Disgorgement of Short-Swing Profits Case

[14-2 KCCR 774, 99Hun-Ba105, etc.,(consolidated), December 18, 2002]

Contents of the Decision

1. Whether Article 188(2) of the Securities and Exchange Act notrequiring use of undisclosed insider information to the public as acondition for return of profits violates the rule of the least re-strictive means in case of infringement on basic rights.

2. Whether Article 188(2) of the Securities and Exchange Act man-dating return of profits as long as there is no such exceptionalcircumstance as listed in Article 188(8) violates the rule of theleast restrictive means in case of infringement on basic rights.

3. Whether there is a balance of interests between property rightsbeing restricted and the public interest being achieved by Article 188(2) of the Securities and Exchange Act.

4. Whether Article 188(8) of the Securities and Exchange Actviolates the rule against blanket delegation.

Summary of the Decision

1. If Article 188(2) of the Securities and Exchange Actstipulating disgorgement of profits from short-term stock sales is literally in-terpreted, as long as i) an insider, ii) within six months after theinitial transaction, iii) makes another transaction of stockcertificates,etc. of his company iv) and makes profits, the person is liable toreturn the profits, regardless of whether he actually has made usee of undisclosed inside information. The statutory provision imposes strict responsibility on the insider, and he is not allowed to prove that he has made a transaction without using undisclosed inside in- formation. If use of undisclosed insider information to the public isrequired as a positive condition for return of profits or non-use ofundisclosed information is required as a negative condition forreturn of profits, it would be very difficult to actually prove that there was use or non-use of inside information. Such requirement would alsoprevent the speedy and effective exercise of the right to requestreturn of the short-term sales margin, and would hamper achievement ofthe legislative purpose. This was based on an inevitable legislativedecision to improve the trust of general investors in the stockmarket.

2. Article 188(2) of the Securities and Exchange Act provides

objective conditions to make an insider return profits from stocktransactions. Article 188(8) of the Act and Article 86-6 of theEnforcement Decree of the Securities and Exchange Act based onArticle 188(8) enumerate exceptions to requirements of return ofprofitsexhaustively, and no other exception is recognized. Even thoughconsidering the legislative purpose of the statutory provision, thenature of Article 86-6 of the Enforcement Decree of the Securities and Exchange Act listing exception to disgorgement of short-swing profits, and the meaning of Article 23 of the Constitution protectingproperty rights, it can be said that stock transactions without anypossibility of the use of inside information is not subject toregulationunder the instant statutory provision to begin with. Therefore,Article 188(8) does not violate the rule of the least restrictive means in the case of infringement on basic rights.

3. Article 188(2) of the Securities and Exchange Act is enacted to protect the interest of general investors by forcing the return of short-swing profits as well as to improve trust by the general in-vestors in the stock market by ensuring fairness and impartiality inthe market. There is no comprehensive ban on insider trading: The provision only stipulates a return of profits if such transaction wasmade within a short period of six months. Moreover, even if theinsider used inside information undisclosed to the public in theinitialstock transaction, he is free to trade stocks without any restrictionafter six months and retain the profits from the transaction.Therefore, restriction on the property rights of the insiders such as the com-plainants by the instant statutory provision is not greater than thepublic interest being achieved by the provision.

4. Let us next examine whether Article 188(8) of the Securitiesand Exchange Act violates the rule against blanket delegation.Sincethere are many forms of transaction in the stock market, and thefinancial system and environment change rapidly, it is impossible to exhaustively list details of all exceptions to the general rule in the statute. Timely and flexible rule-making is necessary to make ade- quate changes for proper regulation. Moreover, considering the leg-islative purpose of Article 188(2) of the Securities and ExchangeAct and the meaning of the phrase "taking into consideration of the nature etc." in Article 188(8) of the Act, people can infer from the statute that what is being delegated by Article 188(8) of the Act to the presidential decree contains such contents as "a transaction thatwould not seem unfair or a transaction that was made withoutusingundisclosed information." Therefore, the statutory provision is notin violation of the rule against blanket delegation.

Parties

Complainants

1. Lee O-ho (99Hun-Ba105)

Counsel of record: Jipyong Legal Corporation

Attorney in charge: Bae Sung-jin

2. Kwon O-sup (2001Hun-Ba48)

Counsel of record: Choi Soo-young

Original Cases

South Branch of Seoul District Court 99KaHap7825 : Disgorement of Short-swing Profits (99Hun-Ba105)

Seoul High Court 2000Na22272 : Disgorement of Short-swing Profits (2001Hun-Ba48)

Holding

Article 188(2) of the Securities and Exchange Act (amended by Act No. 5254 on January 13, 1997, before being amended by Act No.5539 on May 25, 1998) and Article 188(8) of the Securities andExchange Act (amended by Act No. 4469 on December 31, 1991) are constitutional.

