Korean Derivative Suit Law

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. Please see: Suing Korean Directors for Losses to Korean Companies for more information on this issue. 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 the share requirement up until the filing of the suit. A 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 filing 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.

____
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.

You may schedule an initial free consultation with our Attorney at: Schedule a Call with an Attorney in Korea to discuss establishing or expanding your business into Korea.