In cases where “an underwriter who determines terms and conditions of underwriting upon receiving a request for underwriting directly from an issuer of securities” under Article 135(2) of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act is intentionally or by gross negligence, whether the person is subject to a penalty surcharge, inasmuch as he/she fails to prevent an act of making a false description or representation of a material fact or an omission of description or representation of a material fact in the registration statement or investment prospectus submitted by the issuer

The former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013; hereinafter “former Financial Investment Services and Capital Markets Act”) provides that an issuer of securities shall promptly and accurately disclose the contents of securities, including the company’s property, management status, and other matters necessary for investors’ investment judgment in order to enhance the fairness, reliability, and efficiency of the capital market. The issuing market is difficult to assess the value of securities in the first place, and there are many cases where information necessary for investment judgment is insufficient. As a result, it is ordinarily difficult for investors to make an indirect public offering rather than directly invite a issuing company, and the reason is that the issuer is likely to win the public offering through an underwriter, and thus, the issuer may expect the issuer to incur risks arising from the public offering with public confidence, and investors may also be held liable for damages arising from the lack of the insurer’s duty to make a false statement or investment judgment on the securities market (Article 7 of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act).

In full view of the language, purport, etc. of the penalty surcharge provision on violation of disclosure in addition to the position of underwriter and the content of disclosure regulations in the market for issuance, the person who is subject to penalty surcharge, if the “an underwriter who is requested to acquire securities directly from an issuer of securities and determines the terms and conditions of underwriting” under Article 135(2) of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act fails to make a false statement or representation of a material fact in the registration statement or investment prospectus prepared and submitted by the issuer, or fails to prevent any act of omission of description or representation of a material fact

Articles 71 subparag. 7, 125(1)5, 429(1)1, and 430(1) of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 11845, May 28, 2013); Articles 68(5)4 and 135(2) of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act (Amended by Presidential Decree No. 24697, Aug. 27, 2013);

Han Lan Investment Securities Co., Ltd. (Law Firm LLC, Attorneys Limited-Appellee et al., Counsel for the plaintiff-appellant)

Financial Services Commission (Law Firm Yang Hun-Ga, Attorneys Noh Jeong-ho et al., Counsel for defendant-appellant)

Seoul High Court Decision 2015Nu36623 decided December 9, 2015

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

1. A. The reasoning of the judgment of the court of first instance as cited by the court below and the records are as follows.

(1) On September 18, 2009, the Chinese High Island Publication Co., Ltd (hereinafter “China Island”) listed shares on the Singapore Stock Exchange. On May 31, 2010, the Korea Exchange (hereinafter “Korea Exchange”) entered into a management contract with the Daewoo Securities Co., Ltd. (hereinafter “Treatment Securities”) to list the securities depository receipts whose stocks are listed on the Singapore Stock Exchange (hereinafter “instant securities”). On October 15, 2010, the Chinese High Island filed an application for preliminary examination to list the instant securities with the Korea Exchange, and the Korea Exchange approved this on December 9, 2010.

(2) On December 14, 2010, the Chinese High Island entered into a joint supervision agreement with the Plaintiff for the second listing of the Korea Exchange (hereinafter “instant joint supervision agreement”). According to the instant joint supervision agreement, treatment securities and the Plaintiff, as the representative firm of Chinese High Island, faithfully perform the representative business (Article 6(2) of the Financial Investment Services and Capital Markets Act (hereinafter “Capital Markets Act”) and relevant Acts and subordinate statutes, and (2) take over Chinese High Island’s shares in total form (Article 4(2) and (3) of the Financial Investment Services and Capital Markets Act (Article 7(1) of the Financial Investment Services and Capital Markets Act), and submit data (management performance, corporate management, accounting, taxation, etc.) stated in the registration statement to the Financial Investment Services and Capital Markets (Article 7(1) of the same Act) (the same date, the term “representative company”, and the term “the Plaintiff’s stock-listed company” and “the Plaintiff’s stock-listed company” were changed to the total amount of this case’s underwriting securities and investment securities (hereinafter “the instant underwriting securities company”).

