Complete Guide to Shareholder Proposal Rights: From Requirements to Injunctions

1. Basic Concept and Legal Foundation of Shareholder Proposal Rights

Shareholder proposal rights refer to the legal authority established under Article 363-2 of the Commercial Act, whereby shareholders meeting specific conditions can directly propose agenda items or resolutions to be discussed at shareholders’ meetings. This system was designed to expand minority shareholders’ opportunities for management participation and strengthen transparency in corporate operations.

The background for establishing this shareholder proposal rights system stems from the need to improve the previous structure where only management determined shareholders’ meeting agendas, and to enable minority shareholders to participate substantially in management. Through this system, shareholders can perform a monitoring role over management and realize protection of overall shareholder interests.

Rights Characteristics of Shareholder Proposal Rights

Shareholder proposal rights constitute a form of shareholder rights with public interest characteristics. This serves as an institutional mechanism to ensure transparency and soundness in corporate operations, rather than merely pursuing individual shareholder interests.

2. Qualification Requirements for Exercising Shareholder Proposal Rights

2.1 Share Ownership Requirements

To exercise shareholder proposal rights, shareholders must meet share ownership conditions that vary by company type.

Non-listed Companies

• Must hold 3% or more of total issued shares (excluding non-voting shares)

General Listed Companies

• Must continuously hold 1% or more of total issued shares (excluding non-voting shares) for 6 months prior

Large-scale Listed Companies (capital of 100 billion won or more)

• Must continuously hold 0.5% or more of total issued shares (excluding non-voting shares) for 6 months prior

Financial Companies

• Under the Act on Corporate Governance of Financial Companies, must continuously hold 0.1% or more of total issued voting shares for 6 months prior

2.2 Share Holding Period Requirements

For listed companies and financial companies, there is an additional requirement of continuous holding for 6 months or more. This is intended to prevent abuse of the system by shareholders with short-term speculative purposes and to provide proposal opportunities to shareholders who have sufficiently understood the company’s situation.

Legal Issues Related to Holding Period Calculation

• According to Civil Code period calculation rules, the share acquisition date is not included
• Academic opinions are divided on how to handle cases where shareholding ratios change due to new share issuances during the holding period

2.3 Joint Exercise

Multiple shareholders may jointly satisfy shareholding ratio conditions to exercise shareholder proposal rights. In such cases, each individual shareholder need not meet the conditions separately, but the intention for joint exercise must be clear.

3. Specific Methods for Exercising Shareholder Proposal Rights

3.1 Proposal Deadline

Shareholders must submit proposals to the company in writing or electronic documents by 6 weeks before the shareholders’ meeting date (Commercial Act Article 363-2, Paragraph 1).

For Regular Shareholders’ Meetings

• Proposals must be submitted by 6 weeks before the date corresponding to the previous year’s regular shareholders’ meeting date in the current year

For Extraordinary Shareholders’ Meetings

• The relevant agenda must be addressed at extraordinary shareholders’ meetings held 6 weeks after the proposal date

3.2 Proposal Method

Shareholder proposals must be made in writing or electronic documents, and proposals via email are also recognized. Oral proposals are not accepted due to issues regarding timing clarity and content specificity.

Proposals Through Representatives

• Representatives need not be shareholders
• Authority must be proven through power of attorney

3.3 Specification of Proposal Content

Shareholder proposals must be specific and clear, including the following elements:

• Specific content of the proposed agenda or resolution
• Reasons for the proposal
• Other necessary matters

4. Legal Effects of Exercising Shareholder Proposal Rights

4.1 Board of Directors’ Obligations

Upon receipt of a lawful shareholder proposal, directors must report it to the board of directors (Commercial Act Article 363-2, Paragraph 2), and the board must include it as a shareholders’ meeting agenda item unless it violates laws or articles of incorporation or falls under rejection grounds specified by presidential decree.

4.2 Explanation Opportunities at Shareholders’ Meetings

Companies must provide opportunities for proposing shareholders to explain relevant agenda items at shareholders’ meetings upon request (Commercial Act Article 363-2, Paragraph 4). Unjustified refusal may constitute grounds for canceling shareholders’ meeting resolutions.

