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06 May 2003
Under the Commercial Code a joint stock company, which is the most common type of corporation in Korea, must have at least one statutory auditor. The statutory auditor is intended to act as a watchdog for company shareholders and is empowered not only to audit the company's books and records, but also to inspect the conduct of its directors. Most local companies have only one statutory auditor, but many foreign-invested joint venture companies have two, appointed by each joint venture partner.
According to prevailing opinion, if there are multiple statutory auditors, each statutory auditor can act independently and not jointly. Until recently, the position of the judiciary on this matter was unclear. However, the Supreme Court has now issued a decision on the issue.
In the case, one of two statutory auditors of a company filed a lawsuit on behalf of the company against its representative director, seeking damages for his wrongdoing. Under the Commercial Code the statutory auditor is empowered to represent the company in lawsuits against directors of the company, including representative directors. Subsequently, however, the company’s other statutory auditor unilaterally withdrew the lawsuit without the consent of the statutory auditor who had filed it. The key issue was the validity of such withdrawal.
The lower court held that the lawsuit was validly ended by the withdrawal, but added that the company could seek damages against the second statutory auditor if the withdrawal was made as a result of an unlawful collaboration between it and the representative director. The Supreme Court agreed, declaring that each statutory auditor can act independently on behalf of the company.
In light of the ruling, any party to a joint venture agreement or shareholder agreement with respect to a Korean joint venture company should consider carefully the advantages and disadvantages of having two statutory auditors and may wish to insist on the company having only one. In the worst-case scenario, an action taken by a statutory auditor designated by one joint venture partner in order to protect his or her interests may be withdrawn or invalidated by a statutory auditor designated by the other joint venture partner, against whose interests the original action was taken.
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