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One of the first questions shareholders ask when considering a shareholder derivative suit (주주대표소송) is about costs. If you spend your own money and time suing on the company's behalf, only for the damages to go to the company if you win and to bear the costs if you lose, it is hard to step forward.

This article explains how costs are allocated in a derivative suit at three points: when filing, when winning, and when losing. Procedures such as the demand to sue and the 30-day wait are covered in If the Company Does Nothing About a Director's Wrongdoing, Shareholders Can Step In (Korean).

[Contents]

1. Even If You Win, the Damages Go to the Company

2. Costs of Filing – Stamp Fees and Security

3. If You Win – Claim a 'Reasonable Amount' of Your Expenses From the Company

4. If You Lose – The Opponent's Litigation Costs and Liability to the Company Are Different

5. Injunction Demands and Derivative Suits – Prevention and After-the-Fact Liability

Even If You Win, the Damages Go to the Company

A shareholder derivative suit is not a lawsuit to recover the shareholder's personal loss. Article 403 of the Commercial Act (상법) provides that a shareholder holding at least 1% may file a suit to hold a director liable 'on behalf of the company' (Article 403(1) and (3)). Because the right in dispute is the company's claim for damages against the director, even if the shareholder wins, the money the director pays belongs to the company.

That does not mean the shareholder gains nothing. When the company's assets are restored, this is reflected in the value of the shares, and a precedent of holding a director liable serves as a check on future management. However, since it is the shareholder who bears the costs first, the Commercial Act eases that burden through the following mechanisms.

Costs of Filing – Stamp Fees and Security

The stamp fee attached to a complaint usually grows in proportion to the amount claimed (the value of the claim). However, a shareholder derivative suit is treated as a suit whose value cannot be calculated (Article 15(1) of the Rules on Stamps Attached in Civil Litigation, etc. (민사소송 등 인지규칙)), and its value is set at 100 million won (proviso to Article 18-2 of the same Rules). Even if the amount claimed from the director is several billion won, the stamp fee is calculated on a value of 100 million won, so it does not increase in proportion to the claim.

Another cost to keep in mind is security. If the defendant applies for 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 without sufficient grounds can create such a cost burden, so it is advisable to secure materials first, for example through inspection of accounting books.

If You Win – Claim a 'Reasonable Amount' of Your Expenses From the Company

If the shareholder who filed suit wins, the shareholder may claim from the company 'litigation costs and a reasonable amount of other expenses incurred because of the suit' (first sentence of Article 405(1) of the Commercial Act). Since the benefit of the successful suit goes to the company, the company is made to bear the costs of that suit as well.

The provision covers not only 'litigation costs' but also 'other expenses incurred because of the suit.' This means actual expenditures that are only partly recognized in the ordinary calculation of litigation costs, such as attorney's fees, may fall within this scope. However, what can be claimed is not all expenses but a 'reasonable amount' of them, so it may be limited to a reasonable range in light of the difficulty and outcome of the case and the necessity of the expenses. It is advisable to keep this in mind from the time the fee agreement with the attorney is made.

The company that paid the costs may seek reimbursement from the responsible director or auditor (second sentence of the same paragraph). In the end, the system is designed so that the final burden of the costs also falls on the director at fault.

If You Lose – The Opponent's Litigation Costs and Liability to the Company Are Different

If the shareholder loses, two things must be distinguished.

First, the litigation costs owed to the opposing director. In civil litigation, litigation costs are in principle borne by the losing party (Article 98 of the Civil Procedure Act (민사소송법)), so if the shareholder loses, the shareholder may have to bear the director's litigation costs. The opponent's attorney's fees are recognized as litigation costs only within the amount set by Supreme Court Rules (Article 109(1) of the same Act).

Second, liability for damages to the company. The Commercial Act provides that even if the shareholder who filed suit loses, the shareholder is not liable to compensate the company unless acting in bad faith (Article 405(2) of the Commercial Act). The provision does not define 'bad faith,' but as explained in the video, it is understood to refer not simply to the result of losing, but to cases where the shareholder used the suit to harass the company or for another purpose while knowing it was groundless. Because merely losing while properly pursuing a director's liability does not create liability to the company, this mechanism greatly reduces the shareholder's burden.

Injunction Demands and Derivative Suits – Prevention and After-the-Fact Liability

The tools shareholders can use against a director differ by timing. Before a director's unlawful act is carried out, the demand to cease (유지청구권, Article 402 of the Commercial Act) is a preventive tool, and once harm has occurred, the shareholder derivative suit is the tool for after-the-fact liability. The requirements of the demand to cease are explained in How Shareholders Can Stop a Director's Unlawful Act.

Both rights can be exercised by a shareholder holding at least 1% of the total issued shares. In listed companies, on condition of holding the shares continuously for at least six months, the threshold falls to 0.05% for the demand to cease (0.025% for companies with capital of 100 billion won or more) and 0.01% for derivative suits (Article 542-6(5) and (6) of the Commercial Act). Even with a 1% stake, a shareholder has both a tool to prevent harm and a tool to pursue liability afterwards.

In short, the damages in a shareholder derivative suit belong to the company, but the stamp fee is set on a value of 100 million won, a winning shareholder can claim a reasonable amount of the expenses from the company, and a losing shareholder is not liable to the company unless acting in bad faith. However, the possibility of bearing the opponent's litigation costs and providing security remains if you lose, so it is advisable to begin only after securing sufficient materials.

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 want to assess the costs and risks of a suit to hold a director liable in advance, 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.