K&P Law Firm has achieved a victory in a derivative lawsuit where shareholder X (hereinafter "Plaintiff") filed a compensation return claim against CEO A (hereinafter "Defendant") on behalf of Company Y.
According to Article 388 of the Commercial Act, a director of a corporation can only receive compensation if it is determined by either the articles of incorporation or a resolution of the shareholders' meeting. If a director receives compensation without such provisions in the articles of incorporation or a shareholders' meeting resolution, the director must return the compensation to the company.
K&P Law Firm, representing the company's shareholder, first sent a written notice to Company Y requesting that they "file a lawsuit demanding the CEO return all received compensation to Company Y." When Company Y failed to comply, we proceeded with filing a derivative lawsuit.
The summary of the lawsuit is as follows:
1. Defendant's Arguments
The defendant claimed that the shareholders' meeting had guaranteed the compensation levels of the CEO and two employees at the February 2021 level, specifically determining the amount of compensation to be paid. Therefore, the director's right to claim compensation should be recognized even without a separate board resolution.
They also argued that even in cases without a shareholders' meeting resolution, if the situation can be normatively evaluated as equivalent to having had a shareholders' meeting resolution, the director's right to claim compensation should be recognized.
The defendant further contended that specific compensation was determined through shareholder consultations that functionally served as a shareholders' meeting, and this was reflected in the actual shareholders' meeting. Although the subsequent board meeting omitted the resolution regarding director compensation, since the shareholders' meeting had agreed to maintain wages at the February 2021 level, and the director's monthly salary would only require amount verification, the director's right to claim compensation should be recognized even without a board resolution.
They also argued that it was an abuse of rights for the plaintiff to file a lawsuit based on board meeting minutes that the plaintiff themselves had omitted.
The defendant maintained that after conflicts arose between the plaintiff and defendant, key shareholders met and reached an agreement, which was documented as consultation content for Company Y. This agreement included guaranteeing CEO A's salary at the current level (March 2021), and a shareholders' meeting was held according to this agreement, though the resolution was merely omitted from the meeting minutes.
2. K&P Law Firm's Rebuttal
a. Articles of Incorporation and Precedents
Article 40 of Company Y's articles of incorporation states that "The compensation and retirement pay of directors and auditors shall be determined by the board of directors within the scope set by the shareholders' meeting."
Supreme Court precedent also holds that while it is possible for the articles of incorporation or shareholders' meeting to set only the total amount or limit of executive compensation and delegate specific matters regarding individual directors' payments to the board of directors, comprehensive delegation of directors' compensation matters to the board of directors is not permitted (Supreme Court Decision 2016Da241515, 2016Da241522, delivered on June 4, 2020).
This case involves comprehensive delegation of directors' compensation matters to the board of directors, making the March 8, 2021 shareholders' meeting resolution invalid according to both the articles of incorporation and Supreme Court precedent.
b. Regarding the Claim that the February 20, 2021 Agreement for Company Y was Equivalent to a Shareholders' Meeting
Some shareholders did not participate in this meeting.
Therefore, the February 20, 2021 meeting claimed by the defendant cannot be characterized as either a board meeting or a shareholders' meeting. Even if shareholders holding enough shares to satisfy the voting requirements for a shareholders' meeting agreed or approved, this cannot be considered equivalent to a shareholders' meeting resolution.
This is consistent with Supreme Court precedent:
Supreme Court Decision 2016Da241515, 2016Da241522 (June 4, 2020):
In the case of a single-shareholder company where all shares are owned by one person, a shareholders' meeting is established when that sole shareholder attends as a general meeting, and it is clear that resolutions will be made according to that shareholder's will. For this reason, even if there are defects in the shareholders' meeting convocation procedure or if minutes are not prepared, if the single shareholder's intention matches the content of the shareholders' meeting resolution, evidence can establish that such a resolution existed. However, this legal principle only applies to single-shareholder companies. In companies with multiple shareholders, absent special circumstances, the fact that shareholders holding enough shares to satisfy the voting requirements agreed or approved cannot be considered equivalent to having held such a resolution at a shareholders' meeting.
c. Regarding the Claim that Denying Director's Right to Compensation Due to Omission in Shareholders' Meeting Minutes Violates Good Faith Principle
(1) Not an Omission but Absence of Resolution
The scope of director compensation was never resolved at the shareholders' meeting. There is no mention of it in the March 8, 2021 shareholders' meeting minutes submitted by the defendant.
According to Article 373(2) of the Commercial Act, shareholders' meeting minutes must be signed or sealed by the chairman and attending directors. Accordingly, the March 8, 2021 shareholders' meeting minutes were sealed by Company Y's directors: the plaintiff, defendant, and others 1 and 2. The defendant, in particular, as chairman of the shareholders' meeting, held final responsibility for preparing the meeting minutes.
Furthermore, reviewing the shareholders' meeting minutes, representative 3 of the shareholders (including the plaintiff, defendant, and other shareholders) stated that the minutes' contents were truthful.
Therefore, claiming omission from meeting minutes prepared under the defendant's responsibility not only contradicts objective facts but also represents a self-contradictory argument denying their own responsibility.
(2) This Case Is Not Related to Good Faith Principle Violation
Article 388 of the Commercial Act is a mandatory provision protecting the interests of the company, shareholders, and company creditors. The February 20, 2021 agreement meeting for Company Y included only some shareholders, and its contents were never communicated to all shareholders.
This is a derivative lawsuit where the plaintiff, as a shareholder of Company Y, is proceeding on behalf of Company Y, that is, for the company and other shareholders.
Although the formal parties are the plaintiff and defendants, since the actual parties are Company Y and the defendant, claims regarding good faith principles cannot be established.
Supreme Court Decision 2018Da290436 (April 9, 2020):
Article 388 of the Commercial Act stipulates that if the amount of director compensation is not specified in the articles of incorporation, it shall be determined by shareholders' meeting resolution. This is a mandatory provision aimed at preventing directors from pursuing personal interests regarding their compensation and protecting the interests of the company, shareholders, and company creditors. Therefore, when the articles of incorporation stipulate that director compensation shall be determined by shareholders' meeting resolution, directors cannot exercise their right to claim compensation without evidence of a shareholders' meeting resolution regarding the amount, payment method, and timing. "Director compensation" includes all forms of payment made as compensation for performing director duties, regardless of name, including monthly salary and bonuses, as well as performance-based payments or incentive payments made by the company under names such as performance bonus or special performance bonus.
d. Regarding the Claim of Omitted Compensation Details in Board Meeting Minutes
Director compensation was not resolved at the March 8, 2021 board meeting. There is no mention of it in the March 8, 2021 board meeting minutes submitted by the defendant.
The March 8, 2021 board meeting minutes, in accordance with Article 391-3(2) of the Commercial Act, bear the seals of Company Y's directors (the plaintiff, defendant, directors 1 and 2) and auditor 4, and their representative 3 stated that the minutes' contents matched their statements.
Furthermore, the defendant, as board chairman at the time, held final responsibility for preparing the board meeting minutes. Therefore, the defendant's claim of omitted board meeting entries contradicts objective facts and represents a self-contradictory argument denying minutes prepared under their own responsibility.
3. Court's Decision
The court accepted K&P Law Firm's arguments and ruled entirely in favor of the plaintiff.
As a result of this lawsuit, the defendant must return all received monthly salaries to Company Y.
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