Bridging the Divide: The Evolving Discourse on Shareholder Agreements in South Korea and the U.S.
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This article examines the evolving role of shareholder agreements in the governance structures of private companies operating in South Korea, emphasizing their increasing importance and the heightened judicial scrutiny surrounding their compatibility with the Korean Commercial Code (KComC). In contrast to the United States, particularly Delaware, where such agreements face fewer restrictions, the discourse in Korea is more intricate, where shareholder agreements that constrain board authority are often deemed to be in violation of the KComC’s mandatory provisions. Consequently, such agreements frequently rely on procure provisions and the prior-consent rights granted to select shareholders. However, procure provisions are generally considered invalid, while prior-consent rights are recognized only as narrow exceptions to the principle of equal treatment of shareholders, subject to stringent conditions. Recent developments in Delaware underscore ongoing debates about the appropriate level of judicial scrutiny to be applied to shareholder agreements. The Moelis case from the Delaware Chancery Court emphasized the risk of shareholder agreements being invalidated if they conflict with board-centric governance principles. This article advocates a reevaluation of Korea’s approach to shareholder agreements. It suggests that procure provisions be framed as “best-efforts obligations,” thus allowing shareholders to guide constituency directors while preserving directors’ discretion to make independent decisions. Furthermore, it calls for expanding the scope of consent rights to allow more flexible board constraints within closely held corporations—especially when imbedded in the articles of incorporation—going beyond mere contractual consent rights. The Delaware Abercrombie test could serve as a useful reference for determining the permissible limits on board authority. Ultimately, recognizing the autonomy of closely held companies to structure private arrangements through shareholder agreements necessitates the development of new frameworks that must address the fiduciary duties of controlling shareholders, effectively reducing the risk of such private arrangements being exploited for the exclusive benefit of a select few shareholders.
Abstract
This article examines the evolving role of shareholder agreements in the governance structures of private companies operating in South Korea, emphasizing their increasing importance and the heightened judicial scrutiny surrounding their compatibility with the Korean Commercial Code (KComC). In contrast to the United States, particularly Delaware, where such agreements face fewer restrictions, the discourse in Korea is more intricate, where shareholder agreements that constrain board authority are often deemed to be in violation of the KComC’s mandatory provisions. Consequently, such agreements frequently rely on procure provisions and the prior-consent rights granted to select shareholders. However, procure provisions are generally considered invalid, while prior-consent rights are recognized only as narrow exceptions to the principle of equal treatment of shareholders, subject to stringent conditions. Recent developments in Delaware underscore ongoing debates about the appropriate level of judicial scrutiny to be applied to shareholder agreements. The Moelis case from the Delaware Chancery Court emphasized the risk of shareholder agreements being invalidated if they conflict with board-centric governance principles. This article advocates a reevaluation of Korea’s approach to shareholder agreements. It suggests that procure provisions be framed as “best-efforts obligations,” thus allowing shareholders to guide constituency directors while preserving directors’ discretion to make independent decisions. Furthermore, it calls for expanding the scope of consent rights to allow more flexible board constraints within closely held corporations—especially when imbedded in the articles of incorporation—going beyond mere contractual consent rights. The Delaware Abercrombie test could serve as a useful reference for determining the permissible limits on board authority. Ultimately, recognizing the autonomy of closely held companies to structure private arrangements through shareholder agreements necessitates the development of new frameworks that must address the fiduciary duties of controlling shareholders, effectively reducing the risk of such private arrangements being exploited for the exclusive benefit of a select few shareholders.