Reasoning

1. Overview of the Case and the Subject Matter of Review

A. Overview of the Case

(1) 99Hun-Ba105

Complainant Lee O-ho worked as a director or chief executiveofficer of the AAA Inc. from October 23, 1997 to February 12, 1998.During his tenure, Lee-O-ho purchased 365,570 shares (averagevalueof the share assessed at 4,861 won) of the company on his ownaccount under the names of Kim O-woong and 16 other individuals who were former and present employees of the company. Before 6 months had elapsed since his initial purchase of the company stocks, he sold 4,610 shares on November 3, 1997, 390 shares on November6, 1997, 5,000 shares on January 24, 1998, and another 335,951shareson February 16,

1998, respectively. During this period, he sold atotal of 345,951 shares at the average price of 9,284 won, and earned 1,691,464,381 won after the fees.

Upon learning that the complainant earned profits through suchtransaction, the Securities and Futures Commission requested thecompany to take action, such as a law suit, that would effectivelyforce the return of the short-swing profits gained by thecomplainanton March 11, 1999. Following the request of the Commission, theabove company filed a civil law suit against the complainantseeking return of the short-swing profits on May 15, 1999 (South Branch of Seoul District Court 99Ka-Hap7825). During the law suit, the com-plainant petitioned the Court to request a constitutional review onArticle 188(2) and 188(8) of the Securities and Exchange Act whichformed the basis for the original civil law suit, but the presiding court rejected the request. Then, on November 24, 1999, the com-plainant filed the instant constitutional complaint.

(2) 2001Hun-Ba48

Complainant Kwon O-sup owns 30.09% of common stocksissuedby BB Chemical Engineering, Inc., and has served as the chief ex-ecutive officer from March 12, 1992 to present. Between August 12, 1997 and January 10, 1998, the complainant sold 1,844,290 shares ofthe company. Then, between November 21, 1997 and June 3, 1998,before 6 months had elapsed after his initial stock sales, he acquired1,624,250 shares of the company identical to shares he originallysold through subscription of new shares by a third party and trading in the stock market.

Upon learning that the complainant earned profits through suchtransaction, the Securities and Futures Commission requested thecompany to take an action, such as a law suit, that wouldeffectively force the return of short-swing profits gained by the complainanton October 2, 1998. Following the request of the Commission,reorganizedBB Chemical Engineering, Inc. filed a civil law suit against thecomplainant seeking return of the short-swing profits 9,774,839,087 won(Seoul District Court 98Ka-Hap114133) and won. The complainantappealed the decision (Seoul High Court 2000Na22272), and duringtheappeal, petitioned the Court to request a constitutional review onArticle 188(2) and 188(8) of the Securities and Exchange Act, but thepresiding court rejected the request. Then, on May 18, 2001, thecomplainant filed the instant constitutional complaint.

B. Subject Matter of Review

Complainant Kwon O-sup argues that the part of Article 188(2)of

the Securities and Exchange Act designating the juristic personasthe party requesting the return of the short-swing profits and thatfailure of the Securities and Futures Commission to judge whetherthe complainant's transaction would not qualify as one of the exceptions for the return of the short-swing profits in accordance with Article188(8) of the Securities and Exchange Act and Article 83-6 of theEnforcement Decree of the Securities and Exchange Act are uncon-stitutional. First, the constitutionality of failure of the SecuritiesandFutures Commission to make necessary judgments is not subject ofaconstitutional complaint against a statutory provision based on Article68(2) of the Constitutional Court Act. Therefore, it needs not bereviewed. In light of the reasons for a constitutional complaintsubmitted by the complainant, the complaint against the part ofArticle188(2) of the Securities and Exchange Act designating the juristicperson as the party requesting the return of the short-swing profitscould be interpreted as a complaint against the entire statutoryprovision.

Then, the subject matter of review in the instant case is the constitutionality of Article 188(2) (hereinafter referred to as "the instant statutory provision") of the Securities and Exchange Act(amended by Act No. 5254 on January 13, 1997, before beingamendedby Act No. 5539 on May 25, 1998, hereinafter referred to as the"Act") and Article 188(8) of the Securities and Exchange Act (amended byAct No. 4469 on December 31, 1991). The provisions and relatedprovisions are as follows:

Act

Article 188 (Disgorgement of Short-Swing Profits of Insider,etc.)

(2) Where officers, employees or major stockholders of a listedcorporation gain any profit by selling stock certificates, etc. of the corporation concerned within six months after purchasing them, orby purchasing such stock certificates within six months after sellingthem, the corporation concerned may request such officers,employees or major stockholders to relinquish the profit to the corporation. In this case, necessary matters relating to standards for calculation ofsuch profit shall be determined by the Presidential Decree, andprocedures for return as well as other necessary details shall bedetermined by the Commission.

(8) The provisions of paragraph (2) shall not apply in such case as prescribed by the Presidential Decree taking into consideration ofaffairs including the nature of selling or purchasing which wascarried out in the capacity of an officer, employee or major stockholder, and in such case where a major stockholder does not hold such capacity at a time when either he sells or purchases stocks.

