Hello, this is Attorney Baek Gi-hyung from Cheongchul Law Firm.

In corporate management, both the CEO and directors play a pivotal role in the company, but their legal status and powers are distinctly defined. Generally, directors are appointed and dismissed by the shareholders' meeting, while the CEO is appointed and dismissed by the board of directors. However, there are companies that exceptionally allow the shareholders' meeting to directly appoint and dismiss the CEO through the articles of incorporation as per the exception in the proviso of Article 389(1) of the Commercial Act.

Especially in the case of dismissal, it significantly impacts the personal interests of the CEO or directors. According to Article 385(1) of the Commercial Act, it states, "A director may be dismissed at any time by a resolution of the shareholders' meeting under Article 434. However, if a director is dismissed without justifiable reason before the expiration of the term when their term is specified, they may claim damages against the company for dismissal." This allows for a claim for damages if the dismissal is without justifiable reason, whereas there is no special provision regarding the dismissal of the CEO.

For this reason, the Supreme Court ruling on December 10, 2004, 2004Da25123 stated, "Article 385(1) of the Commercial Act allows for the dismissal of directors at any time by special resolution of the shareholders' meeting, while also enabling a director who is dismissed without justifiable reason before the expiration of their term to claim damages against the company, aiming to harmonize the interests of shareholders and directors concerning the shareholders' control over the company and the stability of managerial positions. Therefore, it cannot be analogously applied to cases where the board dismisses the CEO, nor should it be viewed differently just because the CEO has become a non-salaried, non-executive director upon dismissal from that position." This makes it clear that, in principle, a claim for damages is not recognized for the CEO.

However, the aforementioned Supreme Court ruling was regarding 'the case in which the board dismisses the CEO.'

Then, in the special case where the articles of incorporation specify the direct appointment or dismissal of the CEO by the shareholders' meeting according to the proviso of Article 389(1), can the right to claim damages be recognized by applying the provisions of the proviso of Article 385(1)?

[Question]

If a CEO appointed at the shareholders' meeting is dismissed, can they claim damages like a director's dismissal?

[Answer]

In conclusion, the Supreme Court determined that even if a CEO appointed at the shareholders' meeting is solely dismissed from their position as CEO but retains their status as a director, they cannot claim damages under Article 385(1) of the Commercial Act (Supreme Court ruling on September 13, 2024, 2020Da245552).

This expands the legal principle established in the 2004 Supreme Court ruling (2004Da25123) that "the proviso of Article 385(1) does not apply by analogy when the board dismisses the CEO" to clearly state that the same applies when the shareholders' meeting appoints and dismisses the CEO according to the articles of incorporation.

In this case, the plaintiff (the dismissed CEO) was appointed as CEO by the shareholders' meeting of the defendant company, and after being dismissed midway through their term, claimed damages against the company based on the proviso of Article 385(1). The lower court (Gwangju High Court ruling on June 17, 2020, 2019Na21148) ruled that in cases where the articles of incorporation specify the appointment and dismissal of the CEO by the shareholders' meeting, a direct delegation relationship is established between the company and the CEO, thus allowing the application of Article 385(1) to the dismissal of the CEO, partially accepting the plaintiff's claim.

However, the Supreme Court ruling on September 13, 2024, 2020Da245552 explicitly overturned the lower court's decision, stating:

"The proviso of Article 385(1) of the Commercial Act shall not apply by analogy in the case where the board dismisses the CEO, and this also applies when the shareholders' meeting dismisses the CEO as designated by the articles of incorporation under the proviso of Article 389(1)."

The Supreme Court cited four reasons as the basis for its conclusion as follows.

This ruling confirms that the legal statuses of directors and CEOs are evidently different. In other words, the company can dismiss the CEO at any time, regardless of the appointing authority (board of directors or shareholders' meeting), and it is confirmed that it does not bear separate liability for damages in such cases.

In many cases, CEOs receive higher compensation than directors and bear corresponding responsibilities. When taking office as a CEO, there is usually a personal expectation of such high compensation; therefore, it is essential to remember that, as concluded in this ruling, 'a CEO can be dismissed at any time without additional liability for damages,' and it is necessary to secure dismissal rights through separate contracts in advance.

Following the Supreme Court ruling in 2004 regarding the 'liability for damages upon the dismissal of a CEO appointed by the board,' this ruling on the 'liability for damages upon the dismissal of a CEO appointed by the shareholders' meeting' twenty years later is seen as clarifying the status of directors and CEOs and the company's liability. In the future, it is deemed desirable for companies and CEOs to have a thorough understanding of such legal principles and to clearly negotiate compensation plans for dismissal in advance.

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