The meaning of “major shareholder” under Article 9(1)2(b) of the former Financial Investment Services and Capital Markets Act, Article 9 subparag. 2(b) of the Enforcement Decree of the same Act, and Article 1-6 of the former Financial Investment Services and Capital Markets Regulations. / Whether an investor’s primary acquisition of 1/100 or more stocks through an investment contract with an existing controlling shareholder, etc., or an agreement between stockholders, etc., and requires an existing controlling shareholder, etc. to create conditions within a company to establish the foundation for additional investment necessary to exercise dominant influence. However, in the event that an existing controlling shareholder, etc. fails to comply with the request or instruction regarding major decision-making or business execution, such as a management strategy, etc., it is difficult to recognize de facto binding force that the existing controlling shareholder, etc. continues to have a dominant influence, and rather, it is a situation in which the investor is in conflict with the investor and is able to secure the basis for

According to Article 9(1)2 of the former Financial Investment Services and Capital Markets Act (amended by Act No. 13453, Jul. 31, 2015; hereinafter “former Financial Investment Services and Capital Markets Act”); Article 9 of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act (amended by Presidential Decree No. 27414, Jul. 28, 2016; hereinafter “former Enforcement Decree”), a person who owns, on his/her own account, at least 10/10 of the total number of outstanding voting stocks of a corporation (hereinafter “major shareholder”) or a shareholder who exercises de facto influence over important matters regarding the management of a corporation by appointing or dismissing an executive (hereinafter “major shareholder”) and who has appointed the representative director or a majority of directors solely or under an agreement, contract, etc. with another shareholder; Article 9(1)2 of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act (amended by Presidential Decree No. 27414, Jul. 28, 2016; hereinafter “former Enforcement Decree”).

Article 1-6 of the former Financial Investment Services and Capital Markets Act (amended by Act No. 2016-22, Jun. 28, 2016) provides that “a shareholder specified and publicly notified by the Financial Services Commission” among the requirements for major shareholders under Article 9(2) of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act refers to a shareholder who is an executive officer (including a person falling under any subparagraph of Article 401-2(1) of the Commercial Act) and holds at least 1/100 of the total number of outstanding voting stocks. Therefore, in order to fall under subparagraph 2 among major shareholders under subparagraph 2 (b), a person who owns at least 1/100 of the total number of outstanding voting stocks and exercises a dominant influence over major decision-making or business execution, including the authority to appoint and dismiss executive officers, shall meet the requirements of “executive officers, including a person falling under any subparagraph of Article 401-2(1) of the Commercial Act.”

Here, “Exercise of dominant influence over major decision-making or execution of business, such as management strategies,” means a continuous exercise of dominant influence by shareholders with the grounds for de facto binding decisions or instructions with respect to major decision-making or execution of business, such as management strategies.

In particular, even if an investor’s primary acquisition of 1/10 or more shares of the total number of issued and outstanding shares through an investment contract with an existing controlling shareholder, or a contract between shareholders, etc. requires an existing controlling shareholder, etc. to create the conditions within the company for establishing the foundation for additional investment necessary to exercise dominant influence, it is difficult to recognize the de facto binding force that the existing controlling shareholder, etc. should not comply with the request or instruction with respect to major decision-making or business performance, such as management strategies, etc., or rather, if the existing controlling shareholder, etc. continues to have a dominant influence and continues to be in conflict with the investor, or is likely to secure the basis for controlling investors through additional investment, etc., it cannot be deemed that the investor falls under subparagraph (b) of subparagraph

Article 9 (1) 2 of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 13453, Jul. 31, 2015; see current Article 2 subparagraph 6 (b) of the Act on Corporate Governance of Financial Companies), Article 23 (1) (see current Article 31 (1) of the Act on Corporate Governance of Financial Companies), Article 446 subparagraph 1 (see current Article 42 (1) 1 of the Act on Corporate Governance of Financial Companies), Article 9 of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act (Amended by Presidential Decree No. 27414, Jul. 28, 2016); Article 401-2 (1) of the Commercial Act

Defendant

Defendant

Law Firm Construction, Attorneys Choi Promotion et al.

Suwon District Court Decision 2015No4057 decided August 19, 2016

The judgment of the court below is reversed, and the case is remanded to Suwon District Court.

The grounds of appeal are examined.

1. The facts charged in this case and the judgment of the court below

A. The facts charged in this case

On July 17, 2013, the Defendant acquired 65,000 shares (9.6/100 of the total number of shares issued) of Nonindicted Incorporated Co. 1 (hereinafter “instant Company”), a financial investment business entity.