4.3 Legal Remedies

When boards of directors unjustifiably reject shareholder proposals or fail to include them as agenda items, proposing shareholders may apply to courts for injunctions to include agenda items.

5. Company’s Grounds for Rejecting Shareholder Proposals

Article 12 of the Commercial Act Enforcement Decree specifies the following grounds on which companies may reject shareholder proposals:

1. Re-proposal Prohibition: Re-proposing identical agenda items within 3 years from rejection date when previously rejected with less than 10% voting rights support at shareholders’ meetings
2. Individual Shareholder Issues: Matters concerning individual shareholder problems
3. Minority Shareholder Rights Related: Matters concerning minority shareholder rights requiring certain shareholding ratios
4. Executive Dismissal Proposals: Matters concerning dismissal of executives during their terms (limited to listed companies)
5. Impossible to Realize or False Matters: Matters that companies cannot realize or where proposal reasons are clearly false or damage specific individuals’ reputations

6. Key Legal Issues Related to Shareholder Proposal Rights

6.1 Dual Exercise Requirements for Listed Companies

Following the 2020 Commercial Act revision, listed company shareholders can exercise shareholder proposal rights by meeting either listed company special provisions (1% + 6-month holding) or non-listed company standards (3% shareholding ratio) (Commercial Act Article 542-6, Paragraph 10).

6.2 Burden of Proof for Share Holding Period

Opinions differ on who bears the burden of proving the 6-month continuous holding requirement for listed companies. While the prevailing view holds that proposing shareholders must prove requirement satisfaction, some argue that companies bear the burden of proof since they determine inclusion decisions.

6.3 Issues with Specifying Director Types in Director Appointment Proposals

For listed companies, since qualification requirements and appointment procedures differ by director type (inside directors, outside directors, etc.), some argue that appointment proposals not specifying director types may constitute rejection grounds.

6.4 Relationship with Large Shareholding Disclosure System

When large shareholders holding 5% or more under the Capital Markets Act report holding purposes as ‘simple investment’ and subsequently make shareholder proposals that could affect management rights, opinions differ on the validity of proposals made without reporting changes in holding purposes.

7. Analysis of Related Legal Provisions and Precedents

Major Legal Provisions

Commercial Act Article 363-2 (Shareholder Proposal Rights)

Paragraph 1: Shareholders holding shares equivalent to 3% or more of total issued shares (excluding non-voting shares) may propose to directors in writing or electronic documents 6 weeks before shareholders’ meeting dates to include certain matters as shareholders’ meeting agenda items.

Commercial Act Enforcement Decree Article 12 (Grounds for Rejecting Shareholder Proposals)

Boards of directors may not include shareholder proposals as shareholders’ meeting agenda items when proposals fall under any of the following categories.

Related Precedents

While important precedents related to shareholder proposal rights are accumulating, Supreme Court precedents remain limited. Lower courts have produced various case decisions regarding interpretation of exercise requirements and rejection grounds for shareholder proposal rights.

8. Key Checkpoints in Practical Implementation

8.1 Accurate Calculation of Proposal Deadlines

Proposal deadlines of 6 weeks before shareholders’ meeting dates must be accurately calculated and observed. Companies may reject proposals that miss deadlines.

8.2 Thorough Verification of Shareholding Ratio and Holding Period Requirements

Particularly for listed companies, thorough verification through stock transaction records is necessary to confirm satisfaction of 6-month continuous holding requirements.

8.3 Specificity and Legality of Proposal Content

Careful review is required to ensure proposal content does not violate laws or articles of incorporation and is specific and feasible.

8.4 Review of Relationship with Large Shareholding Disclosure Obligations

For shareholders holding 5% or more, prior review of relationships with Capital Markets Act disclosure obligations is necessary, with holding purpose change reports filed when required.

8.5 Preparation of Legal Remedies

Legal remedies such as injunctions for agenda inclusion should be prepared in advance for cases where companies unjustifiably reject shareholder proposals.

K&P Law Firm has successfully resolved complex legal issues related to recent listed company shareholder proposal rights exercises, providing specialized counsel on challenging practical matters including relationships with large shareholding disclosure systems and satisfaction of holding period requirements.