Shareholder disputes in Korea often revolve around a few recurring issues. The primary jurisprudence on shareholder disputes in Korea pertains to access to information, the duty and liability of directors, the fairness of control-related issuances, and exit/value protection through appraisal rights.
For more information on Korean Corporate Law, please see: IPG Legal’s Korean Corporate Law and Compliance Archive. Below is a practical roadmap and guide based on recent and leading Korean Supreme Court holdings.
Recent Trends in Shareholder Rights
Disputes in Korea
Access to Information: Books & Records (KCA art. 466) in Korea
In Korean Supreme Court Case 2019Da270163 (May 13, 2022), the Korean Supreme Court rejected Korean lower-court practice and held that it is enough if “the purpose of the request and how shareholders came to the request is specified enough,” and shareholders “do not need to attach documents that can inspire reasonable doubt.”
The Court opined that: “If shareholders should present the grounds therefor which cause reasonable doubts, it is unfair, because it highly limits shareholders’ right as it overburdens shareholders who don’t have sufficient information about the business, and this goes against the intent of the [Korean] Commercial Act which provides the right of inspection and transcription so that the shareholders can discover information about the company.”
However, earlier Korean Supreme Court holdings noted that mere ” fishing expeditions” shall not be accepted by the Korean Supreme Court.
It is advisable in all requests to access information to narrow the scope, specify the purpose of the request, and prepare to establish that the request advances a legitimate shareholder oversight purpose. For more information on protecting minority shareholder rights in Korea, please refer to “Protecting Minority Shareholder Rights in Korea.“
Director Duties & Derivative Suits in Korea
Korea’s Supreme Court has, in recent years, increased scrutiny over directors’ oversight obligations. In a 2021 decision reaffirming earlier precedents (2007 Da 31518, 2016 Da 260455), the Supreme Court of Korea held that a representative director may be liable even without direct participation in unlawful acts if the director fails to establish and operate reasonable internal control systems to prevent and monitor potential misconduct and violations of Korean Law.
The Korean Supreme Court held that: “the representative director, was unaware of the continuous and systematic collusion, which is a serious illegal act committed by Company C, and could not have prevented it or taken corrective measures immediately after it occurred, this may be deemed to be a result of defendant’s failure to make any efforts to establish an internal control system in order to control the risks potentially arising from the serious illegal and tortious acts in the course of performing Company C’s business, or despite having such system, intentional ignorance of the defendant’s performance of his duty to monitor and supervise the overall business of Company” thus the “representative director cannot be exempt from liability solely because he was unaware and gave no direct instruction.”
This case extends liability to directors who neglect their oversight functions, fail to implement adequate monitoring systems, and fail to provide remedial measures when malfeasance is suspected.
Issuance of New Shares During Management Control Contests
A “Third-Party allotment” is a method of issuing shares defined in Korean corporate law where a company grants a specific third party the right to underwrite newly issued shares. Many high-profile third-party allotment cases were resolved in the Korean lower courts based on the Korean Supreme Court Third-Party Allotment Test.
The Third-Party Allotment tests mandate that if the share issuance dilutes existing shareholders in a control fight, the allotment must be “necessary to achieve the company’s operational objectives” (e.g., urgent financing) and may not be merely a device to entrench management (Hanjin KAL Injuction Dispute and Korea Zinc Share Issuance Invalidation).
It is advisable, when challenging a Korean share issuance that dilutes other shareholders, to build substantial evidence that the alleged purpose can be achieved by less dilutive alternatives, the issuance is for the purpose of entrenching management, and that procedural defects are evident. Prior to an injunction, IPG Legal typically requests the disclosure of company books and records to establish the lack of “necessity.”
Appraisal Rights & “Fair Price” in Korea (KCA arts. 374, 374-2)
The Supreme Court has clarified that “fair price” is not mechanically tied to the market price on the day before the board resolution, especially if the market price was already depressed by the merger’s adverse effects. In 2016Ma5394, 5395, 5396 (Apr. 14, 2022), the Court approved a “flexible” approach in fixing the valuation date/method to avoid unfairness to dissenting shareholders.
The Court held that: “Basing the buy-back price on a market price depressed by the merger’s effects is excessively unfavorable and irrational for dissenting shareholders.” (2016Ma5394 etc.).
Korean courts, when considering unlisted companies, have adopted a holistic approach, taking into account assets, income, book value, comparables, and market indicators to determine the “fair price.”
Enforcement of Shareholder Agreements & Voting Arrangements
The Korean Supreme Court and Korean courts have recently signaled a greater willingness to enforce shareholder/joint-venture voting agreements under specific conditions (differential rights justified by necessity and not directly harming other shareholders), indicating more respect for the freedom of contract in Korea.
We shall update the reader when additional cases are handed down by the Supreme Court. For more information on Korean Corporate Law & Compliance, please see: IPG Legal’s Korean Corporate Law and Compliance Archive.
by Sean Hayes
Sean Hayes 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. Sean is ranked, for Korea, as a Top Attorney by AsiaLaw, and IPG Legal is consistently ranked Top Dispute Resolution Law Firm for our litigation and arbitration services.
If you would like a consultation with Sean Hayes from IPG Legal, please schedule a call at: Schedule a Call with Attorney Sean Hayes.
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