Enforcement Decree of the Securities and Exchange Act (Amendedby

Presidential Decree No. 15312 on March 22, 1997, Before BeingAmended by Presidential Decree No. 15687 on February 24, 1998)

Article 83-6 (Exception to Disgorgement of Short-Swing Profits)

The term "such case as prescribed by the Presidential Decree" inArticle 188 (8) of the Act means any of the following cases:

(ⅰ) Where the transaction is made inevitably under Actsand Regulations;

(ⅱ) Where an enterprise which is designated as an objectofindustrial rationalization under the Regulation of TaxReduction and Exemption Act, makes the transaction in conformity with the criteria for industrial rationalization;

(ⅲ) Where the transaction is made according to permission,authorization, approval, etc. of the Government, or pursuant toa direction, recommendation, etc. in writing by the Government;

(ⅳ) Where the transaction is made for stabilization ormarket making under Article 83-8;

(ⅴ) Where stocks acquired by the exercise of stock optionare sold; and

(ⅵ) Where it is a transaction under the minimumtransactionunit admitted in the securities market or the Association-brokerage market, a transaction by employees securitiessavings,or a direct acquisition, etc. from an issuer or seller, which isdeemed by the Securities and Futures Commission as a trans- action not using material information which is not disclosed to the public.

Rule on Report of Status of Stockholdings by the officers ormajor stockholders and Disgorgement of Short-Swing Profits (Rule of the Securities Management Committee, March 26, 1997)

Article 15(ⅷ)

(A) Acquisition of new stocks by exercise of rightscontainedin the certificates of stocks, convertible bonds, bonds withwarrants (in case of separable bonds, certificate of warrants),or certificates expressing subscription rights (hereinafterreferredto as "stock certificates, etc.") that the stockholder alreadyowns;

(B) Offering of stock certificates, etc. offered and sold inaccordance with Article 8 of the Act;

(C) Offering of preferentially allocated stocks to members ofthe employee stock ownership association in accordance withArticle 191-7 of the Act;

(D) Offering of preferentially allocated stocks to theworker's stock savings programs under provisions of the securities un-

derwriting business regulation;

(E) Acquisition of forfeited shares or odd-lot sharesgenerated during issuance of new shares for value; and

(F) Underwriting of stock certificates, etc. for business pre- scribed in Article 28(2)(ⅲ) of the Act.

2. Complainants' Arguments and Opinion of the Admin-

istrative Agencies and Other Interested Parties

A. Complainants' Arguments

(1) 99Hun-Ba105

(A) The instant statutory provision forcing the return of profits gained from transactions of in stock certificates, etc. by insiders ofan incorporated company to the issuing company restricts theproperty right protected by Article 23(1) of the Constitution. It also violatesthe right of equality protected under Article 11 of the Constitutionby discriminating against insiders of a company in the economicsphere based on their social status. Furthermore, it infringes on the freedom of contract derived from the general freedom of action con- tained in the right to pursue happiness of Article 10 of the Consti-tution. Restriction on these rights is against Article 37(2) of the Con-stitution since the means of restriction is excessive: Other lesser meansof restriction, such as selective application of the provision requiringthe return of the short-swing profits by giving the insiders a chanceto prove that they did not use undisclosed important information, couldbe used to minimize the restriction of the basic rights.

(B) Article 188(8) of the Act provides exceptions to theapplication of the instant statutory provision. However, the phrase of "case asprescribed by the Presidential Decree taking into consideration ofaffairs including the nature of selling or purchasing" dose notprovidea substantial criterion but only formal one to decide what would beexceptions to the rule. The provision is against the principle of therule against blanket delegation set forth by Article 75 of the Consti-tution since it delegates the detailed rule making about thescope of exceptions in applying the provision stipulating the return of the short-swing profits to a presidential decree comprehensively withoutspecifying the criterion, the scope, and the content of the subjectmatter to be regulated by the presidential decree.

(C) If part of the instant statutory provision, namely, whenprofit isgained "by selling stock certificates, etc. of the corporation con-cerned within six months after purchasing them, or by purchasingsuchstock

certificates within six months after selling them", isinterpreted to include such case when the controlling share-holder gains profits by selling his stocks outside the stock market at a negotiated price with due consideration to premiums for management rights followinga decision to transfer the management rights as a way out of worsen- ing business performance after purchasing the stocks of the companywithout any intent nor knowledge about a transfer of the manage-ment rights during the initial transaction, it is against the Constitution.

(2) 2001Hun-Ba48

(A) The instant statutory provision is legislated to protectgeneralstockholders who have suffered a loss from a short-term sharetransaction by an insider. The provision names the juristic person,or the incorporated company, as the requisitioning party for thereturn of the profit. The juristic person should remain neutral in a disputebetween general stockholders and insiders such as officers.However,the provision forces the juristic person to request the insider toreturn the short-swing profits made by use of inside information onbehalf of the general stockholders. Thus, designating the juristicperson as the party requesting the return of the short-swing profitswould result in differential treatment of insiders by the juristicperson, and hence, violates the right of equality of the complainant.

(B) The judge should make a final decision on the scope of thereturn of the profits with due consideration to the type oftransactionand the circumstance under which the short-term transaction wasmade in case when the short-swing profits need to be returned. It is against the right to trial of the complainant if the complainant isordered to return the entire short-swing profits withoutconsideration of special circumstances.