(3) The Chinese High Island submitted a registration statement on December 15, 2010 to the Defendant and the corrective registration statement on January 11, 201 (hereinafter “instant registration statement”). According to the foregoing, ① the assessment of the instant securities 7 persons and the Plaintiff 5 persons participated in the company-based company company company company company company company company company company company company company company company company, ② the cash and cash assets based on the quarterly financial statements of the Chinese High Island are “593,387,000 bills”.

(4) Although the instant securities were listed on January 25, 201. However, the Singapore Stock Exchange temporarily suspended the instant securities transaction on March 22, 2011 at the request of the Chinese High Island as the prime price of KRW 24% drops on March 21, 2011, and on the same day, the Korea Exchange suspended the instant securities transaction on the same day. The special auditor, who is the special auditor, LLP, on May 3, 2012, “The bank balance as of December 31, 2010 of the Island, was approximately KRW 97 million, and only KRW 200,000,000,000,000,000,000 won on the basis of the deposit account of the Chinese High Island and KRW 201,61,000,000,000,000,0000,000 won. The Financial Supervisory Service was sent from the Chinese Securities Management Committee on December 31, 2016.

(5) On October 10, 2013, the Defendant imposed a penalty surcharge of KRW 2 billion on the Plaintiff pursuant to Article 429(1)1 of the Capital Markets Act and Article 25 of the Rules on the Investigation of Capital Markets (hereinafter “instant disposition”). The Defendant’s grounds for imposition of a penalty surcharge are gross negligence that the Plaintiff, based on the instant registration statement, failed to perform the procedures for confirmation of cash and cash assets of the Chinese ancient island (verification of evidential documents, such as deposit passbook and deposit inquiry note), and was remarkably defective due to the Plaintiff’s failure to “prevention” on the instant registration statement submitted by the Chinese High Island. ② The Defendant’s imposition of a penalty surcharge by the Defendant was gross negligence, i.e., the Plaintiff based on the treatment securities, the representative company responsible for the duty to inspect the Chinese High Island, and thus, did not perform the procedures for confirmation of the cash and cash assets of the Chinese High Island (verification of evidential documents, such as deposit passbook and deposit inquiry note).

B. The lower court determined that the instant disposition was unlawful on the following grounds.

(1) Articles 429(1)1 and 125(1)5 of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013; hereinafter “former Financial Investment Services and Capital Markets Act”); and Article 135(2) of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act (amended by Presidential Decree No. 24697, Aug. 27, 2013; hereinafter “former Enforcement Decree of the Financial Investment Services and Capital Markets Act”), which is subject to penalty surcharges for breach of disclosure, “an underwriter who is requested to acquire securities directly from an issuer or seller,” regardless of the name of the issuer or underwriter, “joint-managing company”, “an underwriter who is requested to acquire securities directly from an issuer of the securities”, and “an underwriter who is subject to penalty surcharges” shall be construed as “an underwriter who is subject to imposition of securities,” regardless of the terms and conditions of the instant joint underwriting contract and the instant securities supervision,” and the Plaintiff does not fall under the position of the company’s securities manager.

(2) Articles 429(1)1 and 125(1) of the former Financial Investment Services and Capital Markets Act provide that “A person who makes a false statement or representation of a material fact in a securities registration statement, or fails to state or indicate a material fact therein” shall be subject to penalty surcharges. Thus, when an issuer makes a false statement or representation of a material fact in a registration statement, the issuer shall be subject to penalty surcharges. The Plaintiff, who is the underwriter of the instant securities, is a party to the penalty surcharges, only if he/she directly makes a false statement or representation of a material fact in the registration statement or fails to state or indicate a material fact therein, and does not constitute grounds for penalty surcharges, even if he/she did not prevent it intentionally or by gross negligence.

