advice on the legality of shareholder meeting resolutions or determination of specially interested parties.