Unilateral Director Compensation Cuts? Complete Legal Procedures Guide

1. Legal Nature of Director Compensation Rights

Director compensation rights are established based on Article 388 of the Commercial Act. This provision stipulates that when compensation amounts are not specified in the articles of incorporation, they shall be determined through shareholder meeting resolutions. This provision governs procedural regulations, and the Commercial Act does not directly determine the specific content of compensation amounts.

According to court precedents, Commercial Act Article 388 is interpreted as a provision designed to prevent adverse effects from directors pursuing private interests, thereby protecting the interests of companies, shareholders, and creditors. The relationship between companies and directors follows the civil law provisions on mandate, and in corporate practice, it is common to provide compensation to directors, so explicit or implicit special agreements regarding compensation payment are interpreted to exist.

When shareholder meeting resolutions regarding director compensation adjustments or boards of directors or representative directors delegated by shareholder meetings determine specific compensation amounts for directors, those determined compensation amounts become incorporated into the specific content of employment contracts between companies and directors. Through this, the relevant director acquires specific compensation claim rights with the content of receiving the determined compensation amount, and the company bears corresponding obligations.

2. Provisions and Interpretation of Commercial Act Article 388

Regarding director compensation adjustments, Commercial Act Article 388 specifies as follows:

“Director compensation shall be determined by shareholder meeting resolution when not specified in the articles of incorporation.”

This provision governs the procedures for determining director compensation, and the same procedures must be followed for compensation adjustments. Particularly in cases of director compensation reduction, shareholder meeting resolutions alone are insufficient, and agreement from the relevant director is essential.

This is because director compensation rights are incorporated into the content of employment contracts. Therefore, to adjust already determined compensation, agreement from the director as a contracting party is necessary, which is the consistent position of precedents.

3. Legal Procedures and Essential Requirements for Compensation Reduction

The most crucial legal principle regarding director compensation reduction is the application of contract law principles. When specific compensation amounts for directors have been determined through articles of incorporation or shareholder meeting resolutions and incorporated into employment contract content, reducing director compensation requires agreement from the relevant director in principle, according to general principles of contract law.

Member meetings (or shareholder meetings) resolutions alone cannot have any effect on director compensation rights. Resolutions by general meetings determining compensation reductions merely establish internal company intentions, so without agreement from the director as the counterpart to the employment contract, such resolutions cannot affect the director, which is a natural conclusion in light of contract law principles.

4. Application and Significance of Contract Law Principles

The legal basis for applying contract law principles in director compensation adjustments is as follows:

1. Director compensation is a core component of employment contracts
2. One party (the company) cannot unilaterally modify contract content
3. Agreement between both parties is essential for contract modifications

Therefore, director compensation reduction is not simply a matter of corporate law but of contract law, basically requiring agreement between contracting parties. This is because director compensation rights have already been established as specific claims.

5. Special Circumstances Where Implied Consent is Established

Even when there was no explicit agreement regarding director compensation adjustments, the effect of reduction resolutions may occur when there are special circumstances that can be viewed as implied consent.

For example, when a director assumes office knowing that internal regulations or practices exist regarding compensation systems that provide different compensation or no compensation based on job content, this can be viewed as corresponding ‘implied consent.’

Director job content can change according to company business execution needs, and when companies differentially determine compensation based on job content, those who assume director positions can be presumed to have implicitly agreed that compensation may vary according to job content changes during their term.

6. Litigation for Nullification of Reduction Resolutions and Legal Interest

In the Supreme Court decision of March 30, 2017 (Case No. 2016Da21643), an important judgment was made regarding litigation for nullification confirmation of director compensation reduction resolutions.

In this case, a limited company’s member meeting resolved to reduce plaintiff directors’ compensation, and the plaintiffs filed litigation seeking nullification confirmation of this reduction resolution, claiming it was improper.

The Supreme Court determined that the plaintiff directors had no legal interest in the lawsuit. The reasons were as follows:

• Member meeting compensation reduction resolutions cannot have any effect on directors’ contractual compensation rights without director agreement
• Even if the member meeting’s reduction resolution itself contains grounds for nullification under corporate law, regardless of whether the resolution is null and void, director compensation rights remain in an unreduced state

Legal interest in confirmation lawsuits is recognized only when there are existing uncertainties or risks to the plaintiff’s rights or legal status, and receiving a confirmation judgment is the most effective and appropriate means of removing such uncertainties or risks. The Supreme Court’s judgment was that the plaintiff directors in this case had no interest in confirmation because the member meeting’s compensation reduction resolution legally had no effect on their compensation rights.

7. Key Points in Corporate Practice

Key matters to note in practice regarding director compensation adjustments are as follows:

1. Securing Explicit Agreement: When seeking to reduce director compensation, securing explicit agreement from the relevant director in writing is safest.
2. Utilizing Articles of Incorporation Provisions: Pre-establishing compensation adjustment procedures or conditions in the articles of incorporation can be helpful.
3. Clarifying Internal Regulations: When providing different compensation based on job content, clarifying internal regulations regarding this and notifying directors upon appointment is important.
4. Documentation: Documenting and preserving all procedures related to compensation adjustments is necessary.
5. Prohibition of Reduction Without Director Agreement: Recognition that companies cannot reduce director compensation through unilateral decisions is essential.

8. Final Conclusions and Recommendations

Director compensation adjustments, particularly reductions, are not simply matters of internal company decision-making but areas where contract law principles apply. Since already determined director compensation is important content of employment contracts, agreement from the relevant director is absolutely necessary to adjust it.

Shareholder meeting or member meeting resolutions alone cannot affect director compensation rights, and reduction resolutions without director agreement are ineffective in themselves. Therefore, when companies seek to adjust director compensation, they must proceed through agreement with the relevant director.

K&P Law Firm has experience providing advisory services related to executive compensation for various companies recently, and has particularly provided practical guidelines for preventing legal disputes in the process of adjusting director compensation for listed companies. If you need legal advice regarding director compensation adjustments, please feel free to consult with us at any time.

Detailed Analysis of Major Case Law

Supreme Court Decision of March 30, 2017 (Case No. 2016Da21643)

Facts

• Plaintiff directors who were also members of a limited company received monthly compensation of 5 million won from 2005, but faced a resolution to reduce it to 1.2 million won at an extraordinary member meeting in 2014
• Although plaintiffs held 23% stakes each, representative director A’s faction held 54% stakes and exercised voting rights at the meeting
• During the reduction resolution, plaintiffs’ job titles were also changed from executive managing director and senior managing director to general directors

Supreme Court’s Key Holdings

1. Director compensation determined by articles of incorporation or general meeting resolutions becomes content of employment contracts, binding companies and directors
2. Unilateral reduction is impossible without explicit agreement or implied consent for differential compensation payment based on job content
3. General meeting reduction resolutions cannot have any effect on director compensation rights
4. Therefore, there is no legal interest in seeking nullification confirmation

Practical Implications

This precedent clarifies that director compensation adjustments are matters of contract law and confirms that general meeting resolutions alone cannot infringe upon directors’ vested rights, making it an important case.

Supreme Court Decision of November 22, 1977 (Case No. 77Da1742)

Key Holdings

Director compensation, including retirement allowances, has no effect even when shareholder meetings pass resolutions to unilaterally reduce or deprive such compensation after amounts have been determined by articles of incorporation or shareholder meeting resolutions

Significance

This precedent shows that the Supreme Court has recognized the vesting of director compensation rights for 40 years, serving as the legal foundation for the 2017 precedent.