Supreme Court Pierces Korean Corporate Veil

On January 19 2001 the Supreme Court issued a judgment which recognizes a doctrine similar to the piercing of the corporate veil in US law. In Korea the doctrine is referred to as the 'denial of corporate status'.

In Case 97-DA-21604 the court ruled that a dominant shareholder and representative director was liable for the acts of a corporation where:

• the distribution of shares among four shareholders was in form only and the dominant shareholder was the actual holder of the majority of shares;

• the shareholders and board meetings were in form only and were not held as required by law;

• all decisions regarding the management of the corporation were made in accordance with the personal wishes of the dominant shareholder;

• the corporation had no office or employees;

• the funds and other assets of the corporation and those of the dominant shareholder were combined. In particular, corporate funds were used for purchasing properties in the name of the dominant shareholder and corporate assets were transferred to a third party for the purpose of shielding them from execution by the creditors of the corporation; and

• the corporation was under-capitalized.

In summarizing these circumstances, the court coined such phrases as:

• 'manner and degree of control of the corporation' by the individual being held liable;

• the 'degree of combining of corporate and [personal] transactions and assets';

• the 'state of corporate affairs and use of [corporate] funds' and

• a corporation's 'assets and ability to pay in light of its business undertakings'.

These are likely to be key terms in any future analysis.

Previous cases adopted the same doctrine, but mostly concerned corporations in multiple jurisdictions (often in the context of shipping) that had been established for the purpose of keeping assets out the reaches of creditors or regulators.

There is no express statutory provision for denial of corporate status but the court's ruling is widely supported by the academics and other courts are expected to recognize the doctrine as part of domestic law.

Finally, as a theoretical foundation for denial of corporate status, the court may invoke the principle of good faith or the prohibition against abuse of rights, or both.

For further information on this topic please contact Hee Chul Kang at Woo Yun Kang Jeong & Han by telephone (+822 528 5200) or by fax (+822 528 5300) or by email ([email protected]).