Liability for Damages in Director Dismissal – Supreme Court Latest Precedent Analysis

Legal Foundation of Director Dismissal and Damage Compensation

The issue of damage compensation arising from director dismissal in corporations represents a crucial legal challenge in corporate governance. This becomes particularly sensitive for numerous companies operating in international business districts like Songdo.

Director positions typically have defined terms, and dismissal prior to term completion can trigger complex legal disputes between the company and the dismissed director. The core of such conflicts lies in whether there existed ‘just cause’ for the dismissal, which determines the company’s compensation obligations.

From the company’s perspective, there exists a necessity to swiftly replace unsuitable directors, yet dismissal without legitimate grounds can lead to substantial compensation burdens. From the director’s standpoint, legal protection is needed to prevent career disruption and financial losses from unjust dismissal.

Interpretation and Application Principles of Commercial Act Article 385(1)

Commercial Act Article 385(1) serves as the fundamental provision regarding director dismissal and compensation. This regulation states: “A director may be dismissed at any time by resolution of the shareholders’ meeting. However, if dismissed without just cause, such director may claim damages from the company.”

The main clause aims to guarantee the company’s authority to dismiss directors, thereby securing shareholders’ management control rights. The shareholders’ meeting can dismiss directors at any time through special resolution, requiring neither the director’s consent nor special grounds.

Conversely, the proviso serves as a protective mechanism for directors against dismissal without legitimate grounds. Since directors with defined terms have reasonable expectations regarding their tenure, this provision seeks to protect such expectations and ensure stability in executive positions.

Therefore, Commercial Act Article 385(1) can be interpreted as a provision pursuing harmony between shareholders’ management control rights and directors’ positional stability.

Key Issues in Supreme Court Decision 2023Da220639

Case Development Process

The parties in this case were dismissed directors Plaintiffs 1 and 2, and the defendant Korea Technical Corporation that dismissed them. The major flow of the case can be summarized as follows.

While serving as directors of the defendant company and receiving monthly compensation, the plaintiffs established a company engaged in the same electrical and electronic components manufacturing business as the defendant company on June 9, 2020, without formal approval from the defendant company’s board of directors, and assumed positions as CEO and internal director respectively.

Although they did not receive board approval, the plaintiffs had notified the defendant company’s CEO of their plans to retire and start a business soon, and had obtained approval for this notification.

Dismissal Resolution and Stated Grounds for Dismissal

On August 10, 2020, the defendant company held an extraordinary shareholders’ meeting and resolved to dismiss the plaintiffs. The grounds for dismissal presented at that shareholders’ meeting were as follows.

First, violations of law and articles of incorporation due to the plaintiffs’ embezzlement of scrap metal proceeds and breach of trust. Second, Plaintiff 2’s interference with business operations by sending disparaging text messages about the defendant company to financial institutions.

Notably, the plaintiffs’ competitive activities were not explicitly mentioned as grounds for dismissal, and the defendant company appears to have been unaware of the plaintiffs’ competitive activities at that time.

Lower Court Judgments

The trial court and appellate court concluded that the grounds for dismissal claimed by the defendant company did not constitute just cause for dismissal. Particularly noteworthy was the recognition of factual circumstances that serve as the basis for judging just cause.

The lower courts held that the existence of just cause should be judged based on the time of the shareholders’ meeting dismissal resolution, but the factual circumstances serving as grounds should be limited to matters presented as grounds for dismissal in the dismissal resolution and reasons considered in that resolution.

Therefore, although the plaintiffs’ competitive activities could theoretically constitute just cause for dismissal, they could not be considered because they were not listed as grounds for dismissal at the shareholders’ meeting and the defendant company was unaware of them at the time.

New Direction in Judging Legitimacy of Dismissal

Supreme Court’s Innovative Judgment

The Supreme Court overturned the lower court’s judgment and issued a decision to reverse and remand the original judgment. The core content of the Supreme Court decision was as follows:

“All reasons objectively existing at the time of the shareholders’ meeting’s dismissal resolution regarding a director may be considered in the judgment, and this is not limited to reasons explicitly presented as grounds for dismissal of the relevant director at the shareholders’ meeting where such director dismissal resolution was made or reasons directly or indirectly considered by directors at the time of that resolution.”

This represents an abandonment of the restrictive interpretation by lower courts and presents more substantial and comprehensive judgment criteria.

Legal Background for Changes in Judgment Criteria

The Supreme Court presented the following three grounds for this judgment.

First, the text of Commercial Act Article 385(1) itself does not impose such limitations. The statutory provision simply requires the existence of ‘just cause’ and does not limit the grounds for such judgment to reasons specified at the shareholders’ meeting.

Second, the legislative intent of the same paragraph. Commercial Act Article 385(1) is a provision that pursues balance between guaranteeing shareholders’ director dismissal rights and protecting directors’ expectations regarding their tenure. If judgment grounds were limited only to reasons specified at the shareholders’ meeting, this balance could be disrupted.

