Hello, this is Attorney Sangyun Eom of Cheongchul Law Firm.

In corporate practice, a company often enters into financing, asset, or service transactions with its own director or with another company controlled by that director. In some cases, the board approval procedure is omitted at the time of the transaction and, only after a dispute arises, an attempt is made to ratify the deal through a subsequent board resolution. Whether such later approval can validate a director's self-dealing is a recurring issue.

On this point, the Korean Supreme Court, in its decision rendered on 30 April 2026 (Case No. 2025Da218191) and related precedents, reaffirmed that if a director's self-dealing is not approved by the board in advance, the transaction is in principle void, and that even where board approval is obtained later, the void transaction does not become valid absent special circumstances. This article reviews the key holdings of that decision and the practical implications for corporate legal practice.

Significance of the Self-Dealing Regulation Under Article 398 of the Commercial Act

Article 398 of the Korean Commercial Act provides: "In order for a director, etc. to enter into a transaction with the company on his/her own account or on the account of a third party, the director must, in advance, disclose the material facts concerning the transaction at a board meeting and obtain board approval. In such case, board approval shall require the affirmative vote of at least two-thirds of the directors, and the content and procedure of the transaction shall be fair."

The purpose of this provision is to prevent a director from using his/her position to sacrifice the company's interests in pursuit of personal gain, by subjecting the fairness of the transaction to ex-ante board scrutiny. Accordingly, for board approval to be deemed lawful, all of the following requirements must be satisfied: (i) the "material facts" concerning the transaction must be disclosed in advance; (ii) the resolution must be passed by at least two-thirds of the directors; and (iii) the content and procedure of the transaction must be fair.

In particular, the Supreme Court has held that the board approval contemplated by Article 398 of the Commercial Act cannot be satisfied by a resolution that merely ratifies the outward form of the transaction; rather, the material facts of the transaction must be disclosed and the board must deliberate as to whether the transaction is "fair as a conflict-of-interest transaction" (Case No. 2021Da291712, etc.). Therefore, a merely formal or blanket board resolution authorising ordinary-course transactions cannot be regarded as the board approval required under Article 398 of the Commercial Act.

Holding of Supreme Court Decision 2025Da218191

In this case, the plaintiff company entered into investment agreements with the defendant company on three occasions between July 2020 and November 2020, investing tens of billions of won and agreeing to receive interest of approximately 8.2% per annum and 20% of the profits, while defendant A jointly and severally guaranteed the defendant company's obligations under those investment agreements. At the time of the investment agreements, the person acting as the plaintiff company's representative was none other than Mr. A, who was one of the three directors of the defendant company. The dispute centered on the fact that, although this constituted a transaction "on the account of a third party" within the meaning of Article 398, item 1 of the Commercial Act, board approval of the defendant company was never obtained.

On these facts, the Supreme Court reaffirmed the following legal principles:

1. If a director, etc., on his/her own account or on the account of a third party, enters into a transaction with the company without first obtaining the board approval prescribed by Article 398 of the Commercial Act, the transaction is, absent special circumstances, void.

2. Even where board approval of the transaction is obtained ex post, absent special circumstances the void transaction does not thereby become valid.

3. Because board approval must be made after disclosure of the material facts of the transaction and deliberation as to whether the transaction is fair as a conflict-of-interest transaction, a merely formal board resolution that authorises the transaction as an ordinary-course matter cannot be regarded as board approval under Article 398 of the Commercial Act.

The decision reaffirms the existing line of Supreme Court precedents and is significant in that it once again clarifies that the absence of prior board approval cannot be cured indirectly through ex-post ratification.

Practical Implications

Although the decision merely reaffirms the existing law on the validity of director self-dealing, it carries clear implications for corporate legal practice.

First, where a company seeks to transact with (i) a director personally, (ii) another company in which the director serves as representative director or major director, (iii) a director's spouse or lineal ascendant or descendant, or (iv) any other person enumerated in Article 398 of the Commercial Act, the company must complete the board approval procedure before entering into the transaction; obtaining board approval afterward will not render the transaction valid.

The form and content of the board approval are equally important. The minutes of the board meeting must clearly record (i) the counterparty, (ii) the specific terms and conditions of the transaction, (iii) the fact that the transaction constitutes a conflict-of-interest transaction, and (iv) the deliberation results regarding the fairness of the transaction terms; the resolution must be passed by the affirmative vote of at least two-thirds of the directors. Companies should be mindful that a mere "blanket approval of ordinary-course transactions" or a general resolution that does not identify the counterparty or the transaction terms is not recognised as the board approval required by Article 398 of the Commercial Act.

From the counterparty's perspective as well, where there is suspicion that a director of the contracting company was involved in the transaction or that the counterparty is in a special relationship with a director of the company, it is necessary to verify whether prior board approval exists and whether the content of that approval was lawful. If the counterparty is later sued by the company on a contract that lacked prior board approval, it may be possible to assert the invalidity of the transaction on that ground and to escape liability.

That said, even a transaction lacking prior board approval is not invariably void. The Supreme Court has left room for exceptions through the qualifier "absent special circumstances," so where the counterparty's bad faith or gross negligence is established, it may be difficult to assert invalidity. Accordingly, when entering into a transaction that may potentially constitute self-dealing, the safest course is to verify, before execution, the lawfulness of the board approval and, if possible, to directly inspect the counterparty's board minutes.