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When dealing with a Korean company, you may have heard that you should review the counterparty's board meeting minutes before signing. This is especially true when the counterparty is a director of that company or a party with a special relationship to a director. Under Article 398 of the Korean Commercial Act on director self-dealing, prior board approval determines whether the transaction is enforceable.

[Table of Contents]

1. What is director self-dealing?

2. No prior approval means the transaction is void in principle

3. Formulaic resolutions do not count as lawful approval

4. Items to verify in the board minutes

5. Asserting invalidity: the limits of bad faith and gross negligence

What is director self-dealing?

Article 398 of the Commercial Act (상법 제398조) requires that, before a director transacts with the company for the director's own account or that of a third party, the director disclose the material facts of the transaction to the board and obtain approval of at least two-thirds of the directors. Typical scenarios include transactions where the director is the counterparty, the director represents another company, or the counterparty is the director's spouse or lineal ascendant/descendant.

This rule serves as a conflict-of-interest control mechanism, preventing directors from sacrificing the company's interests for personal gain and protecting minority shareholders.

No prior approval means the transaction is void in principle

In practice, parties sometimes close the deal first and seek ratification by a later board resolution. However, the Korean Supreme Court has clarified that a self-dealing transaction lacking prior board approval is void in principle, and subsequent ratification does not generally cure the invalidity absent special circumstances.

What matters is whether approval existed at the time of the transaction. After-the-fact ratification is not a reliable cure.

Formulaic resolutions do not count as lawful approval

Even when a prior resolution exists, it must be substantive. A blanket resolution stating something like “ordinary transactions are permitted” without specifying the self-dealing transaction is not recognized as lawful approval.

A valid board resolution should specifically address the counterparty, the substance and terms of the transaction, the fact that it is a conflict-of-interest transaction, and the board's review of the fairness of the terms.

Items to verify in the board minutes

If the counterparty is a director of the company or has a special relationship with a director, the safest course is to review the counterparty's board minutes directly before signing. Items to confirm include:

• The specific identity of the counterparty

• The concrete content and terms of the transaction

• An explicit notation that it is a conflict-of-interest transaction

• The board's review of the fairness of the terms

Without these four items clearly recorded, challenging the transaction's validity in a later dispute becomes significantly harder.

Asserting invalidity: the limits of bad faith and gross negligence

Conversely, if a company demands performance under a transaction that lacked prior approval, the counterparty may have grounds to argue invalidity and avoid the obligation.

However, the Supreme Court's “absent special circumstances” caveat matters. If the counterparty's bad faith or gross negligence is established, an invalidity claim may fail. Each case requires a careful factual analysis.

Cheongchul Law Firm has represented both companies and counterparties in disputes involving director self-dealing, defective board resolutions, and Article 398 of the Commercial Act. If you need a review of board minutes, an invalidity argument, or a compliance framework, please contact Cheongchul Law Firm.

This article is provided for general informational purposes only and does not constitute legal advice. Please consult a qualified attorney for advice on your specific situation.