Third, the nature of damage compensation liability as statutory liability. Since damage compensation liability under the proviso of Commercial Act Article 385(1) is statutory liability that does not require the company’s intent or negligence, it should be judged based on substantial legitimacy.

Scope of Review for Objective Facts at Time of Dismissal

Temporal Reference Point: Time of Dismissal Resolution

The Supreme Court clarified the temporal standard for judging just cause as ‘the time of dismissal resolution.’ This represents a consistent precedential position, whereby reasons occurring after the dismissal resolution cannot be used as grounds supporting the legitimacy of dismissal.

In this case as well, all the problematic reasons – suspected embezzlement of scrap metal proceeds, suspected dissemination of false information, and competitive activities – were facts that occurred before the dismissal resolution date of August 10, 2020.

Expansion of Scope of Considerations

The most significant change in this decision was the substantial expansion of the scope of considerations. Previously, the scope was limited to reasons explicitly presented as grounds for dismissal at the shareholders’ meeting or considered at the time of that resolution.

However, the Supreme Court ruled that all factual circumstances objectively existing at the time of the dismissal resolution could be considered. This means that if there were objective grounds for dismissal that the company failed to specify or was unaware of at the time of dismissal, these could be used for defense.

Impact on Practice

This change has had considerable impact on practice. From the company’s perspective, the scope of defense for dismissal decisions has broadened, while from the director’s perspective, all of their actions could become grounds for judging the legitimacy of dismissal.

In fact, in the remand trial of this case, the plaintiffs received a complete dismissal judgment, suggesting that competitive activities were recognized as just cause for dismissal.

Nature and Structure of Damage Compensation Liability

Nature of Statutory Liability

The Supreme Court clearly defined the company’s damage compensation liability under the proviso of Commercial Act Article 385(1) as ‘statutory liability.’ This means that the company’s intent or negligence is not a requirement for the occurrence of damage compensation liability.

This nature of statutory liability has validity for the following reasons. First, the legal relationship between director and company is essentially a mandate relationship, and since mandate contracts are based on trust, they can be terminated when the trust relationship is lost. Second, Commercial Act Article 385(1) is a provision specially recognized to balance shareholders’ director dismissal rights and directors’ expectations regarding their tenure.

Scope of Damage Compensation

Directors dismissed without just cause can receive compensation equivalent to remuneration for the remaining term as primary damages. This can include not only basic salary but also bonuses, severance pay, and various allowances.

However, current precedent recognizes offsetting income earned by dismissed directors through employment at other positions during the remaining term against the damages to be compensated by the company.

Practical Response Strategies for Companies and Directors

Company-Side Response Strategies

First, thorough preliminary review is necessary. When considering director dismissal, all objective factual circumstances that could constitute grounds for dismissal should be thoroughly reviewed in advance and relevant evidence secured. While the Supreme Court decision has made it possible to claim reasons not specified at the shareholders’ meeting, presenting clear grounds remains important.

Second, proper procedures must be followed. Director dismissal must strictly comply with procedures stipulated in the Commercial Act and articles of incorporation, such as special resolutions of shareholders’ meetings. Procedural defects can become grounds for challenging the validity of dismissal itself.

Third, objectivity of dismissal grounds must be secured. Just cause means objective circumstances such as violations of laws or articles of incorporation, or difficulties in performing duties, beyond subjective complaints or simple differences in management judgment.

Director-Side Response Strategies

First, the impropriety of dismissal grounds should be reviewed. Upon receiving dismissal notification from the company, careful examination should be conducted regarding whether the grounds for dismissal claimed by the company actually constitute ‘just cause’ and whether they were facts objectively existing at the time of the dismissal resolution.

Second, the possibility of claiming damages should be confirmed. If it is determined that there was no just cause for dismissal and tenure remained, damages equivalent to remuneration for the remaining term can be claimed from the company under the proviso of Commercial Act Article 385(1).

Third, assistance from legal experts should be sought. If it is determined that dismissal was unjust, it is important to promptly seek help from legal experts to actively assert and defend one’s rights.

Future Developments and Unresolved Legal Issues

Application of Benefit Offsetting

Current precedent recognizes benefit offsetting whereby income earned by directors dismissed without just cause through employment elsewhere during the remaining term is deducted from damages to be compensated by the company (see Supreme Court Decision 2011Da42438, decided September 26, 2013, etc.).

Legal Nature of Dismissal Compensation

Companies sometimes agree through contracts with directors to pay separate dismissal compensation in addition to severance pay when dismissed before term completion. The legal nature and validity of such dismissal compensation is also controversial.

Current precedent tends to apply Commercial Act Article 388 by analogy to dismissal compensation, considering it valid only when there are articles of incorporation provisions or shareholders’ meeting resolutions (see Supreme Court Decision 2004Da49570, decided November 23, 2006, etc.).

K&P Law Firm successfully handles director dismissal cases related to management disputes in small and medium enterprises. K&P Law Firm’s main practice areas include litigation representation and legal consultation for various disputes arising in corporations, such as conflicts between shareholders and companies, disputes between shareholders and directors, and internal conflicts among directors.