K&P Law Firm successfully represented shareholder X of Company A in a lawsuit that compelled CEO Y to return all compensation (including monthly salary, bonuses, and all other forms) and corporate card usage amounts to Company A.
Additionally, Z, who was the auditor of Company A, was held jointly liable and ordered to return Y's compensation to Company A in solidarity with Y.
1. Case Overview
Company A is a company engaged in the manufacture of sterilizers and other businesses. Y has been serving as the CEO of Company A since around March 8, 2018, and Z is serving as the auditor of Company A.
The plaintiff served as co-CEO of Company A along with Y from around March 8, 2021, to around March 4, 2022.
As of May 24, 2022, Company A had issued a total of 200,000 shares. The plaintiff owned 37,500 shares (approximately 18.75% of total shares), while Y owned 49,000 shares (approximately 24.5% of total shares).
Company A held a regular shareholders' meeting on March 8, 2021, appointing the plaintiff, Y, Kim OO, and Oh OO as internal directors, and Z as auditor. On the same day, Company A's board of directors appointed the plaintiff and Y as co-CEOs and passed a resolution to establish a "Joint Representative Regulation" limiting the representative rights to be exercised jointly by the plaintiff and Y. On the same day, the registration of this joint representative regulation was completed.
Y received a total of 362,082,260 won (hereinafter referred to as "the payment in question") from Company A under the name of "CEO salary" from around July 2015 to around December 2022, as detailed in the attached "Y's Compensation Payment Details."
2. Arguments of K&P Law Firm
A. Regarding Y
1. Article 388 of the Commercial Act stipulates that "The remuneration of directors shall be determined by a resolution of a shareholders' meeting if the amount is not fixed in the articles of incorporation." This remuneration includes all forms of compensation for directors' performance of duties, regardless of the name, such as monthly salary and bonuses, and severance pay or retirement allowances are also a type of remuneration paid for their duties during their tenure. This provision is a mandatory regulation to prevent directors from pursuing personal interests related to their remuneration and to protect the interests of the company, shareholders, and company creditors. Therefore, if there is no evidence to recognize a resolution of the shareholders' meeting regarding the amount, payment time, and payment method of directors' remuneration when the articles of incorporation state that directors' remuneration is to be determined by a resolution of the shareholders' meeting, directors cannot claim remuneration (Supreme Court Decision 2004Da25123, December 10, 2004; Supreme Court Decision 2018Da290436, April 9, 2020, etc.). The director bears the burden of proof regarding the existence of such a shareholders' meeting resolution (Supreme Court Decision 2015Da213308, September 10, 2015, etc.).
2. Article 361 of the Commercial Act stipulates that "A shareholders' meeting may pass resolutions only on matters provided for in this Act or in the articles of incorporation." These matters for resolution by the shareholders' meeting must be determined by the shareholders' meeting itself and cannot be delegated to other organs or third parties, even by the articles of incorporation or a resolution of the shareholders' meeting. Therefore, while it is possible for the articles of incorporation or shareholders' meeting to determine only the total amount or limit of executive remuneration and delegate specific matters such as individual directors' payment amounts to the board of directors, it is not permitted to comprehensively delegate matters concerning directors' remuneration to the board of directors (Supreme Court Decision 2016Da241515, 241522, June 4, 2020).
3. Y claims that "the decision regarding the payment of CEO Y's remuneration was unanimously delegated to CEO Y at the inaugural meeting," but there is no such record in Company A's inaugural meeting minutes dated July 14, 2015.
4. Although it is recognized that the regular shareholders' meeting of Company A on March 8, 2021, resolved to determine directors' remuneration by "board resolution," it is difficult to conclude that the board meeting held on the same day specifically determined the CEO's remuneration.
5. Considering that the amount paid to Y as salary increased each year without any board resolution regarding this, it cannot be considered that there was a board resolution or agreement of all shareholders regarding Y's remuneration, including its amount, payment time, and payment method.
6. Y argues that if the shareholders' meeting decided to pay remuneration to directors, the director's right to claim remuneration should be recognized even without a specific resolution of the board of directors. However, Company A only resolved at the regular shareholders' meeting on March 8, 2021, to determine directors' remuneration by board resolution, and it cannot be considered that the shareholders' meeting specifically determined the scope of Y's remuneration.
7. Given that Y's right to claim remuneration cannot be considered to have arisen despite the fact that neither the shareholders' meeting nor the board of directors determined a specific amount,
8. Considering the above points comprehensively, the evidence submitted by Y is insufficient to recognize that Y's remuneration was determined by a resolution of the shareholders' meeting or the board of directors, and there is no other evidence to support this.
B. Regarding Z
1. An auditor is a necessary permanent organ of a stock company with the authority to audit the execution of duties by directors, including accounting audits and overall business execution of directors. For business audits, the auditor has the authority to request reports on business from directors at any time or to investigate the company's business and financial status (Article 412 of the Commercial Act). If a director engages in an act that violates laws or the articles of incorporation and there is a risk of irreparable damage to the company, the auditor can request the director to cease such act (Article 402 of the Commercial Act). The auditor can also convene board meetings and extraordinary shareholders' meetings (Articles 412-3 and 412-4 of the Commercial Act) and has the authority to express opinions at board meetings (Article 391-2(1) of the Commercial Act). On the other hand, the auditor has the obligation to perform delegated tasks with the duty of care of a good manager towards the company, and when recognizing that a director has violated or is likely to violate laws or the articles of incorporation, the auditor must report this to the board of directors (Article 391-2(2) of the Commercial Act).
2. Given the authority and obligations of auditors prescribed by the Commercial Act as described above, if an auditor discovers a director's act that violates laws or the articles of incorporation but fails to take necessary measures, it should be considered that the auditor has not properly fulfilled their duty of care (Supreme Court Decision 2012Da20475, July 12, 2012, etc.).
3. Article 388 of the Commercial Act is a mandatory provision, and Y's act of arbitrarily setting and receiving remuneration without a resolution of Company A's shareholders' meeting or board of directors, in violation of Article 388 of the Commercial Act and Article 40 of Company A's articles of incorporation, can be considered a tort against Company A.
4. Given that Z is Y's brother-in-law and they have a very close relationship, and considering Z's position as the auditor of Company A, it can be inferred that Z was aware of Y's continuous receipt of remuneration from Company A.
5. Nevertheless, Z did not take any necessary measures regarding Y's illegal act, such as requesting to cease the act or reporting it to the board of directors or shareholders' meeting.
6. Z did not respond to the plaintiff's continuous requests, starting from around October 2021, to conduct an audit on Y's execution of duties and Company A's financial status, despite the plaintiff being a co-CEO and shareholder of Company A.
7. Therefore, Z, as the auditor of Company A, had an obligation to prevent the illegal act of co-CEO Y but failed to take necessary measures, thus enabling or facilitating Y's illegal act through inaction.
8. This constitutes aiding and abetting by intent or at least negligent aiding and abetting due to failure to fulfill the duty of care as an auditor as mentioned earlier.
9. Z's intentional or negligent aiding and abetting and Y's illegal act are objectively related and jointly caused a single result of Y receiving remuneration without legal grounds. There is also a proximate causal relationship with the damage to Company A, thus establishing joint tort liability.
3. Court's Decision
The court accepted the arguments of K&P Law Firm and ordered Y to return all compensation received and the full amount of corporate card usage to Company A. Simultaneously, the court ordered Z to pay the full amount of Y's compensation and corporate card usage to Company A in solidarity with Y.
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