[비즈한국] Ourhome and Namyang Dairy Products003920 have recently received court rulings to cancel the general shareholders' meeting resolutions from last year that approved compensation limits for company directors. Under the Commercial Act, company shareholders cannot exercise voting rights on meeting agendas that conflict with their personal interests. The issue in these cases was that the major shareholders, who were serving as directors at the time, participated in the vote to set their own compensation limits. These consecutive court rulings are seen as a wake-up call regarding the deeply rooted practice of "self-determined compensation" by major shareholders.
According to reports by BizHankook, Ourhome received a court ruling on the 27th of last month to cancel the general shareholders' meeting resolution from last year that approved the 2023 director compensation limit. Former Ourhome Vice Chairman Koo Bon-sung (38.56% stake), who had stepped down from management at the time, filed the lawsuit in May of that year, arguing that the voting by his sister, former Vice Chairwoman Koo Ji-eun (20.67%), and former director Koo Myung-jin (19.6%)—who were serving as directors—was illegal because the agenda passed with the approval of all other shareholders except himself. The approved director compensation limit at the time was 15 billion won, the same as the previous year.
Namyang Dairy Products also received a court ruling on May 31 to cancel a shareholders' meeting resolution of the same nature. After the agenda to set the director compensation limit at 5 billion won was passed at last year's regular shareholders' meeting, an auditor of the company, Attorney Shim, filed a lawsuit seeking the cancellation of the resolution, taking issue with the exercise of voting rights by former Chairman Hong Won-sik, who was both a director and the largest shareholder (54.7% stake, excluding treasury shares at the time). Attorney Shim is an auditor appointed by Cha Partners Asset Management, a private equity firm that holds a 3% stake in Namyang Dairy Products.
The background behind the cancellation of the shareholders' meeting resolutions at both companies lies in the exercise of voting rights by major shareholders who were also company directors. Under the Commercial Act, individuals who have a special interest in a resolution of a general shareholders' meeting cannot exercise their voting rights. This is because there is a concern that individuals with personal interests may exercise their votes to favor their own private gain rather than act in the interest of the shareholders. The Commercial Act restricts the exercise of voting rights by shareholders with conflicting interests to ensure the fairness of meeting resolutions. In the resolutions to approve director compensation limits at Ourhome and Namyang Dairy Products, directors and major shareholders Koo Ji-eun, Koo Myung-jin, and Hong Won-sik participated in the voting.
Last year's director compensation limit approval agendas at Ourhome and Namyang Dairy Products would have failed had the votes of the director-shareholders been excluded. According to the Commercial Act and the articles of incorporation of both companies, director compensation is determined by a general shareholders' meeting, requiring a majority of votes from attending shareholders and at least one-quarter of the total issued shares. In Ourhome's case, excluding the votes of directors Koo Ji-eun and Koo Myung-jin drops the approval rate from 61.44% to 35.43%; for Namyang Dairy Products, excluding Director Hong Won-sik's vote drops the approval rate from 82.69% to 41.41%. Both cases fall short of the required quorum.
The Seoul Southern District Court, which ruled to cancel Ourhome's shareholders' meeting resolution, stated, "It is reasonable to view Ourhome directors Koo Ji-eun and Koo Myung-jin as having a special interest, as they would be entitled to receive compensation within the set limits if the resolution passed. Therefore, the shares held by Koo Ji-eun and Koo Myung-jin should not have been counted in the number of voting rights of attending shareholders." The court concluded, "The resolution in question is illegal and must be canceled because it suffers from the flaw of having allowed individuals who should not have exercised their voting rights to do so." The reasoning behind the Namyang Dairy Products ruling was identical.
These consecutive rulings are sounding a warning against the long-standing practice of major shareholders "self-determining their compensation." Despite the Commercial Act's provision prohibiting the exercise of voting rights by those with a special interest, major shareholders who served as company directors had openly voted on director compensation limit agendas in the past. Typically, a corporation sets the overall director compensation limit at the shareholders' meeting, then the board of directors determines the individual compensation for each director. Until these recent rulings, the prevailing view in the legal community was that it was unrealistic to exclude voting rights on the total compensation limit agenda, rather than individual compensation.
Kang Jung-min, Policy Team Leader at the Economic Reform Alliance, pointed out, "According to the Commercial Act, which mandates limiting the voting rights of shareholders with a special interest in a meeting agenda, the votes of directors should be restricted on agendas determining director compensation limits. The recent rulings confirm the intent of the Commercial Act." He added, "Many companies currently ignore these restrictions, and they go unchallenged because no shareholders raise the issue. There is a need for practical guidelines to be distributed."
Some express concerns that such rulings could make it practically impossible to set director compensation. Kwon Jae-yeol, a professor at Kyung Hee University Law School, noted, "In the case of small, unlisted companies, most shareholders serve as directors. If you exclude the voting rights of shareholders who are directors while setting compensation limits, you could end up in a situation where there are no shareholders left to determine the limit. We need to wait for a Supreme Court ruling, but at present, I believe there are issues with this court decision."
Conversely, a source involved in a current lawsuit to cancel a director compensation limit resolution countered, "The provision limiting the voting rights of shareholders with a special interest is a fundamental pillar of the Commercial Act, yet I have never seen it practically enforced until now. If we don't have these rulings, that provision might as well be a dead letter. Legislative errors that cause practical issues should be resolved through legal amendments, not by bypassing court rulings."
If these rulings to cancel the approval of director compensation limits are upheld by the Supreme Court, the actual disbursement of director compensation is expected to be restricted. This is because the compensation limit approved at the shareholders' meeting serves as the legal basis for individual compensation payments. If the rulings are finalized, companies will have to retrospectively reset the compensation limits, which may result in lower director pay or potentially categorize previously paid compensation as unjust enrichment. In such cases, lawsuits for the return of unjust enrichment could potentially be filed.