Supreme Court: "Preparing a Proxy Alone Does Not Make One a Joint Shareholder"

Melpas Minority Shareholder Lawsuit Over General Meeting Nullification
Temporary and Revocable Proxy Exempt from "5 Percent Rule"

The Supreme Court has ruled that simply preparing a proxy form at the request of another person to exercise voting rights on behalf of a shareholder at a general meeting does not constitute joint stock ownership.

Supreme Court Building, Seocho-gu, Seoul. Photo by Yonhap News

According to the legal community on October 5, the Supreme Court's second division (Presiding Justice Oh Kyung-mi) recently confirmed a lower court decision dismissing and rejecting a lawsuit filed by minority shareholders of Melpas, a Kosdaq-listed semiconductor company, who sought to nullify the resolutions of a general shareholders' meeting against the company.

In November 2022, third parties such as Cheongun Partners, who were attempting to gain management control of Melpas, led the call for an extraordinary general meeting. Although their holdings were less than 5 percent, they exercised voting rights at the meeting by receiving proxies from other shareholders. During this process, the proxy agent and the third parties, using the shareholders' seals, rewrote some of the proxies—arbitrarily changing approvals or opposition on certain proposals—and made other modifications. As a result, the extraordinary general meeting adopted resolutions including the appointment of an interim chairperson, amendments to the articles of incorporation, and the dismissal and appointment of directors and auditors, all of which were publicly disclosed.

Minority shareholders subsequently filed a lawsuit, claiming that those who delegated voting rights and the third parties had become joint holders of the shares, thus causing their combined holdings to exceed 5 percent and violating the large shareholding reporting obligation. They also argued that, because some proxies were allegedly forged, the exercise of voting rights was invalid. Under the Capital Markets Act, joint holders are those who agree to jointly acquire, dispose of, or exercise voting rights over shares, and if their combined holdings exceed 5 percent, this triggers the "5 percent rule" requiring a public disclosure.

Both the first and second trials dismissed and rejected the minority shareholders’ claims. The courts found no evidence that the shareholders who delegated their voting rights had agreed with the third parties to jointly exercise the voting rights, and therefore ruled that they were not joint holders. The fact that the delegation was limited to the extraordinary shareholders’ meeting and that the delegation could be freely revoked were cited as reasons. It was also considered relevant that the Financial Supervisory Service had issued guidance stating that merely delegating voting rights does not impose a 5 percent disclosure obligation. Even when excluding votes from allegedly forged proxies, the resolutions regarding the appointment of directors still met the necessary quorum and were not found to be procedurally defective.

The Supreme Court upheld the lower courts’ decision. The Court stated that in order to be considered a joint holder, there must be an agreement not just to delegate voting rights but to jointly exercise voting rights or instructions. The Court further held that delegation of voting rights on a temporary and revocable basis for a particular general meeting does not constitute such an agreement. Regarding the allegations of forged proxies, the Supreme Court also agreed with the lower court’s finding that there were no defects in the extraordinary general meeting resolutions, and dismissed the appeal.

This content was produced with the assistance of AI translation services.