[1] The purport of Article 398 of the Commercial Code stipulating that a company shall obtain approval from the board of directors for transactions between a director and a company, and whether the above provision stipulates only the prior approval of the board of directors and excludes ex post facto approval (negative)

[2] Whether a director with respect to a transaction in conflict of interest between a director and a company is obligated to commence his/her interest in the transaction prior to the approval of the board of directors (affirmative), and whether the approval of the board of directors under the proviso to Article 398 of the Commercial Act can be deemed to exist in a case where a resolution of the board of directors allowing a transaction in ordinary terms was made without commencement

[3] In a case where a resolution of ratification was adopted at a general meeting of shareholders for an interest-sharing transaction without the approval of the board of directors, whether such transaction becomes effective (negative in principle)

[4] Requirements for an implied ratification of an interest-conflicting transaction between a director and a company

[1] The purport of Article 398 of the Commercial Code stipulating that a director shall obtain the approval of the board of directors for a transaction between a director and a company is to prevent a director from pursuing his own or a third party's interest by making a transaction with a company using his position and causing damages to the company and a stockholder's interest. Thus, in interpreting the latter part of Article 398 of the Commercial Code, which provides for the exclusion of the application of Article 124 of the Civil Code upon approval of the board of directors, a director's act of making a transaction with a company without obtaining the approval of the board of directors can be deemed as a kind of unauthorized Representative, and it is possible to confirm an act of an unauthorized representative, in light of the fact that Article 398 of the Commercial Code provides only the prior approval of the board of

[2] In order to prevent the transaction between a director and a company from being in secret, to ensure fairness in the transaction, and to guarantee the proper exercise of the right to supervise duties by the board of directors, the director involved in the transaction has a duty to start his interest in the transaction and important facts about the transaction at the board of directors prior to obtaining the approval of the board of directors. If such matters are not deliberated upon without the commencement of the board of directors on whether the transaction is fair as a transaction in interest, but merely a resolution of the board of directors allowing the transaction is made, it shall not be deemed that the approval of the board of directors under the proviso of Article 398 of the Commercial Act is granted.

[3] Unless there are special circumstances, such as that approval of an interest-conflicting transaction between a director and a company is stipulated in the articles of incorporation as the matters subject to the authority of the general meeting of shareholders, the approval of an interest-conflicting transaction between a director and a company shall be deemed to be subject to the discretion of the board of directors. Thus, a resolution of ratification after the general meeting of shareholders without any authority to approve an interest-conflicting transaction cannot be valid

[4] In order for a company to be deemed to have implied ratification of a beneficial derivative transaction, the board of directors having the authority to approve the transaction should have acknowledged the reason to deem that the company had ratified the transaction, with knowledge of the interests of directors related to the transaction and the important facts related thereto, by converting the original invalid transaction into its validity, thereby causing damage to the company and bearing joint and several liability.

[1] Article 398 of the Commercial Act, Articles 124 and 130 of the Civil Act / [2] Article 398 of the Commercial Act / [3] Article 398 of the Commercial Act, Article 130 of the Civil Act / [4] Article 398 of the Commercial Act, Article 130 of the Civil Act

Korea Life Insurance Co., Ltd. (Law Firm Chuncheon, Attorneys Cho Jong-ok et al., Counsel for the defendant-appellant)

Newdong Private Teaching Institutes (Law Firm Gyeong & Yang, Attorneys Yellow-ho et al., Counsel for defendant-appellant)

Seoul High Court Decision 2004Na14804 delivered on December 14, 2004

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. As to the subsequent approval by the board of directors

A. The purport of Article 398 of the Commercial Act, which provides that a director shall obtain the approval of the board of directors with respect to a transaction between a director and a company, is to prevent a director from making a transaction with a company by taking advantage of his/her position, thereby promoting his/her own or a third party's interest and causing losses to the company and shareholders. Thus, a director's act of making a transaction with a company without obtaining the approval of the board of directors in accordance with Article 398 of the Commercial Act, which provides that a director shall exclude the application of Article 124 of the Civil Act upon obtaining the approval of the board of directors, can be deemed as a kind of act of unauthorized representative. In light of the fact that an act of an unauthorized representative can be ratified, it cannot be deemed that Article 398 of the Commercial Act provides only the prior approval of the board of directors and excludes ex post facto approval. However, in either case, in order to prevent a transaction between a director and a company from taking advantage of his/her position and ensure fairness in such transaction and to ensure reasonable exercise of supervisory rights by the board of directors.

B. In light of the above legal principles and records, even if the board of directors of the Plaintiff company has deliberated and resolved on documents related to the settlement of accounts, such as a statement of donations, which included the details of expenditure for the instant act of donation, before holding a general meeting of shareholders for approval of financial statements and business reports, the board of directors of the Plaintiff company, but during that process, the representative director of the Plaintiff company and the president of the Defendant corporation commenced his interest and important facts in relation to the instant act of donation to the Defendant corporation of the Plaintiff company, and there is no evidence suggesting that the board of directors of the Plaintiff company deliberated and resolved on whether the instant act of donation was fair as a profit-contributing transaction. Thus, the mere fact that the board of directors of the Plaintiff company deliberated and resolved on the documents related to the settlement of accounts, such as the statement of donations, cannot be deemed to have

Although the reasoning of the judgment of the court below is partially insufficient or inappropriate, it is just in rejecting the assertion of the defendant corporation that obtained the ex post approval of the board of directors of the plaintiff company with respect to the contribution act in this case, and it is not erroneous in the misapprehension of legal principles as to Article 398 of the Commercial Act, or in the misapprehension of the rules of evidence, which affected the conclusion of the judgment.

