This article was published on April 29, 2025, at 10:31 a.m. on the ChosunBiz MoneyMove site.
The Supreme Court ruled that Hong Won-sik, former chairman of NAMYANG DAIRY PRODUCTS, acted illegally by voting in favor of his compensation limit approval. After a two-year legal battle, Hong has ultimately lost.
The financial investment industry and legal circles consider this ruling significant. With the Supreme Court precedent stating that a registered director-shareholder should not exercise voting rights on matters concerning their own compensation limits, it is expected to become more challenging for corporate owners to set compensation limits as they wish starting from next year's regular shareholders' meeting. Especially for companies in management disputes, this precedent has increased the potential for minority shareholders to use it as a 'weapon.'
◇ “Registered inside directors who are shareholders cannot exercise voting rights on their own compensation limits”
According to investment banking (IB) industry sources and legal circles on the 29th, the Supreme Court dismissed the appeal in the case brought by Shim Hye-seop, the auditor of NAMYANG DAIRY PRODUCTS, against the resolution of the shareholders' meeting on the 24th. (Related article☞[Exclusive] Hong Won-sik, former chairman of NAMYANG DAIRY PRODUCTS, ultimately lost in the 'self-approval of compensation limit' lawsuit)
On 4th of 2023, Shim Hye-seop, the auditor of NAMYANG DAIRY PRODUCTS, alleged issues with the 'Board of Director’s compensation limit' item in the regular shareholders' meeting resolution and filed a lawsuit for resolution cancellation. Auditors can file a cancellation lawsuit within two months if they deem the resolution to be unfair.
In that year's regular shareholders' meeting, the compensation limit for directors was set at 5 billion won. The issue raised by the auditor Shim was that Hong voted in favor of this resolution. Article 368, Section 3 of the Commercial Act states, 'A person with a special interest in the resolution of the general meeting shall not exercise voting rights.' At the time, Hong was the largest shareholder and inside director, owning more than half of NAMYANG DAIRY PRODUCTS shares.
Generally, the setting of a director’s compensation limit occurs in two stages. The common compensation limit applied to directors is subject to the general resolution of the shareholders' meeting. It must be approved by a majority of attending shareholders' votes and at least one-fourth of the total issued shares.
Once the compensation limit passes at the shareholders' meeting, the individual compensation amounts for directors are determined by the board of directors. For example, if there are three directors, A, B, and C, then A's compensation is decided by directors B and C, while B's compensation is set by directors A and C.
The reason for adopting this method is that it is viewed as a violation of the Commercial Act for a director to determine their own compensation. However, when determining the overall compensation limit for the board, the voting rights of major shareholders are recognized, as this is practically unavoidable.
A capital market specialist lawyer noted, “In the case of unlisted companies, many have a representative director holding 100% equity, and in such cases, only one person, the representative, can set the compensation limit. If the representative cannot exercise voting rights due to being an interested party, then the compensation limit issue may not pass through the shareholders' meeting. Thus, it has been operated in a manner where they participate in the approval stage of the compensation limit but the specific compensation amounts are determined by the board of directors.”
However, this Supreme Court ruling stipulates that interested parties, namely major shareholders who are inside directors, should not exercise voting rights even at the compensation limit approval stage.
◇ Corporate governance dispute-stricken companies face a direct blow… What if they resign from the registered director position?
With the establishment of Supreme Court precedent, it is expected that starting from next year's regular shareholders' meeting, registered director-shareholders will be completely barred from exercising voting rights on compensation limits.
An IB industry source stated, “Until the shareholders' meeting in March this year, most believed ‘we should wait for the Supreme Court ruling for NAMYANG DAIRY PRODUCTS to come out’, allowing major shareholders to exercise their voting rights on compensation limits, but that will be impossible starting next year.”
In particular, companies involved in management disputes are expected to be significantly affected by this ruling. In cases where the equity ratios between major and second shareholders or minority shareholders are not significantly different, there is a high possibility that a major shareholder who wants to increase the compensation limit will fail if the second shareholder opposes.
This could further become a weapon to shake the board where the major shareholder sits. If a major shareholder disregards this ruling and votes in favor of the approval of the compensation limit, and if the second shareholder files a lawsuit for revocation of the resolution, then not only would the major shareholder's compensation limit be disapproved, but also that of the outside directors, thus eliminating the basis for paying compensation to all directors for one year. An IB industry source mentioned, “Outside directors of companies in management disputes are generally persons loyal to the current major shareholder. If the basis for these individuals to receive compensation disappears, it could lead to scenarios where the board of directors collapses.”
Of course, the major shareholders have countermeasures against this ruling. For example, a major shareholder who is a registered director could step down to become an unregistered executive, a 'trick' considering that the compensation limit for unregistered executives is not subject to shareholders' meeting resolutions.
However, this also carries legal risks. First of all, the compensation regulations for unregistered executives can also be determined at shareholders' meetings. Minority shareholders can propose guidelines through resolutions.
Another issue is taxation. A capital market specialist lawyer warned, “If a representative director received 2 billion won, but an unregistered executive who is a major shareholder got 3 billion won, then the National Tax Service may consider this excessive compensation and deny it.”
In reality, there are many such cases. Kim Seung-yeon, chairman of Hanwha Group, and Lee Myung-hee and Chung Yong-jin, chairpersons of Shinsegae Group, are receiving higher pay as unregistered executives than as registered executives. The lawyer stated, “If the National Tax Service aims to investigate these individuals, it can certainly do so, and it is essentially suggested that owners should not take excessive compensation but instead share profits equally with other shareholders through dividends.”
Furthermore, the role of auditors is expected to be enhanced in the future. In this case, the auditor of NAMYANG DAIRY PRODUCTS raised the issue that led to the Supreme Court ruling. In other words, if a company selects one good auditor on their side, they may gain an advantageous position in management disputes.