When acquiring the shares of the instant company as above, the Defendant, upon receiving one of three directors and one auditor, appointed Nonindicted 2 as an outside director, and appointed Nonindicted 3 as an auditor, and prepared a firm foundation to exercise influence over the instant company, such as changing the main contents of the articles of incorporation, including the total number of shares to be issued by the said company from 2200,000 to 5 million, and changing the main contents of the articles of incorporation.

A person who intends to become a major shareholder by acquiring stocks issued by a financial investment business entity shall meet the statutory requirements and obtain prior approval from the Financial Services Commission. Nevertheless, the Defendant, even without obtaining approval from the Financial Services Commission, ordered the representative director of the instant company located in the Seocho-gu Seoul Metropolitan Government ( Address omitted) to conduct business through the director of the said company by ordering the representative director Nonindicted 4 of the instant company’s office located in Seocho-gu, Seoul to conduct the business.

Accordingly, Defendant becomes a major shareholder of a financial investment business entity without obtaining approval from the Financial Services Commission.

B. The judgment of the court below

In full view of the facts and circumstances found in its reasoning, the lower court convicted the Defendant of the instant facts charged on the ground that the Defendant constitutes a shareholder who has exercised dominant influence over major decision-making or business performance, such as management strategies and organizational changes

2. Summary and key issues of the facts charged in the instant case

According to Article 9(1)2 of the former Financial Investment Services and Capital Markets Act (amended by Act No. 13453, Jul. 31, 2015; hereinafter “former Financial Investment Services and Capital Markets Act”), Article 9 of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act (amended by Presidential Decree No. 27414, Jul. 28, 2016; hereinafter “former Enforcement Decree of the Financial Investment Services and Capital Markets Act”), a person who owns at least 10/10 of the total number of outstanding voting stocks of a corporation on his/her own account (hereinafter “major shareholder”) or a shareholder who exercises de facto influence over important matters regarding the management of a corporation by appointing or dismissing an executive officer (hereinafter “major shareholder”) and who has appointed the representative director or a majority of directors solely or under an agreement or contract with another shareholder, etc., and Article 9 of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act (amended by Presidential Decree No. 27414, Jul. 28, 2016); and

The key point of the facts charged in this case is that “the defendant has established a firm foundation to exercise his influence over the company of this case, and has ordered the execution of business through Nonindicted 4, the representative director of the company of this case,” and whether the defendant should obtain prior approval from the Financial Services Commission as he falls under subparagraph 2 among the major shareholders of this case.

3. Judgment of the Supreme Court

The lower court’s determination is difficult to accept for the following reasons.

A. Relevant legal principles

Article 1-6 of the former Financial Investment Services and Capital Markets Act (amended by Act No. 2016-22, Jun. 28, 2016) provides that “a shareholder specified and publicly notified by the Financial Services Commission” among the requirements for major shareholders under Article 9(2) of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act refers to a shareholder who is an executive officer (including a person falling under any subparagraph of Article 401-2(1) of the Commercial Act) and holds at least 1/100 of the total number of outstanding voting stocks. Therefore, in order to fall under subparagraph 2 among major shareholders under subparagraph 2 (b), “a shareholder who owns at least 1/100 of the total number of outstanding voting stocks and exercises dominant influence over major decision-making or business execution, including the authority to appoint and dismiss executive officers, shall meet the requirements for “executive officers, including a person falling under any subparagraph of Article 401-2(1) of the Commercial Act.”

Here, “Exercise of dominant influence over major decision-making or execution of business, such as management strategies,” means a continuous exercise of dominant influence by shareholders with the basis of de facto binding decision-making or direction with respect to major decision-making or execution of business, such as management strategies.

In particular, even if an investor’s primary acquisition of 1/10 or more shares of the total number of issued and outstanding shares through an investment contract with an existing controlling shareholder, or a contract between shareholders, etc. requires an existing controlling shareholder, etc. to create the conditions within the company for establishing the foundation for additional investment necessary to exercise dominant influence, it is difficult to recognize the de facto binding force that the existing controlling shareholder, etc. should not comply with the request or instruction with respect to major decision-making or business performance, such as management strategies, etc., or rather, if the existing controlling shareholder, etc. continues to have a dominant influence and continues to be in conflict with the investor, or is likely to secure the basis for controlling investors through additional investment, etc., it cannot be deemed that the investor falls under subparagraph 2 among the major shareholders

B. Examining the reasoning and record of the lower judgment, the following facts are revealed.

1) Nonindicted 4 was the representative director and the major shareholder of the instant company, and the Defendant was the representative director of Nonindicted 5 (hereinafter “Nonindicted 5”) in the instant company.

