The Supreme Court of Korea recently ruled that an agreement between a director and a company providing for dismissal compensation in case of the director being dismissed is void in the absence of a shareholder resolution.
A former representative director of Bridge Securities Co. filed a lawsuit with the Seoul Central District Court against the former employer for payment of dismissal compensation amounting to some USD 700,000.00. The claim of the former representative director was based on the employment agreement between the former representative director and the company, which specified, among other things, that in the event of the employee being involuntarily dismissed, the company was required to pay him certain dismissal compensation.
The Seoul Central District Court ruled that the employee was not entitled to the compensation for the dismissal and the Seoul High Court affirmed the decision. The former representative director appealed the ruling of the lower courts, but the Supreme Court also concurred with the decision of the lower courts as it denied the appeal filed by the former representative director (Case 2004da49570).
In its ruling, the Supreme Court referred to Article 388 of the Commercial Act that provides that if the amount of remuneration to be received by directors has not been fixed by the articles of incorporation, it shall be determined by the resolution of a general meeting of shareholders. The Supreme Court stated that Article 388 of the Commercial Act is also applicable to the dismissal compensation matters, and, therefore, unless a specific amount is provided for in the relevant articles of incorporation or there exists a shareholder resolution approving the relevant dismissal compensation, the employer is not obligated to pay the dismissal compensation amount specified in the employment agreement.
The Supreme Court further stated that since a company is free to dismiss a director with or without a just cause pursuant to a special resolution of shareholders under the Commercial Act, recognition of director dismissal compensation in an employment agreement could interfere with, especially if the compensation amount is large, the free right to dismissal of directors by shareholders, leading to the restriction of stipulated functions of shareholder meetings under the Commercial Act.