B. Summary of Ordinary Courts' Reason forRejecting

the Request for Constitutional Review

(1) The instant statutory provision aims to protect thesoundnessof the stock market, prevent loss of general investors from insidertrading, protect the issuing company, and improve the effectivenessof the stock market through encouraging early notice of importantinformation. It aims to achieve these goals by preventing unfairgains from transactions in stock certificates, etc. by insiders suchas officers, employees or major stockholders of a listed corporationwho may have easy access to inside information that could influencethe stock price: Insiders could buy or sell company stocks usingsuch undisclosed information before such information is publicly known,and gain profits in the process as the stock price rises or falls,reflecting the newly

publicized information. While the instantprovisionof the Securities and Exchange Act could restrict the propertyrights of officers, employees or major stockholders of a stock-listed corpo-ration, it cannot be concluded that such restriction would makediscrimination of insiders based on their social status without rea- sonable basis if the legislative objectives of the provision are dulyconsidered. Article 188(8) of the Act providing exceptions to theregulation under the instant statutory provision stipulates that the"[instant statutory provision] shall not apply in such case asprescribedby the Presidential Decree, taking into consideration affairsincluding the nature of selling or purchasing", making it possible for insidersto keep the short-swing profits in some cases, depending on thenature of the transaction. Therefore, the provision restricts theproperty right of the insiders in a minimal fashion, and does notinfringe on essential aspect of the basic right.

(2) Considering the legislative intent of the provision stipulating the return of the short-swing profits and the fact that Article 188(2)and 188(8) are adopted along with Article 188-2 and Article 188-3prohibiting use of undisclosed important information as well asArticle188-4 prohibiting unfair transaction such as market manipulation,Article 188(8) of the Act is not against the rule against blanketdelegation because it could be inferred that the contents ofexceptionswhose legislation is delegated to the presidential decree wouldinclude transaction that would not seem unfair or transaction that was made without using important undisclosed information.

C. Opinion of the Minister of Finance and Economy

(1) Requirement of the return of the short-swing profits hasbeenadopted to mitigate the difficulty of regulating insider trading.Sinceit is very difficult to prove that the suspect was aware of the factthat the information was indeed very important and undisclosed tothe public, the provision allows the confiscation of profits fromstocktransaction without further proof for certain insiders as long astheir selling or purchasing is classified as a short-term transaction. Therequirement is a preventive measure prohibiting use of undisclosedinformation by insiders, and its contribution to maintenance offairness in the market is significant.

(2) Let us examine whether the statutory provision violates theprinciple against excessive restriction in restriction of basic rights. First, persons required to return short-swing profits are limited toinsiders of the company (officers, employees or major stockholders).Second, the provision does not prohibit transaction by insiders alto-gether; It only regulates a transactions made within a relativelyshortperiod of six months, and only regulates transactions of stocks of thecompany where the insider either works or is a major shareholder.Third, the insider only needs to

return the profits of transaction, notthe entire value of the transaction, to the concerned company sothatthe profits would benefit every shareholder. Fourth, Article 188(8) ofthe Act providing exceptions to the regulation under the instant stat-utory provision makes it possible for insiders to keep the short-swingprofits in some cases, depending on the nature of the transaction.Therefore, restriction of property rights of the insiders by the instantstatutory provision is minimal, and it is not unconstitutional.

(3) Let us examine whether Article 188(8) of the Act violatestheprinciple of the rule against blanket delegation. Since there aremanyforms of transactions in the stock market, and the financial systemand environment changes rapidly, it would be impossible to effectivelyreflect market changes and thus cause inconvenience for stocktradersif a statute were to contain details of all exceptions to the rule.The Securities and Futures Commission close to the market couldmake timely and appropriate adjustment to the exceptions to returnthe short-swing profits with due consideration of diverse cases.Second, the delegated part of the statutory provision dose notrestrictthe basic rights of citizens. Detailed rules delegated to apresidentialdecree is to remove the imposed restriction by recognizingexceptions.Article 1 of the Act providing the legislative objective and a com- prehensive overview of Article 188 would make it possible for the people to predict that what is being delegated by Article 188(8) ofthe Act to the presidential decree contains such contents as "a trans-action that would not seem unfair or a transaction made withoutusing undisclosed information." Therefore, the statutory provision isnot in violation of the rule against blanket delegation.

(4) The requirement to return the short-swing profits has beenadopted to achieve the legislative objectives of promoting thesoundness of the stock market and preventing losses by general investors from insider trading. It does not aim to resolve conflicts between share-holders. No matter who the party requesting the return of theprofits is, the profits would be reverted to the concerned juristicperson. Accordingly, the juristic person would be most earnest inseeking the return, and it would be most likely to succeed ingatheringinformation to prove that the insider indeed made a short-termtransaction regulated by the statute. Thus, the statute designatesthe juristic person as the party requesting the return of the short-swingprofits, and it is similar in the case of legislation in the UnitedStates of America and Japan.

D. Opinion of the Commissioner of the Financial Su-pervisory Commission, the President of the KoreaSecurities Dealers Association, and the President ofthe Korea Listed Companies Association

Opinions of the Commissioner of the Financial Supervisory Commis-sion, the President of the Korea Securities Dealers Association, and thePresident of the Korea Listed Companies Association are mostly inagreement with the ordinary courts' reasons for rejecting the requestfor constitutional review and the opinions of the Minister of Finance and Economy.

