Hello, this is Cheongchul Law Firm.

Sometimes a director causes the company harm, yet the company does not hold that director responsible at all. If the director who should be held liable runs the company or is close to other management, it is not easy for the company to sue on its own. The shareholder derivative suit (주주대표소송) is the system that allows a shareholder to sue the director on the company's behalf in such cases.

Following the order in which a derivative suit actually proceeds, this article explains what to include in the written demand sent to the company, when you do not have to wait 30 days, and what to know during and after the lawsuit. How to stop a director's act before harm occurs is covered in How Shareholders Can Stop a Director's Unlawful Act.

[Contents]

1. Shareholder Derivative Suits – Shareholders Exercise the Company's Right on Its Behalf

2. Step One – Make a Written Demand to the Company Stating the Reasons

3. Why You Wait 30 Days, and When You Do Not Have To

4. After Filing – Notice of Suit, the Company's Intervention, Security and Venue

5. How It Ends and What It Costs – Court Approval of Settlement, Winning and Losing

Shareholder Derivative Suits – Shareholders Exercise the Company's Right on Its Behalf

If a director, intentionally or negligently, violates any Act or the articles of incorporation or neglects their duties and thereby causes the company harm, the director is liable to compensate the company (Article 399(1) of the Commercial Act (상법)). Because this claim for damages belongs to the company, the company is in principle the one that should sue the director.

In case the company does not act, Article 403 of the Commercial Act allows a shareholder holding at least 1% of the total issued shares to file suit directly on behalf of the company. As the name suggests, it is a lawsuit in which a shareholder exercises the company's right 'as its representative,' and if the suit succeeds, the damages go to the company, not the shareholder. Several shareholders may combine their holdings to reach 1%, and listed companies have a special rule that lowers the shareholding requirement on condition of a holding period.

It is also worth knowing that a director's liability can be waived only with the consent of all shareholders (Article 400(1) of the Commercial Act). This means the director's liability does not disappear merely because management decided not to pursue it.

Step One – Make a Written Demand to the Company Stating the Reasons

A shareholder cannot file suit right away. The shareholder must first demand that the company file a suit to hold the director liable, and this demand must be made in writing stating the reasons (Article 403(1) and (2) of the Commercial Act). In practice this document is called a demand letter (제소청구서), and it is often sent by certified-content mail so that the date and content are recorded.

The Supreme Court held that the 'reasons' in the demand letter must include the director to be held liable and the facts giving rise to the liability, so that the company can decide whether to sue. However, since a shareholder cannot know everything inside the company, even if the director's name is missing or the facts are stated somewhat generally, the requirement is met if the company can specifically identify them by combining the letter with company records such as board minutes (Supreme Court Decision 2018Da298744, July 15, 2021).

The same decision held that if a shareholder sues without submitting a demand letter at all, or bases the claim on facts entirely unrelated to those stated in the demand letter, the derivative suit is unlawful absent special circumstances such as grounds permitting an immediate suit. By contrast, if the claim is based on the facts in the demand letter and merely applies a different legal assessment, it is lawful, and such a claim may even be added during the suit. In the end, stating the transactions and acts in question completely in the demand letter defines the scope of the later lawsuit.

Why You Wait 30 Days, and When You Do Not Have To

If the company does not file suit within 30 days of receiving the demand, the shareholder may then file suit on behalf of the company (Article 403(3) of the Commercial Act). This period gives the company, as the owner of the right, the first chance to decide, and prevents abusive suits by shareholders.

There is an exception. If waiting 30 days is likely to cause the company irreparable harm, the shareholder may file suit immediately (Article 403(4)). There must be time-sensitive circumstances, for example where the director to be held liable is trying to divert assets or the limitation period is about to expire, and the shareholder filing suit must concretely show those circumstances.

Recently, the Supreme Court held that even if a suit was filed without properly going through the demand procedure, the defect is cured if special circumstances show that the company would not respond to the demand, such as the company expressly stating during the suit that it will not sue the director (Supreme Court Decision 2024Da216743, June 12, 2025). It was a case against the representative director, in which the company replied that 'it is hard to accept that the representative director should sue himself.' However, since this was an exceptional remedy, it is safer to make the demand first as the rule requires.

After Filing – Notice of Suit, the Company's Intervention, Security and Venue

A shareholder who has filed suit must give notice of the suit to the company without delay, and the company may intervene in the suit (Article 404 of the Commercial Act). This is to let the company know about the suit and give it a chance to protect its own right.

A derivative suit must be filed with the district court at the location of the company's head office (Articles 403(7) and 186 of the Commercial Act). In addition, if the defendant requests security by making a prima facie showing that the shareholder's claim is in bad faith, the court may order the shareholder to provide adequate security (Articles 403(7), 176(3) and 176(4) of the Commercial Act). Filing suit first without sufficient grounds can draw you into such disputes, so it is advisable to secure materials first, for example through inspection of accounting books.

Even if the shareholder's holding falls below 1% after filing, the effect of the suit is not affected. The exception is where the shareholder no longer holds any shares at all (Article 403(5) of the Commercial Act).

How It Ends and What It Costs – Court Approval of Settlement, Winning and Losing

Once a derivative suit is filed, the parties cannot withdraw the suit, waive or acknowledge the claim, or settle without court approval (Article 403(6) of the Commercial Act). This safeguard prevents the shareholder and the director from settling for a small amount behind the company's back. If the plaintiff and defendant colluded to obtain a judgment for the purpose of harming the company's right, the company or a shareholder may even file an action for retrial against the final judgment (Article 406(1) of the Commercial Act).

If the shareholder wins, the shareholder may claim from the company the litigation costs and a reasonable amount of other expenses incurred for the suit, and the company that paid may seek reimbursement from the director (Article 405(1) of the Commercial Act). Conversely, even if the shareholder loses, the shareholder is not liable to compensate the company unless acting in bad faith (Article 405(2)).

In short, a shareholder derivative suit proceeds by first making a written demand to the company stating the reasons, then either waiting 30 days or making a prima facie showing of urgent circumstances to sue immediately. The content of the demand letter defines the scope of the suit, and procedures such as notice of suit, security and court approval of settlement follow even after filing. Shareholders are not powerless just because the company does not act, but the right can be used properly only if the first written demand is prepared accurately.

Cheongchul Law Firm directly handles corporate law cases, including the exercise of minority shareholder rights, inspection and copying of accounting books, and shareholder derivative suits. If you are considering proceedings to hold a director liable, please contact us through consultation booking.

This post is written for the purpose of providing legal information and does not constitute legal advice on any specific matter. Since conclusions may differ depending on the facts of each case, please be sure to consult a professional.