If the regular general meeting of shareholders approves the director compensation limit the same as last year, there will be a big problem.

This article is a contribution by Attorney Hee-chul Ahn of DLG Law Firm. If you would like to share quality content for startups in the form of a contribution, please contact the Venture Square editorial team at editor@venturesquare.net .

As the regular general shareholders' meeting season approaches, many companies repeatedly bring up one agenda item: the "limit on director compensation." As stipulated in Article 388 (Director Compensation) of the Commercial Act, "If the amount of director compensation is not specified in the articles of incorporation, it shall be determined by resolution of the general shareholders' meeting," most companies do not specify director compensation in their articles of incorporation. Instead, they approve a total compensation limit for all directors at the annual general shareholders' meeting, and within that limit, the board of directors determines the compensation and payment standards for individual directors. This procedure and method has long been established as customary practice and has been implemented without major issues in practice.

However, the Namyang Dairy Products director compensation limit case, finalized by the Supreme Court in the spring of 2025, overturned this familiar practice. This case is an example of the judiciary's clear position on whether the director compensation limit simply approved the compensation of all directors, regardless of their affiliation, or whether it directly relates to the interests of individual directors. Namyang Dairy Products proposed a proposal to set the total director compensation limit at 5 billion won at its 2023 regular shareholders' meeting. Former Chairman Hong, then the largest shareholder and an inside director, voted in favor, and the motion passed. However, the company's standing auditor determined that the resolution was flawed. The court ruled that the resolution was unlawful because, as a director, Chairman Hong had a direct interest in the compensation limit resolution and thus qualified as a "person with a special interest" as defined in Article 368, Paragraph 3 of the Commercial Act.

This argument was accepted by both the first trial (Seoul Central District Court, May 31, 2024, Case No. 2023GaHap66328) and the second trial (Seoul High Court, January 22, 2025, Case No. 2024Na2027590, 2024Na2051821). The courts noted that the resolution on the limit on director compensation is not simply an abstract decision made for the purpose of managing the company's overall costs, but that the moment the resolution is passed, the directors are placed in a position to receive compensation within the limit. In other words, the resolution on the limit on compensation is a legal act that grants individual directors the possibility to receive compensation, and this is a personal economic interest that is distinct from the general interests of shareholders (the Supreme Court has previously ruled that a "special interest" means a case where a director has a personal interest regardless of the position of a shareholder, and the special interest in this case was also determined based on the same standard). This decision was confirmed by the Supreme Court when it dismissed the appeal on April 24, 2025 (Supreme Court Decision 2025da210138, April 24, 2025).

The implications of this ruling are by no means light. While in practice, if a shareholder meeting resolution directly determines the compensation of an individual director, that director's voting rights may be restricted due to special interests, resolutions setting compensation limits for all directors are generally considered comprehensive and neutral, and thus, special interests are not a concern. Consequently, individual directors have participated in the resolution. However, this time, the court has ruled that a resolution setting compensation limits for all directors also directly relates to their individual financial interests, and in this case, they are subject to special interests, and therefore, cannot exercise voting rights. This means that compensation is not a secondary element of the governance structure, but rather a core area where management and corporate assets directly interact. Conflicts of interest that may arise during this decision-making process must be strictly controlled by the system.

This Supreme Court legal ruling has significant implications, particularly for companies preparing for the 2026 first half of the year. The director compensation limit agenda is no longer a matter that can be handled merely as a formality. Failure to carefully examine in advance whether any shareholders participating in the resolution are directors subject to the resolution, whether the voting rights exercised by such shareholders have a substantial impact on the resolution's passage, and whether the quorum is met if such voting rights are excluded runs the risk of the resolution itself being subsequently revoked or rendered invalid. This risk is particularly acute for companies where the controlling shareholder serves as a registered director. This is because agenda items are often passed with the approval of the controlling shareholder even when minority shareholders oppose them. The Namyang Dairy Products case arose within this very framework. If the voting rights of special interests are excluded, the very premise of the resolution's passage could be compromised, leaving the company directly exposed to the legal risk of the resolution's revocation or invalidation.

The problem doesn't end here. If the resolution to cap director compensation is revoked, the dispute could escalate to questions about the legality of compensation paid based on that resolution, and even to issues of severance pay or liability for damages. In other words, a single procedural or substantive flaw at a general shareholders' meeting could trigger a long-term, complex legal dispute. So, what should companies prepare for? First, they should clearly identify in advance who are directors and shareholders who could be considered special stakeholders in relation to the director compensation cap agenda. This should be determined not simply by their high stake, but by whether they are subject to the resolution itself. Second, the quorum calculation and the procedures for conducting proceedings should be designed in advance, anticipating the potential for such voting restrictions. These are not matters that can be decided on the spur of the moment on the day of the general shareholders' meeting. Third, they should provide a more thorough explanation and justification for the compensation cap resolution. When you can explain to shareholders how total compensation is linked to the company's performance, accountability, and risk management systems, you can avoid unnecessary disputes related to compensation.

Resolutions on director compensation limits can no longer be relied on conventional wisdom. Shareholders' meetings must function as substantive controls, transcending formalities. In cases where conflicts of interest are likely, appropriately stringent standards must be applied. The 2026 annual general meeting of shareholders is likely to be the first test of the legal principles of the aforementioned Supreme Court precedent, fully reflected in corporate practice. What's needed now is to avoid following existing practices and instead accurately understand the clearly established intent of the aforementioned Supreme Court precedent and faithfully reflect it in the conduct of the general meeting of shareholders.

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Attorney Heechul Ahn 010-9135-4773 / heechul.an@dlglaw.co.kr
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