3. Review on Merits

A. Regulation of Insider Trading and the Means of

Regulation

(1) Insider trading refers to transactions of stocks of thecompany by insiders such as officers, employees, or major stockholders of thecompany, using undisclosed insider information that they obtained through their work or position. The reason that such transaction becomes subject to regulation is that insiders are likely to obtain confidential information before everyone else that would influencethe market value of the company stocks such as increase in paid-incapital or capital increase without compensation, plans for assetsrevaluation, merger, development of new products, and bankruptcy.Thus, they are in a very favorable position for stock tradingcompared to general investors, and general investors are likely to suffer loss in return.

Generally, the risk associated with stock investment resultsmainlyfrom the imperfectness of investors' judgments about earnings ofthe company as well as market or economic trends. Therefore, when aninvestor suffers a loss because he did not use information that others had or because he did not make a accurate analysis, it is pursuanttothe nature of stock trading, and no legal problem would arise in suchcase. However, a loss suffered from insider trading isnot a resultof a lack of adequate skill or the negligence of the trader: it arisesbecause an insider used undisclosed insider information of the companyto his advantage. Such misconduct should not be overlooked lightly.If such conduct is ignored, the general public would be doubtful ofthesoundness of the stock market, and thus, hesitate to make invest-ments. This would make it very difficult for companies to raisenecessary capital from the stock market. As a result, the sounddevelopment of the stock market would be impossible, and effectivemanagement of capital by citizens would in turn be hampered.

In conclusion, the objective of the regulation of insider tradingis to enable investors to trust the stock market by protecting theinvestors and securing fairness in the stock market. This could beachieved by ensuring equality of information in stock transaction which could

promote fair and free competition for all individualsparticipating in the stock market under similar positions and withsimilar possibilities for profits (9-1 KCCR 274, 283-284,97Hun-Ba24, March 27, 1997).

(2) In order to regulate insider trading, the Act directlyprohibitsuse of undisclosed information by insiders: The Act prohibits aninsider's use of undisclosed information that he gained from hiswork (Article 188-2); If the insider breaches the law, he should beliable for damages for the loss of the other party to the transaction(Article 188-3), and should be subject to criminal punishment(Article 207-2(ⅰ)). In order to secure the effectiveness of the regulation of insider trading, the Act has adopted several preventive and indirectmeans of regulation: Any officer or major stockholder of acorporationis required to report the number of stocks owned by him or thechangeof ownership of stocks (Article 188(6)); and insiders are prohibitedfrom making a short sale (Article 188(1)). The instant statutoryprovision makes the insider return the profits gained from a short- term transaction, made within a six-month period, to the company.

B. Legislative Objective of Requirement of the

Disgorgement of Short-Swing Profits

The instant statutory provision enables the company to requestthe return of the profits made by insiders through purchasing orselling company stocks within six months after the initial selling orpurchasing. Whether the insider indeed used undisclosed insiderinformation of the company in making the transaction is not afactorfor consideration, and all profits made from such short-termtransaction needs to be returned to the company.

In order to regulate the insider trading, the Act, as seen above,makes the insider subject to civil and criminal sanctions when hemade transaction of stocks using undisclosed company information.However, considering the relationship between the company and theinsider and the fact that the insider has ready access to suchevidentialdocuments as the company records, it would be very difficult toprove that the insider indeed has made use of undisclosed information.

Accordingly, the instant statutory provision, in order to function effectively as preventive and indirect means of regulation of insidertrading, requires the return of all profits made by an insider if hemade stock transactions within six months after the initialtransaction,regardless of whether the insider indeed made use of undisclosedinformation or not.

C. Review on Violation of the Property Rights

The instant statutory provision requires the return of all profitsmade by an insider if he made stock transaction within six months after the initial transaction, regardless of whether the insider indeedmade use of undisclosed insider information or not, as long as theprofits are made under the prescribed conditions. The insider is notallowed to prove that he has made a transaction without usingundisclosed inside information. However, if the instant statutoryprovision requires disgorgement of short-swing profits in caseswhen it is objectively evident that the insider had not made use ofundisclosed company information, when it was not possible to makeuse of such information to begin with, or when the insider provesthat he had not made use of undisclosed company information, itwould result in a deprivation of legitimate profits that the insider isentitled to. This would be beyond the legislative objective of theprovision stipulating disgorgement of short-swing profits.

Let us then examine whether the statutory provision requiring the return of all profits to the company if they are made from short-termsales infringes on the property rights of the complainants against therule against excessive restriction.

(1) Legitimacy of Legislative Purpose and Appropriateness

of the Means

The legislative purpose of the instant statutory provision is toprotect the interests of general investors, secure the trust of thegeneral investors in the stock market by ensuring fairness andimpartiality in the stock market, and thus, promote the developmentof the national economy. It is apparent that the statutory provision has a legitimate legislative purpose.

