Joseph Hwang
We all know the case of the dispute between the famous entertainment corporation HYBE and the CEO of its subsidiary ADOR, which is the producer of the K-pop idol group "New Jeans", in April 2024.
At present, all the board members of ADOR are the directors for Min, HYBE wants to remove them and appoint new directors from HYBE again because of Min's criminal issues through its management audit as the largest shareholder of ADOR.
The HYBE applied to the court for permission to convene an extraordinary meeting of shareholders of ADOR on April 25, 2024, Min agreed to convene the extraordinary meeting of shareholders on May 31, 2024, in front of the judge. Therefore, the Board of Directors of ADOR decided on the issue on May 10, 2024, and the shareholders' meeting will be held at that time.
The problem is that Min had filed the disposition to prohibit shareholders from exercising voting rights before the opening of the shareholders' meeting of ADOR on May 7, 2024, pursuant to Article 2.1 of the shareholders' agreement between them contracted on March 27, 2023. Therefore, the court has to decide whether or not to accept Min's request for disposition before the date of the shareholders' meeting. This court judgment will be very important in this dispute in connection with the removal of her position as CEO in force and the maintenance of the shareholder of ADOR, who has 17.8% of the share. Due to this court judgment, the criminal case of the dispute and the civil cases are likely to be very different.
This request for a disposition against the prohibition of shareholder voting rights by Min to the court is to ask the judge to grant a temporary judicial position that can maintain the CEO as a board member of the Board of Directors of ADOR against the voting rights of the largest shareholder "HYBE". The provisional disposition has available requirements in the Korean legal system: (i) the applicant must have preserved rights from the infringer(s), (ii) the applicant must have necessities to preserve through the application before the merits of the case.
Min's attorneys appear to think that this case is available through requirements under the provision of the shareholders' agreement contracted between HYBE and Min. The issue of Min's directors' removal does not belong to the directors' meeting but to the shareholders' meeting. HYBE is the largest shareholder of ADOR, holding 80% of the shares. The Commercial Act of the Republic of Korea stipulates that Article 385 (Removal) (1) "A director may be removed from office at any time by a resolution adopted at a general meeting of shareholders under Article 434: Provided, That where the term of office of a director has been determined and his/her removal is made without justifiable grounds before the expiration of his/her term of office, he/she may file a claim for damages caused thereby against the company.", and the Article 434 (Special Resolutions for Amendments to Articles of Incorporation) "A resolution under Article 433 (1) shall be adopted by the affirmative votes of at least two-thirds of the voting rights of the shareholders present at a general meeting of shareholders and of at least one-third of the total issued and outstanding shares".
This means that HYBE has an available and legal right to remove Min's directors, including herself, from ADOR through the special voting right according to the Commercial Act and the Articles of Incorporation of ADOR. However, according to Article 385 (Removal) (1) of the Commercial Act, in case of removal before the expiration of the term of office of the director without JUSTIFIABLE GROUNDS that the term of office of the director has been determined, the one may file a claim for damages caused thereby against the company. That is, only Min can have the right to ask for indemnification for her damages to the ADOR, under the contractually guaranteed term of office and the removal caused by unjustifiable reasons, and Min seems to be unable to avoid this removal. This opinion is the consensus of the South Korean legal community.
The Supreme Court of the Republic of Korea says through the precedent; “Article 385 (1) of the Commercial Act provides that a director may be removed at any time by a special resolution of the general meeting of shareholders, and if the director's term of office is fixed and the director is removed before the expiration of the term without justifiable grounds, the director may claim compensation for damages caused by the removal against the company. This provision seeks to reconcile the interests of shareholders and directors in securing control of the company and stabilizing management positions by ensuring the freedom to remove directors at the general meeting of shareholders, while protecting the expectations of directors whose terms of office are fixed, by making the company liable for damages if the director is removed before the expiration of the term without justifiable grounds." (Supreme Court, Aug. 31, 2023, Decision 2023da220639)
It also states; "Here, 'JUSTIFIABLE GROUNDS' mean that a mere subjective loss of trust, such as a feud between a shareholder and a director, is not sufficient, and that there are objective circumstances that would impede the director's ability to execute his or her duties as a manager, such as when the director has committed acts in violation of laws or the articles of incorporation, is mentally or physically incapable of performing his or her duties as a manager, or has failed to establish or implement an important business plan for the company, resulting in a fundamental loss of trust in his or her managerial ability."
The JUSTIFIABLE GROUNDS of the Commercial Act is a very important legal concept in this case between HYBE and Min regardless of whether the provisional disposition is granted or denied.
Because unless there are special circumstances, HYBE should be able to remove the directors of Min's side including herself at any time as the largest shareholder of ADOR under the regulation of the Commercial Act. We can assume this fact based on the Supreme Court's decision above with other cases of its lower court rulings. And then, we have to pay attention to Min's criminal cases caused by her illegal violence such as the occupational breach of trust and civil action raised by Min against HYBE to ask for the indemnification of damages for the removal of the director before the term of office according to the shareholders' agreement.
At this time, what the "JUSTIFIABLE GROUNDS" are, is very likely to be the standard or cause that consisted of guilt in the criminal action and HYBE can protect from the claim filed by Min to compensate her damages due to the removal of the director before her term of office. I'm assuming that the shareholders' agreement has set up the clause of confiscation for Min's share of ADOR on behalf of HYBE's interests if the breach of contract or the illegal behaviors from Min will occur. If the causes of this dispute between HYBE and Min are Min's defaults and illegal behaviors, those belong to the "UNJUSTIFIABLE GROUNDS", as a result, HYBE is certainly likely to be exempted from the obligations and responsibilities concerning Min's claims. So the "JUSTIFIABLE GROUNDS" are a significant key factor in understanding this case of dispute between HYBE and Min. If there were attempts to transfer the "NewJeans" the K-pop idol group of ADOR into another business entity by Min's lead and direction with clear evidence, it would be a betrayal against HYBE the largest shareholder, and a great mistake simultaneously.
P.S. The court has accepted Min's request for a provisional disposition on May 30, 2024. Therefore, the Extraordinary Shareholders' Meeting of ADOR on May 31, 2024, cannot be opened due to the Court's decision.
First, the Tribunal held that in order for HYBE to exercise its right to vote at the ADORE shareholders' meeting to remove Min from her position as a director, there must be a reason for the removal and that HYBE must prove the existence of such a reason for removal or resignation.
However, the Tribunal found that the allegations and materials submitted to date did not sufficiently establish HYBE's alleged cause for removal or resignation.
The Tribunal concluded that Min was either attempting to transfer NewJeans out of HYBE's control or gaining control of ADOR by pressuring HYBE to sell its shares.
However, it's hard to see how they went beyond exploring options to taking concrete action and concluded that such attempts might betray HYBE, but not a breach of trust.
The court also said that since Min's damages were likely to be substantial, it was necessary to prohibit the exercise of HYBE's voting rights through provisional disposition prior to the main proceedings.
* References and quotations:
https://v.daum.net/v/20240528174941482
https://v.daum.net/v/20240507202549565
https://v.daum.net/v/20240508182302760
https://www.lawtimes.co.kr/news/198197
https://www.law.go.kr/LSW/precInfoP.do?mode=0&precSeq=238663#AJAX
https://www.joongang.co.kr/article/25251511#home
https://www.sedaily.com/NewsView/2D90Q2QGQB
https://v.daum.net/v/20240530160613480
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