THE REPRESENTATIVE DIRECTOR IN KOREAN COMPANIES

( by Andrew Baek , August 16, 2024 )

More often than not, foreign investors are puzzled by the corporate title of a Representative Director commonly found in Korean companies.

Simply put, the Representative Director is the highest management position in a stock company, or a limited company, incorporated under the laws of Korea, often likened to a CEO. However, there is a significant difference between these two roles, which can lead to misunderstandings. It is because of this difference that foreign-investor board members may perceive the Representative Director as insubordinate, while the Representative Director may view these board members as encroaching on their authority to execute the company’s affairs.

The difference lies in the nature of the positions: a CEO is typically an employee hired under a contract, accountable to, and operating under the supervision of, the board of directors (the “BoD”). In contrast, the Representative Director is elected among the directors and entrusted with representing the company, holding the authority to conduct all business affairs of the company, judicial and extrajudicial.

A Representative Director generally enjoys greater discretion in corporate management compared to a CEO. While a CEO operates under the close oversight of the BoD, the Representative Director is a voting member of the BoD and often serves as the chairperson at BoD meetings. As earlier said, the Representative Director is elected among the directors, and thus the Representative Director position is inherently tied to the directorship. Accordingly, a director remains a director regardless of whether they are elected to or removed from the Representative Director role, and a person can no longer be the Representative Director if they are removed from the director’s position.

All in all, it is advised that foreign investors fully consider the above and its ramifications when incorporating or investing in companies in Korea. A non-resident foreigner may well become the Representative Director of a company, or one may as well appoint someone locally to the position. If the latter, make sure that there is mutual trust built among those involved and that everyone shares a clear understanding of the direction towards which the company is heading.

In the context of a stock company, when a dispute arises between a shareholder—whether foreign or local—and the Representative Director, the shareholder may need to take legal action to compel the Representative Director to cease and desist from conducting specific business activities, or even from performing all duties, often times in matters related to financial activities.

The easiest way to address such a matter would be to remove the person from the Representative Director’s position by resolution at the BoD meeting. Where this is not possible, another way would be to remove the person from the director’s position altogether by special resolution at the shareholders’ meeting. If such resolution is not entered despite the fact that the Representative Director at issue has engaged in inappropriate activities or any grave fact in violation of any statute or the articles of incorporation of the company, then shareholders with 3% or higher share ownership can request the court of law to remove the director. If the shareholder has less than 3%, the shareholder still has the option to initiate a representative suit, which is similar to a derivative suit in the U.S., if the shareholder has at least 1% share ownership and the company does not file the suit itself despite the shareholder’s request to do so.

But in all cases above, the requirements are more stringent than those of a derivative suit in the U.S., and more importantly, it may take considerable time before the court reaches a final judgment. During this period, the Representative Director could potentially cause significant disruption. One possible way to restrain the Representative Director from engaging in further business activities under the legal system of Korea is the provisional disposition: the provisional disposition is a temporary measure comparable to the preliminary injunction in the U.S., and similarly, its purpose is to preserve certain rights before the final judgment of the court is entered on the merits of the main case, the main case being the request to the court for removal of the director or the derivative suit, mentioned above.

If you are involved in a management dispute involving the concerns addressed above, please feel free to contact us for further discussion. You can reach us via email at inpyeong@inpyeonglaw.com or by phone at +82 2038 2339.

End.