Supreme Court Rules "Excessive Incentive Resolution by Reconstruction Association Head is Invalid"

[Asia Economy Reporter Baek Kyunghwan] The Supreme Court has ruled that even if a proposal to provide incentives to executives at a general meeting of an apartment reconstruction association is passed, it should be considered invalid if the incentives are unfairly excessive.

On the 2nd, the Supreme Court's First Division (Presiding Justice Kim Seonsu) announced that it overturned the lower court ruling, which had ruled against the plaintiffs in the appeal case filed by 29 members of the Shinbanpo 1st Reconstruction Housing Association against the association to confirm the invalidity of a temporary general meeting resolution, and sent the case back to the Seoul High Court.

The association held a board meeting in September 2013 and planned to submit a proposal to the delegates' meeting to pay 30% of the additional profits from the sales contract results to the association president and other executives, but withdrew the proposal due to opposition from some delegates.

Subsequently, the association executives prepared a plan where, in case of losses, the association president would compensate up to 1 billion KRW and each executive up to 500 million KRW, and in case of profits, they would receive 20% of the additional profits. This plan was passed at the general meeting of members without the consent of the delegates.

Some members filed a lawsuit claiming that this plan was invalid as it violated the association's articles of incorporation by bypassing the delegates' meeting. The first trial ruled in favor of the association, stating that the reconstruction association's general meeting, as the highest decision-making body composed of members, should be able to make decisions on all association affairs. The claim that it was invalid for not going through the delegates' meeting was interpreted as invalid because the '30% profit payment plan' had been previously submitted and rejected at a delegates' meeting, indicating that there had been overall discussions on profitability improvement measures. The second trial dismissed the claims of Mr. A and others for the same reasons.

The Supreme Court's judgment was different. The court emphasized that reconstruction projects have a public interest nature aimed at improving residential environments. It found the association's profitability improvement plan problematic because the executives' compensation could "increase exponentially." The compensation limit for association executives was capped at a total of 5.5 billion KRW, while the additional profit share was set at only 20%.

When setting the compensation standards for association executives, it is necessary to evaluate how much the executives contributed to the successful progress of the project, but the lower courts did not sufficiently examine this, the court pointed out. The court stated, "If there are circumstances where the compensation for association executives is excessive and violates the principles of good faith and fairness, such a resolution should be considered invalid."

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