Joint Venturing Tips: “Veto” Rights for One-Third Shareholders
by Brendon Carr
Today a question came in from a client apparently intending to form a joint venture in Korea—the question concerned what kind of “veto” rights a shareholder would have under Korean law if he held 1/3 of the voting rights in a Korean corporation.
For the purpose of clarity, note that this applies to a non-listed joint stock company, which is the type that comprises most foreign-Korean joint ventures.
The short answer is: None. To have a “veto” over certain major events of the company, which under the Commercial Code require an Art. 434 supermajority vote, the shareholder must have one-third plus one share. Art. 434 provides that a supermajority shall be a resolution approved by 2/3 of the shareholders in attendance at the shareholders’ meeting, provided that the approving votes comprise at least 1/3 of the total issued and outstanding voting rights.
So with only 1/3 of the shares, a shareholder couldn’t even block approval of the Art. 434 supermajority events. (What are these supermajority events? Well, as a general rule they are so-called “life changing” events like a merger, consolidation, spin-off of a major part of the business, capital reduction, etc.—but importantly, removal of the Representative Director. Election of a director takes only a simple majority, but removal of a sitting director takes an Art. 434 2/3 supermajority.
Where the Articles of Incorporation so specify, a company can be required to seek a greater-than-2/3 supermajority for Art. 434-type corporate actions. The simple majority required for approval of resolutions can also be increased. If you’re going to hold 1/3 of shares or fewer in a Korean corporation, and think you ought to have a veto of some sort, better have a Shareholders’ Agreement and insist on amendment of the Articles of Incorporation of the joint venture company to raise approval thresholds to match the ratio you hold.
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