In order to achieve such legislative purpose, the instantstatutoryprovision requires the return of profits made from a short-termstocktransaction by insiders which is likely to have been made usingundisclosed insider information, thereby making such transaction unprofitable. This would have a considerable deterrent effect oninsider trading, and therefore, the means employed to achieve theend is appropriate.

(2) Doctrine of the Least Restrictive Means

(A) Let us look at the legislative history of the instantstatutory provision. In 1976, when the provision was first introduced, Article188(2) read as "Where an officer, an employee, or a majorstockholderof a stock-listed corporation gains profits by selling stockcertificates, etc. of the

corporation concerned within six months after purchasingthem, or by purchasing such stock certificates within six monthsafter selling them, using information that he obtained from his workor position, the corporation concerned or the shareholders of thecorporation may request such officer, employee, or major stockholderto give such profits to the corporation." Thus, the insider wasrequired to return the profits only when the company proved that he indeed made use of insider information. The provision was revisedin 1987, and read as "Where an officer, an employee, or a majorstockholder of a stock-listed corporation or Association-registeredcorporation gain profits by selling stock certificates, etc. of the cor-poration concerned within six months after purchasing them, or bypurchasing such stock certificates within six months after sellingthem,the corporation concerned or the Commission may request suchofficer,employee, or major stockholder to give such profits to thecorporation:Provided, That the insider would not be required to return theprofitsfrom such transaction if he successfully proves that he has notmadeprofits using information that he obtained from his work orposition."Thus, the burden of proof was shifted to the insider in order toenhance the effectiveness of the provision stipulating disgorgementof short-swing profits.

In spite of the transfer of the burden of proof, the insider couldeasily prove that he had not made use of insider information sincehe had exclusive access to the evidential documents to prove use ofinsider information. At times, he argued, without any basis, that histransaction was made without insider information, thus delaying thereturn of profits. As a result, disgorgement of short-swing profits was not effective. Then in 1991, the provision was again revised.This time, the proviso was deleted, and the insider was required toreturn all profits made by an insider if he made stock transactionswithin six months after the initial transaction, regardless of whether the insider indeed used the undisclosed insider information or not.

Thus, under the instant statutory provision stipulating dis-gorgement of a short-swing profits, as long as i) an insider, ii)within six months after the initial transaction, iii) makes anothertransaction of stock certificates, etc. of his company iv) and makesprofits, the person is liable to return the profits, regardless ofwhether he actually has made usee of undisclosed insider information. The statutory provision imposes strict responsibility on the insider, andhe is not allowed to prove that he has made a transaction withoutusing undisclosed insider information.

Article 188(8) of the Act stipulates that "The provisions of par-agraph (2) shall not apply in such case as prescribed by the Presi- dential Decree taking into consideration affairs including the natureof selling or purchasing which was carried out in the capacity of anofficer,

employee or major stockholder, and in such case where amajor stockholder does not hold such capacity at a time when hesells or purchases stocks," thus providing some relief on strict liability ofthe insider in some cases prescribed by a presidential decree. However, such exceptions are limited to certain types of stocktransaction prescribed in a presidential decree. The insider is still not allowed to prove that he has made a transaction without using undisclosed insider information, and the exceptions to the rule donot apply in cases unprescribed by the presidential decree.Therefore,let us next see whether imposition of such strict liabilityexcessively restricts the property rights of the complainants.

(B) Whether it violates the rule of the least restrictive meansnotto require use of undisclosed insider information as a positiveconditionfor return of profits or non-use of undisclosed insider informationas a negative condition for return of profits

Considering the relationship between the insider and thecompany,it would be hard to expect the company to actively prove that theinsider actually made use of the undisclosed company information.Also, it would be impossible for a regulatory agency or generalshareholders to prove this since all evidence is being maintained bythe company which the insider manages or oversees. Even if theburden of proof is shifted to the insider, it would be fairly easy for him to prove his point, and in some cases, there is a high risk that he would manipulate evidence since he has easy access to evidential documents. This would make the statutory provision requiring dis- gorgement of short-swing profits ineffective and void.

Even when there is evidence that the insider has made use ofundisclosed insider information, in most cases, such insiderinformation would be mixed along with information known to outsider. It would be difficult to make judgments which had influenced the rise or fallof the stock price in such case. Moreover, insider information isnot only limited to singular significant information but also that formedby accumulation of numerous insignificant information. In suchcase, it would be difficult to designate what would be the specific insider information at issue.

Under such circumstance, if use of undisclosed information tothepublic is required as a positive condition for return of profits ornon-use of undisclosed information is required as a negativeconditionfor return of profits, it would make the instant statutory provisionunable to require the return of short-swing profits, thereby makingregulation of insider trading ineffective. Therefore, the instantstatutory provision requires disgorgement of all profits made by an insider regardless of whether the insider indeed made use of undis- closed company information or not.

Furthermore, if the insider gains profits from short-term trans- action, general investors would suspect that it is a result of use ofundisclosed insider information gained from his position in thecompany even if the insider had not made use of insider information. Such distrust would arise if the insider gains short-swing profits, and thestock market would languish if such distrust is rampant in themarket.

