[Startup Must-Know Laws] Strategic Operation of Shareholders' Meetings Through Shareholder Agreements

An Heecheol's Essential Startup Law

Heecheol Ahn, Attorney at Law, DLG Law Firm

A corporation is characterized by the separation of management and ownership. While the management of a corporation is conducted through a decision-making body called the board of directors, essential matters-such as amendments to the articles of incorporation or the appointment of directors-are determined by resolutions at the general meeting of shareholders, which represents the owners of the corporation. Decisions at the general meeting of shareholders are categorized as ordinary resolutions or special resolutions, depending on the matter at hand. An ordinary resolution requires approval by a majority of the voting rights of shareholders present and at least one-quarter of the total issued shares. A special resolution requires approval by at least one-third of the total issued shares and two-thirds of the voting rights of shareholders present. To strategically operate the general meeting of shareholders, it is necessary to specifically stipulate matters such as how voting rights will be exercised and the quorum for the general meeting by entering into shareholder agreements and similar arrangements.

A shareholder agreement is not merely a contract listing the rights and obligations of shareholders. It is a mechanism by which shareholders predefine how they will exercise their voting rights on certain agenda items, the standards for decision-making in the event of a management dispute, and what costs and penalties will be imposed if one party breaches the agreement. In practice, a shareholder agreement can be used to prearrange how certain shareholders will exercise their voting rights or to require that they express approval or opposition to specific matters. However, such agreements are only effective among the parties to the contract and do not affect the company or other shareholders. Furthermore, even if a shareholder exercises their voting rights in violation of the agreement, such exercise of voting rights remains valid under the Commercial Act. Therefore, it is necessary to stipulate penalties or damages for breach of contract.

Delegating voting rights through a shareholder agreement can also be used strategically. However, a comprehensive and indefinite delegation of voting rights may conflict with the inherent rights of shareholders as stipulated by the Commercial Act and could negatively impact corporate management, making it undesirable. In particular, granting an "irrevocable proxy" may conflict with the legal principles of termination of delegation under civil law and is likely to lead to disputes. Therefore, in practice, it is reasonable to limit the scope and duration of delegation and to clarify its purpose, rather than granting a blanket delegation.

A shareholder agreement can also be used to strengthen the quorum required for resolutions at the general meeting of shareholders. The Commercial Act clearly stipulates the quorum for ordinary and special resolutions at the general meeting, and these are mandatory provisions. However, Article 368, Paragraph 1 of the Commercial Act states that "unless otherwise provided by this Act or the articles of incorporation, resolutions of the general meeting shall be adopted by a majority of the voting rights of shareholders present and at least one-quarter of the total issued shares." Therefore, it is considered possible to strengthen the quorum through the articles of incorporation. Thus, by amending the articles of incorporation through a shareholder agreement to reinforce the quorum for resolutions at the general meeting, strategic operation of the general meeting of shareholders becomes possible.