2. On the post ratification of a general meeting of shareholders

A. Unless there are special circumstances, such as that approval for an interest-conflicting transaction between a director and a company is given consent or approval is stipulated in the articles of incorporation as a matter of authority of the general meeting of shareholders, approval for an interest-conflicting transaction which has not been approved by the board of directors, the resolution of ratification after the general meeting of shareholders without any authority to approve such transaction cannot be valid.

B. In light of the above legal principles and records, there is no evidence to support that the consent of all shareholders of the Plaintiff company is obtained with respect to the contribution act of this case, or that the approval of an interest-contributing transaction between a director and a director of the Plaintiff company is stipulated as a matter of authority of the general meeting of shareholders. Thus, even if a resolution of ratification was made ex post facto at the general meeting of shareholders of the Plaintiff company with respect to the contribution act of this case, such circumstance

Although the reasoning of the judgment of the court below is somewhat insufficient, the conclusion of rejecting the assertion by the defendant corporation that the act of donation in this case was effective by the post ratification of the general meeting of shareholders is justifiable, and contrary to what is alleged in the ground of appeal, the court below did not err by misapprehending the legal principles on ex post facto ratification of the general

3. As to the implied ratification by the Plaintiff Company

A. The purport of Article 398 of the Commercial Act, which provides that a company and a shareholder are subject to approval by the board of directors, shall be jointly and severally liable for damages arising from the transaction. As such, the board of directors may take into account that not only the directors related to the transaction but also the other directors who approved the transaction will have been jointly and severally liable for damages. If an implied ratification is easily acknowledged solely on the grounds that the company did not actively raise any objection to the transaction after the transaction between a specific director and the company, etc. was made, the original null and void transaction becomes effective, thereby resulting in losses to the company, and a third party related to the transaction becomes liable for damages, on the other hand, because the subject or responsibility of implied ratification is unclear. Accordingly, in order to deem that a company has implicitly ratified the transaction, the board of directors having the authority to approve the transaction should be aware of the interests of the director and the important facts related to the transaction, and thus, it can be acknowledged that the loss incurred to the company can be acknowledged as a joint and severally void transaction.

B. In light of the above legal principles and records, there is no reason to believe that the board of directors of the Plaintiff company had confirmed the validity of the act of donation in this case when it became aware of the interest of the non-party related to the act of donation in this case and the important facts related thereto, and that the act of donation in this case may cause damage to the Plaintiff company, and that the director of the Plaintiff company may be jointly and severally liable for such damage. Thus, it is difficult to deem that the Plaintiff company ratified the act of donation in this case as impliedly, solely on the following grounds: (a) the board of directors or the shareholders' meeting of the Plaintiff company approved the financial statements and the business report; and (b) the Plaintiff company received disposition of inclusion in deductible expenses in the calculation of corporate tax by filing a tax return based on its business report; or (c) the Plaintiff company did not raise any objection against

Although the reasoning of the judgment of the court below is somewhat insufficient, the conclusion of rejecting the argument of the defendant corporation that the contribution act in this case was effective by implied ratification of the plaintiff company is proper, and contrary to what is alleged in the ground of appeal, there is no error of misapprehending the legal principles on implied ratification, violating the rules of evidence, or omitting judgment, thereby affecting the conclusion of the judgment.

4. As to the violation of the principle of good faith

A. The principle of trust and good faith refers to an abstract norm that a party to a legal relationship should not exercise his right or perform his duty in a way that is contrary to equity or less trust in consideration of the other party’s interest. In order to deny the exercise of right on the ground that it violates the principle of trust and good faith, it should have been provided to the other party, or the other party should have been objectively regarded as being in a legitimate state, and the exercise of right against the other party’s trust should have reached an extent that is not acceptable in light of the concept of justice (see, e.g., Supreme Court Decisions 91Da3802, Dec. 10, 1991; 2003Da18401, May 26, 2006).

B. In light of the above legal principles and records, the court below is just in rejecting the plaintiff company's claim for return of unjust enrichment of this case against the defendant corporation, which is a malicious beneficiary, in order to recover its damage late, and it is anticipated that the defendant corporation will suffer considerable property damage due to the lawsuit of this case. Even if the plaintiff company neglected the act of this case for a long time or obtained tangible and intangible profits due to the act of this case, such circumstance alone is not allowed in light of the concept of justice, and there is no error in the misapprehension of legal principles as to the principle of good faith, as otherwise alleged in the ground of appeal.

5. As to the extinction of prescription

The grounds of appeal are all new claims that are not asserted in the grounds of appeal, since the extinguishment of prescription recorded in the supplemental appellate brief that was not timely filed is not legitimate grounds of appeal.

6. Conclusion

Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices.

Justices Kim Young-ran (Presiding Justice)