Thus, the legislators came to the conclusion that it would beunable to achieve the legislative objective of regulating insidertrading if the provision were to make the insider disgorge the short-swingprofits only when he actually made use of insider information. Itwasan inevitable legislative decision to achieve the legislative purposeof promoting trust in the stock market that the statutory provision,to prohibit short-term transactions altogether because they arelikelyto be based on insider information, requires the insider to disgorgeall profits made from short-term stock transaction regardless ofwhether he indeed used undisclosed company information or not.

(C) Whether it is against the Rule of the Least RestrictiveMeans to Make an Insider Disgorge All Profits if Transaction is not One of the Exceptions Prescribed by Article 188(8)

As seen above, there might be a necessity and reasonable basisto force the insider to disgorge all profits made from short-termstock transaction regardless of whether he indeed used undisclosedcompany information or not. However, it might be against the ruleof the least restrictive means to force the insider to return theprofitsmade from short-term transaction when it is objectively clear thatthereason for short-swing profits is not from use of the undisclosedinformation, just because the transaction, while it may be basicallyidentical to the exceptions stipulated by the law, is not an exceptionprescribed by Article 188(8) of the Act, Article 83-6 of the En-forcement Decree of the Act based on Article 188(8), or Article 9-2 of the Rule on Report of Status of Stockholdings by the Officers or Major Stockholders and Disgorgement of Short-Swing Profits based on Article 83-6(ⅵ) of the Enforcement Decree.

Unlike the provisions in the legislation of the United States ofAmerica or Japan requiring the disgorgement of the short-swingprofits, the instant statutory provision does not include the phrase in order "prevent the insider from using undisclosed insider infor-mation."Therefore, it may be interpreted that as long as the trans- action meets the objective condition prescribed by the act, the insiderwould berequired to return the profits from the transaction, even if there is no possibility that the insider had made use of undisclosed company information.

While the instant statutory provision may not have explicitlystipulated the legislative objective of regulating insider trading,

requirement of disgorement of the short-swing profits is to regulatethe insider trading of the company shares using undisclosed insiderinformation. Since a short-term stock transaction by insiders islikely to have been made using undisclosed insider information, theinsider is required to disgorge all profits from stock transactionsregardless of whether he actually made use of undisclosed company information or not. Therefore, the legislative purpose of regulating insider trading shall be duly considered in interpreting and applyingthe instant statutory provision even if the provision does notcontain the phrase stipulating the legislative objective, unlike the legislation in the United States of America or Japan. In this light, the instant statutory provision would not apply in such cases when it is objec-tively clear that the transaction is not a form of insider trading,thatthe reason of short-swing profits is not from use of undisclosedinformation, even if such transaction is not listed as an exception tothe rule under Article 188(8) of the Act or Article 83-6 of the En-forcement Decree of the Act based on Article 188(8).

Such problem also arises in the United States of America andJapan which have similar legislation requiring disgorgement ofshort-swing profits. The U.S. Supreme Court and the SupremeCourt of Japan rendered similar decisions in their rulings onKern CountyLand Co. v. Occidental Petroleum Corp.,411 U.S. 582 (1973) andHeisei12(Oh) 1965, 1703, March 13, 2002, respectively.

Considering the legislative purpose of the statutory provision,nature of Article 86-6 of the Enforcement Decree of the Securitiesand Exchange Act, listing exception to disgorgement of the short-swing profits, and the meaning of Article 23 of the Constitutionprotecting property rights, it can be said that stock transactionwithout any possibility of insider trading is not subject to regulation underthe instant statutory provision to begin with, even if the instantstatutory provision prescribes objective conditions for disgorgementof profits by the insider and Article 188(8) of the Act and Article86-6 of the Enforcement Decree of the Securities and Exchange Actbased on Article 188(8) enumerate exceptions exhaustively.Therefore,levying strict liability on the insider for the return of profits fromshort-term stock transaction if such transaction is not listed as an ex-ception to the rule under Article 188(8) and Article 86-6 of the En-forcement Decree does not violate the rule of the least restrictive means.

(3) Balance of Legal Interests

The instant statutory provision is enacted to protect the interest of general investors by forcing the return of short-swing profits aswell as to improve the trust of general investors in the stockmarketby ensuring fairness and impartiality in the market. There is nocomprehensive

ban on insider trading: The provision only stipulatesreturn of profits if such transaction was made within the shortperiod of six months.

Moreover, even if the insider used insider informationundisclosedto the public in the initial stock transaction, he is free to tradestocks without any restriction after six months and retain the profits from the transaction. Therefore, restriction on the property rights of the insiders such as complainants by the instant statutory provision is not greater than the public interest being achieved by the provision.

(4) Sub-conclusion

Restriction by the instant statutory provision is inevitable toachieve the legislative objective of protecting the interest of generalinvestors by forcing short-swing profits as well as improving thetrustof general investors in the stock market by ensuring fairness andimpartiality in the market. It is a reasonable restriction necessaryforthe public welfare, and is allowed by the Constitution. Thestatutoryprovision does not infringe on the essential aspect of the propertyrights in violation of the rule against excessive restriction.