2. A. According to Article 429(1)1 of the former Capital Markets Act, where a person falling under any subparagraph of Article 125(1) falls under “when the Financial Services Commission makes a false statement or representation of a material fact or fails to state or represent a material fact in a registration statement, statement, or other documents submitted under Article 119, 122, or 123,” the Financial Services Commission may impose a penalty surcharge not exceeding 3/100 of the amount of public offering or sale on the registration statement (or two billion won if the amount exceeds two billion won).” Article 125(1)5 of the former Enforcement Decree provides that “a person who has entered into an underwriting contract for the relevant securities (referring to a person prescribed by Presidential Decree if the person has entered into an underwriting contract is two or more persons)” (Article 135(2) of the former Enforcement Decree of the Capital Markets Act provides that “any person who directly takes over or sells securities from the issuer” under Article 125(1)5 of the former Enforcement Decree.

Meanwhile, according to Article 2-12(1) of the Regulations on Issuance, Public Disclosure, etc. of Securities (wholly amended by the Financial Services Commission No. 2010-37, Nov. 8, 2010), the term “managing company” means a financial investment company that acts on behalf of the issuing company and takes charge of the affairs related to the acquisition and sale of securities upon request of the issuer or seller of the securities publicly offered or sold, and determines the terms and conditions of underwriting upon request of the issuer or seller of the securities and takes charge of the affairs related to the public offering or sale in question. In addition, according to Article 2(5) of the Regulations on the Underwriting of Securities (amended by the Korea Financial Investment Association and the Korea Financial Investment Association, August 20, 201), the term “managing company” means a financial investment company that acts on behalf of the underwriting company and takes charge of the affairs related to underwriting and subscription, and the term “managing company” means a financial investment company that represents the issuing company, and the term “managing company” means a company that acts on behalf of the underwriting company and underwriting company.

B. In order to enhance the fairness, reliability, and efficiency of the capital market and to protect investors, the Financial Investment Services and Capital Markets Act has established a system that requires an issuer of securities to promptly and accurately disclose the details of the company necessary for investors’ judgment on investment, such as the contents of the securities or the company’s assets, management status. The issuing market is difficult to assess the value of the securities in that the securities first appeared in the market, and there are many cases where investors lack information necessary for investment judgment, and as a result, it is difficult for the issuer to have conviction in trust and investment in the securities market. Accordingly, offering and sale of securities is ordinarily an indirect public offering rather than an offering by the issuer rather than directly offering by the issuing company. The reason is that the issuing company is not only likely to success in the public offering by the underwriter, but also it is expected that investors will act as an insurer who bears the risk of interference with the public offering, and investors may be able to easily obtain, verify, or obtain information necessary for investment judgment from the issuer (Article 5(1)7) of the Financial Investment Services and Capital Markets Act).

In full view of the language, purport, etc. of the penalty surcharge provision on violation of disclosure in addition to the position of underwriter and the content of disclosure regulations in the market for issuance, the person who is subject to penalty surcharge shall be deemed to have failed to make a false statement or representation of a material fact in the registration statement or investment prospectus prepared and submitted by the issuer, or failed to prevent any act of omission of description or representation of a material fact in the registration statement or investment prospectus prepared and submitted by the issuer, as well as in the registration statement or investment prospectus submitted by the issuer.

Based on these legal principles, the court below examined the judgment of the court below. The provision of Article 429 (1) 1 of the former Capital Markets Act is applied to the plaintiff who is not an issuer of the securities of this case but merely an underwriter, only when it makes a false statement or representation of a material fact or does not describe or indicate a material fact in the "written opinion" in the registration statement. In this case, the plaintiff did not actually perform its business despite the name of the "competent company", and even if there was a false statement or representation of a material fact in the registration statement of this case, the above provision is not applicable because it does not relate to the underwriter's opinion. However, even according to the reasoning of the judgment of the court of first instance cited by the court below, the plaintiff acquired the status as a "managing company" for the issuance of the securities of this case under the joint management contract of this case and the underwriting contract of this case. The "main company" is clear that the plaintiff is not subject to penalty surcharges in this case, regardless of the content of regulation of the capital market law, and thus, it is unlawful.

3. Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Park Jung-hwa (Presiding Justice)