Hello, I am Attorney Kim Kwang-sik of Cheongchul Law Firm.

March is the time when the regular general meetings of listed companies are held intensively. During this period, management prepares for the approval of business reports and financial statements, and shareholders also ponder how to exercise their rights.

Recently, with the spread of active voices not only from institutional investors and activist funds but also from individual shareholders, interest in the practical utilization of 'shareholder proposal rights' is increasing. Today, I will calmly summarize the legal requirements and practical issues regarding shareholder proposal rights in listed companies.

[Question]

Under what conditions can shareholder proposal rights in listed companies be exercised, and what is the most important practical issue during the regular annual meeting season?

[Answer]

1. Legal Basis and Overview of Shareholder Proposal Rights

Shareholder proposal rights are based on Article 363-2 of the Commercial Act, which gives shareholders holding a certain percentage of shares the right to propose agenda items for the general meeting. This serves as a check against the authority of the board of directors, which had been monopolized by them.

In the case of listed companies, more relaxed requirements are applied compared to general unlisted companies. According to Article 542-6 of the Commercial Act, a shareholder who has held more than 0.5% of the total issued shares for at least 6 months (which may be relaxed to 1% depending on the size of assets, etc.) can make a shareholder proposal.

Proposals can cover a wide range of agenda items, including amendments to the articles of incorporation, the appointment and dismissal of directors and auditors, matters related to dividends, and approvals for specific actions. However, proposals that simply direct management interference or fall under the authority of the board of directors directly are not permitted.

2. Conditions for Exercise: 'Shareholding' and 'Timing' are Key

The most frequently problematic aspect of exercising shareholder proposal rights is whether the conditions are met.

First, the shareholding requirement. Merely holding shares at the reference point is insufficient; in the case of listed companies, they must meet the 'continuously holding for 6 months' requirement in principle. Particularly, stock loan transactions, trust holdings, and joint holdings can raise complex legal issues regarding the determination of continuous holding.

Secondly, the timing of the proposal. It must be submitted to the company in writing or electronically at least 6 weeks before the date of the general meeting. Considering that regular general meetings are usually held in late March, the practical preparation time falls in early January to February. If the timing is missed, the company may lawfully refuse to present the agenda item.

3. Reasons and Points of Dispute for Company Rejections

Companies are not obligated to present all shareholder proposals without exception. They can refuse in the following cases:

• If it violates laws or articles of incorporation

• If the same matter has already been presented at the general meeting

• If it is not within the authority of the general meeting

• If there is clear concern that it may cause significant harm to the company

There are also numerous cases where companies refused based on business burdens or potential damage to their image, while in reality, strong motives for defending management were at play. In such cases, shareholders may consider judicial remedies such as applying for a preliminary injunction for agenda presentation.

Recently, courts have been showing a tendency to broadly protect the rights of participation for shareholders in proposals that meet formal requirements. Therefore, companies must carefully review whether the legal grounds for rejection are strictly recognized, rather than relying solely on simple defensive arguments.

4. Strategic Considerations for the Regular General Meeting Season

In the regular general meeting in March, the election of directors is usually addressed. In this case, shareholder proposal rights become a means that influences the composition of the board of directors beyond merely expressing opinions.

Particularly, if combined with the recently discussed cumulative voting system under Article 382-2 of the Commercial Act, the strategic utilization of minority shareholders becomes even more significant. When shareholder proposals related to director appointments are concurrently submitted in the same regular general meeting, the methods of candidate recommendations, the number of directors to be elected, and the order of agenda presentation can significantly influence the outcome.

Additionally, the content of recent shareholder proposals is becoming increasingly diverse, including topics such as increasing dividends, stock buybacks, and the establishment of ESG-related clauses in the articles of incorporation. This shows a trend of being utilized as part of corporate value enhancement strategies, going beyond mere management disputes.

5. Preparation Begins with 'Form'

While the validity of the proposal's content is important, the starting point is the fulfillment of formal requirements.

• Securing documentation to prove continuous holding

• Pre-check on joint holdings

• Legal compatibility review of the proposal text

• Analysis of conflicts with articles of incorporation and existing agenda

If any of these are deficient, the purpose may be thwarted due to formal defects before the merits are assessed. Particularly, the wording is crucial in proposals with activist characteristics, as it can become a significant point of interpretation in future litigation.

The shareholder proposal rights of listed companies are a powerful legal right that can have a significant impact on corporate governance, not merely a means for minority shareholders to express their opinions. As the regular general meeting season in March approaches, both shareholders and the company need to prepare carefully, considering both formal requirements and strategic effects. 

Especially in the context of recent changes in the capital market environment, the exercise of shareholder rights is becoming increasingly sophisticated. It is important to design legal principles and procedures not merely from the perspective of “is it possible?”, but of “can it be enforced?” 

Cheongchul Law Firm provides professional advice to both shareholders and companies to minimize legal risks and reach reasonable conclusions amid the changing corporate governance environment. If you need legal review regarding shareholder proposals ahead of the regular general meeting, I recommend consulting well in advance.