Shareholder's Rights in Unlisted Companies

This article summarizes the general rights of a shareholder in an unlisted stock corporation (a "Chusik hoesa") under the Korean Commercial Code (KCC). An unlisted corporation is one that is neither listed on the Korea Stock Exchange nor registered for the purposes of trading on the KOSDAQ, the Korean over-the-counter market. The contents of this article may be of special interest to those readers who either own shares in an unlisted corporation or are considering the purchase of such stock.

I. General Summary

A company is essentially controlled by the shareholders and the board of directors ("BOD"). The shareholders, as the supreme corporate organ, have the power to pass resolutions concerning those fundamental matters specified in the KCC or the articles of incorporation ("AOI"). The KCC lists matters which require resolution at a shareholders' meeting, settlement of which cannot be derived from shareholder authority via the AOI. Further, the KCC also enumerates several matters which were originally reserved for board resolution, but which, under the prevalent view of the KCC, may be decided by the shareholders if the AOI so provides.

II. Matters Requiring Ordinary Resolution

Most matters to be decided at a general meeting of shareholders ("GMS") may be adopted by "ordinary" resolution of the shareholders, meaning a resolution adopted by a majority of the shares represented at a GMS, provided that such majority represents at least one-fourth of the total issued shares in the company. The company's AOI may further restrict or confine the voting or quorum requirement but may not relax such requirements. Examples of such ordinary resolution matters are as follows:

1. Election of a director or a statutory auditor (for the election of a statutory auditor of a company, whatever a shareholder's actual shareholding may be, a shareholder including its affiliates will only be able to exercise its voting rights up to a limit of 3 percent of the total issued shares of the company);

2. Election or dismissal of a liquidator;

3. Determination of remuneration of directors, statutory auditors or liquidators;

4. Approval of annual financial statements;

5. Declaration of cash or stock dividends; and

6. Approval of completion of the liquidation of the company.

III. Matters Requiring Special Resolution

Certain matters, however, require a "special" resolution of the shareholders, meaning a resolution adopted by a two-thirds vote of the shares represented at a general shareholders meeting ("GMS"), provided that such two-thirds represents at least one-third of the total issued voting shares in the company. As in the case of matters requiring an ordinary resolution, under the prevalent view of Korean law, the company's AOI may further restrict or confine the voting or quorum requirement but may not relax such requirements. The matters requiring a "special" resolution under the KCC are as follows:

1. Amendment of the articles of incorporation;

2. Transfer of the whole or of an important part of the business of the company;

3. Making, altering, or rescinding a contract for leasing the whole business, granting authority to manage such business, or sharing with another person all profits and losses in relation to the business or any similar contract thereof;

4. Acquiring the entire business of another company;

5. Entering into an agreement within two years of incorporation to acquire, for value equivalent not less than one-twentieth of the capital, property existing prior to its incorporation and intended to be continuously used for purposes of the business;

6. Dismissal of a director or a statutory auditor;

7. Issuance of shares at a price less than par value;

8. Reduction of paid-in capital;

9. Dissolution of the company;

10. Continuation of the company after its dissolution;

11. Approval of merger or consolidation; and

12. Appointment of organizing committees in case of consolidation.

IV. Matters Requiring Unanimity

Two matters as set forth below require the unanimous consent of all the company's shareholders:

1. Any release of a promoter or a director from liability owed to the company; and

2. Changing the company from a chusik hoesa (stock corporation) to a yuhan hoesa (limited liability company). Such procedure requires a resolution adopted at a GMS.

V. Specific Rights Provided by Law Protecting Minority Shareholders

In principle, a company may be ultimately controlled by a majority shareholder or a group of shareholders collectively holding a majority of shares through their ability to pass corporate resolutions and to elect directors. Although various veto powers are given to minority shareholders as a consequence of certain supermajority voting requirements under the KCC, such powers are not sufficient to protect minority shareholders. In this respect, the KCC confers certain special rights upon minority shareholders.

1. Shareholders holding one share have the following rights:

(a) The right to bring an action for revocation or nullification of a resolution of a GMS if convocation of the meeting or adoption of a resolution is in contravention of the law or the AOI;

(b) The right to inspect accounting documents (including the balance sheet, profit and loss statement, disposition of profit and loss, operating report and auditing report) and detailed documents thereof, and to receive a copy or abstract of such documents;

(c) The right to bring an action to declare the nullification of the issuance of new shares if there are defects in the issuance procedures; and

(d) The right to bring an action for the nullification of the incorporation of the company based on defects in such incorporation procedures.

 

2. Shareholders holding at least 1 percent of the total issued shares have the following rights:

(a) The right to demand that a director abstain from taking certain action in contravention of the law or AOI;

(b) The right to bring a derivative action and/or to demand the company bring action against promoters, directors, statutory auditors, or liquidators;

(c) The right to bring an action against those who acquired new shares at a materially low price in connection with the directors to disgorge the difference between a proper price and the actual paid price; and

(d) The right to bring an action against shareholders who derived benefits from the company in relation to their shareholder's right to disgorge such benefits.

 

3. Shareholders holding at least 3 percent of the total issued shares have the following rights:

(a) The right to apply to the court for dismissal of directors or auditors if such person acted dishonestly or in contravention of any law or the AOI and the resolution for dismissal of such directors or auditors was not adopted at the shareholders' meeting;

(b) The right to inspect the books and documents of accounts;

(c) The right to demand the convening of an extraordinary GMS;

(d) The right to have an inspector of accounts appointed by the court if there exist suspicion that any act was dishonest or in contravention of any law or the AOI;

(e) The right to request cumulative voting at a GMS, unless cumulative voting is prohibited under the AOI; and

(f) The right to apply to the court for the dismissal of a liquidator.

 

4. Shareholders holding in aggregate shares representing ten percent or more of the total issued shares have the following rights:

(a) The right to apply to the court for dissolution if corporate affairs are in a continual deadlock, and significant and irreparable injury to the company is being suffered or impending; or if the management or disposition of the company's property is grossly improper and thereby the existence of the company is endangered; and

(b) The right to apply to the court for reorganization of the company pursuant to the Corporate Reorganization Act, if the company is likely to succumb to insolvency.

VI. Other Mechanisms to Protect Minority Shareholders

To safeguard minority shareholders, the AOI of a company may provide for a quorum and higher thresholds for adopting shareholder resolutions, i.e., supermajority voting requirements. Such creation of a supermajority vote grants veto power to a small number of shareholders. A supermajority voting system, however, also readily causes deadlocks.

VII. Shareholders' Agreements

In theory and practice, all provisions of a shareholders' agreement will be enforceable under Korean law, as long as such provisions do not contravene public policy or violate the mandatory provisions of the law. The provisions of a shareholders' agreement may be incorporated in the AOI of a company to the extent that such provisions are related to the areas covered by the AOI, e.g., provisions restricting share transfers, election of directors, company procedures, etc. A shareholders' agreement on restraining voting power so that shareholders exercise their voting power in an agreed manner is also generally valid under Korean law, e.g., to ensure the election of a director nominated by a particular group of shareholders.

For more details, please contact

Bae, Kim & Lee

Tel: 82-2-3404-0000, Fax: 82-2-3404-0006