Getting Rid of the Representative Director: Seven Corporate Governance Tweaks for Your Company

by Brendon Carr

Another day, another country manager to remove at short notice. Honestly speaking, as my practice has come to have more and more of an employment-law component over the years, I must have been involved in the termination of 200-250 employees including the most difficult of all—the Representative Director. These days it’s at least one of them per month.

It’s a fact of business that the management of a company—unless the management also owns the company—serves at the pleasure of the shareholder. And the corollary of this is that the management has to leave upon the displeasure of the shareholder. But the shareholder’s ignorance of Korean law and a failure to plan for this disaster can make things more difficult than need be—it’s not necessarily the client’s failure, but rather may also be described as a failure of the legal advisor to anticipate future needs. Just because a client hasn’t asked about the issue doesn’t mean it doesn’t exist. I admit having been as complacent as the next guy in this regard, which is why today I offer some tips based on hard experience.

Here are seven recommendations for corporate-governance practices which should be adopted by foreign-invested companies in Korea. Check your company’s Articles of Incorporation, and if necessary, schedule an amendment of the Articles:

  1. Increase Directors. Most foreign-invested companies start off with a Board of Directors comprised of three (3) directors, which under the older iterations of the Commercial Code was the minimum number required by law. Change the number of authorized directors from three to five, and appoint at least one more (a fourth) director. See the next item for the reason why.
  2. Keep a Spare Representative Director. Change the Representative Director system of the company from single R/D to multiple R/D, and appoint one of your headquarters-based officers as a second, independent Representative Director. Because a company must have at least one Representative Director, snap removal of the Korean-resident one—if necessary—is made very difficult if the company only has the minimum three directors and there is no other Representative Director already in office. But if you have four directors and one of them is another Representative Director, then poof!—a troublesome Korean-resident Representative Director may be removed overnight.
  3. Adopt Direct Election. By default, the Commercial Code provides that the Representative Director is elected by the Board of Directors from among its members. Convocation of the Board can take some effort because people travel or are otherwise unavailable. Change the election method for Representative Director from vote of the Board of Directors to direct election by resolution of the shareholders. This way, the shareholder cannot be frustrated in its desire to convene a meeting by the refusal of the Representative Director to attend the Board of Directors’ meeting.
  4. Shorten Directors’ Term of Appointment. Change the term of appointment for all directors and the statutory auditor from three years (the bog-standard Korean company would have a three-year term, which is the longest allowed by law) to one year. The reason to shorten the term of office from three years to one is that the Commercial Code gives sacked directors a right to claim compensation (their salary for the remaining balance of the appointed term) when removed “without cause”. The standard is less than the “just cause” required to sack an employee under the Labor Standards Act, so it’s not insurmountable, but things are made much easier when the potential liability—and therefore the company’s exposure in a dispute—is capped by a shorter term of appointment
  5. Open Up the Convocation Power. Allow any director to call a meeting of the Board of Directors, or a meeting of the shareholders. Another reason to have a second Representative Director is that by default under the Commercial Code, only the Representative Director has the power to convene a meeting of the shareholders. Sometimes in a control struggle the Representative Director, knowing his neck is on the chopping block, will refuse to convene a shareholders’ meeting and we are forced to go to court to obtain an order convening the meeting. But if there is a second Representative Director, that second Representative Director can convene the meeting. What if that second Representative Director is unavailable? If this recommendation has been adopted, any other director convenes the meeting, the shareholders resolve to axe the problem first Representative Director and things roll merrily along. This adds flexibility.
  6. Authorize Video Conference Meetings. The Commercial Code does authorize meetings of the Board of Directors to be held by the telecommunications-based method of video conferencing, as well as in person. By contrast, telephone conferencing is not allowed. Modern technology permits for recording and archiving of computer-based conferencing, which is recommendable for evidentiary value.
  7. Authorize Meetings Anywhere. By default, it is expected that meetings of the Board of Directors and the Shareholders should be held in the registered headquarters of the company. Amend the Articles of Incorporation to permit meetings anywhere in the world.

We can’t promise that these recommendations will cure all your heartaches, but they should strengthen the shareholder’s hand and reduce operational impacts in the case of the need to terminate the Representative Director.

July 21, 2007 | Filed Under Company and Commercial Law, Employment Law

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