D. Review of Remaining Arguments of the Complainants

(1) The complainants argue that the instant statutory provision would result in differential treatment of insiders and others withouta reasonable basis by requiring only insiders to disgorge short-swing profits.

The instant statutory provision restricts insider trading in order to ensure fairness in the stock market and protect general investors'trust in the market. In order to achieve such legislative objective,the instant statutory provision only requires disgorgement of profits from short-term stock transactions made by insiders since a short- term stock transaction by insiders is likely to have been made using undisclosed insider information. Such differential treatment is by a reasonable basis, and does not violate the principle of equality.

(2) The complainants also argue that it violates the right ofequality of complainants to designate the juristic person, or the in-corporated company, who should remain neutral in a disputebetweengeneral stockholders and insiders such as officers, as therequisitioningparty for the return of the profit. This could be understood as anargument that it violates the complainants' right to a fair trial toname the juristic person as the requisitioning party in the case.

The instant statutory provision names the juristic person, or the incorporated company, as the requisitioning party for the return ofprofits. The Securities and Futures Commission can request thecorporation to

requisition the insider to disgorge short-swingprofits, and if the corporation does not obey such request within a certain period, shareholders of the corporation or the Securities and Futures Commission could request the return of profits subrogating the cor- poration (Article 188(3) of the Act).

Since the instant statutory provision aims to protect theinterests of general investors by regulating insider trading, general investors who suffered a financial loss from the short-term stock transactionby the insider has the biggest interest in principle. However, it isreasonable to give the right to request the return of the profits to the company considering the following facts: that the profits fromthe insider trading is reverted to the company; that while thelegislative purpose of requiring disgorgement of the short-swingprofitsincludes the resolution of a dispute between some officers andshareholders, it is largely to achieve policy goals of protectingfairness in the stock market and the trust of general investors; and that it is more likely that the company would be able to attain information to prove that there was indeed short-term transactions by insiders.

(3) In addition, the complainants argue that the instant statutoryprovision infringes on the freedom of contract derived from thegeneral freedom of action implied in the right to pursue happiness of Article10 of the Constitution. However, the statutory provision does notdirectly restrict freedom of contract. Even if it indirectly constrainsthe freedom of contract, such restriction is imposed with areasonable basis within the permitted boundary of limitation of the basic rights. Therefore, complainant's argument is without basis.

E. Constitutionality of Article 188(8) of the Act

(1) Article 75 of the Constitution provides that "the Presidentmay issue presidential decrees concerning matters delegated to him in a concrete, limited scope by statute, and also the matters necessary toenforce statutes." It forms the basis for delegation of rule-making, and at the same time, limits the scope of delegation by stipulatingthat the delegation must be within "a concrete, limited scope."

It not only provides a basis for delegation of rule-making, butrequires such delegation to limit its scope concretely. Article 75aims at carrying out the rule of law and the principle of legislative law- making by requiring the parental statutes to specify the scope andthe content of the subject matter to be regulated by presidentialdecrees, thereby precluding the arbitrary interpretation orenforcement of law. In light of this constitutional-legislative intent, 'concrete inscope' means that the enabling statute must specify the subjectmatterdelegated to presidential decrees as well as other inferior laws soclearly and concretely as to

allow people to infer from the statuteitself the basic outlines of the presidential decrees. Here,inferabilityis not to be measured by each statutory provision but evaluatedthrough a comprehensive and systemic analysis of the entire set ofrelated provisions as a whole, and also in light of the concretenatureof the individual statute at issue (12-1 KCCR 62-74, 99Hun-Ba23,January 27, 2000).

(2) Let us next examine whether Article 188(8) of the Securitiesand Exchange Act violates the rule against blanket delegation.Since there are many forms of transactions in the stock market, andthe financial system and environment change rapidly, it isimpossibleto exhaustively list the details of all exceptions to the rule on astatute. The Securities and Futures Commission close to marketshould make timely and appropriate adjustment to the exceptions to requirement to return the short-swing profits with due considerationto diverse cases. Second, the delegated part of the statutoryprovisiondose not restrict the basic rights of citizens. Instead, detailed ruledelegated to a presidential decree is to remove the imposedrestrictionby recognizing exceptions. Since the instant statutory provisionstipulates the subject and conditions of regulation, the contents andscope of exceptions are predictable to a certain degree. Third,considering the legislative intent of the provision stipulating thereturn of the short-swing profits and the fact that Article 188(2)and 188(8) are adopted along with Article 188-2 and Article 188-3 prohibiting use of undisclosed information as well as Article 188-4prohibiting unfair transaction such as market manipulation, Article188(8) of the Act is not against the principle of the rule againstblanket delegation because people can infer from the statute thatwhatis being delegated by Article 188(8) of the Act to a presidentialdecree contains such contents as "transaction that would not seemunfair or transaction made without using undisclosed information."

4. Conclusion

All Justices unanimously decide that the instant statutoryprovision and Article 188(8) of the Act are constitutional.

Justices Yun Young-chul(Presiding Justice), Han Dae-hyun, Ha Kyung-chull, Kim Young-il, Kwon Seong, Kim Hyo-jong, Kim Kyoung-il, Song In-jun, and Choo Sun-hoe(Assigned Justice)