Derivative/Shareholder Suits in Korea: Corporate Governance in Korea

Much like the United States, Korean law permits shareholders of a company to file a lawsuit against the company’s directors/third parties, on behalf of the company, when directors’/third parties’ wrongful acts result in losses or may later result in losses.

In this type of legal action in Korea, known, often, as a derivative suit, the plaintiff-shareholders do not bring a claim as themselves as individuals, but as representatives of the corporation, the entity suffering the harm but which otherwise would be unable to raise a claim.

In Korea, Article 403 of the Korean Commercial Code defines the statutory basis for derivative suits. The Code provides that a shareholder, holding at least 1/100 of the total issued and outstanding shares of a company, may sue a director on behalf of the company shareholders.

With regard to listed companies, the code permits derivative suits when a shareholder has held not less than 1/10,000th of the total and outstanding shares of the listed company for the last 6 months. Whether listed or not, minority shareholders must maintain the portion of share requirement up until filing of the suit. Portion of shares may fall below the statutorily prescribed level after the suit has been filed.

Derivative suits emerged in Korea as a response to the 1997 Asian Financial Crisis as a means for improving corporate governance. At first it was mainly civic groups filings these suits and it is still rare to see a derivative suit filed independently, and not paired with other causes of action against those in control of the company. The derivative suit, however, is still a viable option, however, for any shareholders of any company, large or small, who want to address wrongs or potential wrongs committed by those controlling the company.

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by Brendan Cochrane

Brendan Cochrane is an associate of Sean Hayes. Brendan was a top graduate of the University of Michigan and attended law school at the University of Wisconsin, where he served as Managing Editor of the Wisconsin Law Review.  Brendan is an attorney licensed to practice in both Illinois and Wisconsin.  He may be contacted at: BrendanCochrane@ipglegal.com.

Sean may be contacted at: SeanHayes@ipglegal.com. Sean Hayes is co-chair of the Korea Practice Team at IPG Legal. He 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 has, recently, been ranked as one of only two non-Korean attorneys as a Top Attorney working in Korea by AsiaLaw.