South Korea's Supreme Court has ruled that a shareholder who delegates voting rights to another party for a specific shareholders' meeting cannot, on that basis alone, be treated as a "joint holder" with that party under the Capital Markets Act.
The second division of the Supreme Court, with Justice Oh Kyung-mi as presiding justice, upheld a lower court ruling that dismissed a suit filed by minority shareholders of electronic parts maker Melfas against the company seeking to void a shareholders' meeting resolution, legal sources said on the 5th.
Company A, a shareholder of Melfas, along with shareholders B and C, obtained court approval to convene an extraordinary shareholders' meeting on Nov. 11, 2022. The three agreed to exercise their voting rights jointly at the meeting, but their combined holdings fell short of 5% of Melfas' total outstanding shares. Company A and shareholder B solicited proxies from other shareholders and voted the shares at the meeting. Minority shareholders of Melfas challenged the meeting, arguing that the shares delegated by other shareholders pushed the total above 5%, triggering a large-holding reporting requirement that was never met, and that voting rights subject to restriction were exercised without that filing. The resolution adopted at the extraordinary meeting was therefore defective, they argued.
Under the Capital Markets Act, anyone whose holdings in a listed company, combined with those of specially related parties, reach 5% or more must report the stake to the Financial Services Commission and the Korea Exchange. Parties who have agreed or contracted to exercise voting rights jointly are counted as "joint holders" and included among specially related parties. A violation of the reporting requirement restricts the exercise of voting rights on the shares in breach of the rule, among those exceeding the 5% threshold.
The minority shareholders also argued that some of the votes cast by B's side rested on forged proxy forms. Of the shares voted by B's side, 3,239,602 had been delegated by shareholders who joined the suit as co-litigants. The small shareholders further claimed that an agent handling the delegation had taken custody of their seals and, together with A, drawn up new proxy forms in which the votes for and against certain agenda items were changed from what had originally been marked. The minority shareholders sued to have the November 2022 resolution declared void or nonexistent, and alternatively to have it annulled.
The court of first instance sided with Company A and shareholders B and C. The appellate court also rejected the minority shareholders' appeal. It found no evidence that the shareholders who granted proxies had agreed to exercise their voting rights jointly with Company A's side, noting that the delegation covered only the one extraordinary meeting and that shareholders were free to revoke it.
The Supreme Court likewise found that no large-holding reporting requirement had arisen for Company A and the others. Becoming a joint holder under the Capital Markets Act requires more than the outward appearance of voting together, the court held; there must be a meeting of minds to jointly exercise the voting rights, or the right to direct how they are exercised.
"The mere fact that a shareholder has had a third party exercise voting rights on his or her behalf for a specific shareholders' meeting on a temporary and revocable basis, or has delegated the exercise of voting rights to a proxy solicitor under the Capital Markets Act, cannot be taken as an agreement to exercise voting rights jointly," the court said.
The Supreme Court also rejected the claim that voting rights had been exercised on the basis of forged proxy forms.