2) The investment proposal submitted by the instant company to attract investment in Nonindicted Co. 5, a company established at the time of July 2, 2013, is premised on the premise that “A (the persons designated by Nonindicted Co. 5 and Nonindicted Co. 5) shall secure at least a majority of the voting rights and voting rights of the board of directors of the instant company through this investment (ordinary note +BW) in a valid manner. The voting rights of the A’s general meeting of shareholders: 51.1% (including voting rights delegation), the composition of the board of directors: 4/10 (including three persons), and the chairman of the board of directors: 4/10 (three persons in total).”

3) On July 17, 2013, the Defendant agreed to subscribe to KRW 650,000,000 for shares issued by the instant company with capital increase with KRW 130,000,000 (hereinafter “instant investment agreement”). On the same day, the Defendant paid KRW 650,000 to the instant company with KRW 650,000,000, and acquired 130,000 shares of the instant company (9.6% of the total number of shares issued) of the instant company as a pre-investment condition. Article 4 of the instant investment agreement provides for “a resolution on appointment of one outside director and one auditor nominated by the Defendant” as a pre-investment condition.

4) In addition, on July 17, 2013, the Defendant drafted a written agreement between the Defendant and Nonindicted 4 on the instant investment agreement with Nonindicted 4 in order to clarify the rights and obligations of the Defendant and Nonindicted 4 (hereinafter “instant agreement”). Article 2(2) of the agreement between the shareholders of the instant case provides that “ Nonindicted 4 has the right to purchase shares acquired through this case’s investment and the entire amount of shares additionally acquired (including the entire amount of bonds with warrants) for one month from the date on which the Defendant completed the instant investment, until the date on which he/she becomes one year from the date on which he/she completed the instant investment, and until the date on which he/she becomes one month from the date on which he/she acquired the instant investment,” and Article 5(1) provides that “Nonindicted 4 and Nonindicted 4 agreed to work as the representative director of the instant company for at least three years from the date on which the instant agreement was concluded, and the Defendant agreed to appoint Nonindicted 4 as the director and the representative director of the instant company.”

5) Around that time, the Defendant exercised one of three directors of the instant company and one auditor’s right to nominate in accordance with the instant investment agreement. Accordingly, the shareholders’ general meeting of the instant company was appointed as outside directors, and Nonindicted 3 as outside directors, respectively. On the same day, Nonindicted 4 had Nonindicted 6, who was the head of the real estate investment headquarters of the instant company, appointed as internal directors. On the same day, Nonindicted 4 had Nonindicted 6, who was the head of the real estate investment headquarters of the instant company, appointed Nonindicted 6 as their respective representative directors.

6) On November 28, 2013, the board of directors of the instant company resolved with Nonindicted Co. 5 on the agenda that “type of bonds: the total face value of bonds with non-guaranteed bonds, bonds with warrants separate from guarantee private placement: less than 3,000,000 won per share, the exercising price of preemptive rights: KRW 5,000 per share, and the period for exercising preemptive rights: the period for exercising preemptive rights: from the date one month has elapsed from the date of issuance to the date one month has passed from the date of maturity”; Nonindicted Co. 4 opposed, but the said agenda was resolved with Nonindicted Co. 6 and Nonindicted 2’

7) On December 4, 2013, the instant company concluded a contract with Nonindicted Co. 5 for underwriting bonds with warrant (total face value of KRW 1,800,000,000) with Nonindicted Co. 5 (hereinafter “instant bonds”). Nonindicted Co. 5 paid KRW 1,80,000,000 on December 8, 2013, and acquired the instant bonds.

8) On December 24, 2013, the board of directors of the instant company dismissed Nonindicted 4 from the respective representative directors of the instant company, with the consent of Nonindicted 6 and Nonindicted 2, on the grounds that “Nonindicted 4 was aware of the charge of embezzlement and breach of trust against the instant company” was stated that “Nonindicted 4 was aware of the charge of embezzlement and breach of trust against the instant company.”

9) On January 22, 2014, the board of directors of the instant company decided to hold a temporary general meeting of shareholders as an agenda item, such as the case of dismissal of Nonindicted 6’s directors, and the case of dismissal of Nonindicted 4’s directors.

10) On February 7, 2014, the instant company paid the total amount of KRW 1,848,082,192 (i.e., principal amount of KRW 1,800,000 + interest KRW 48,082,192) to Nonindicted Company 5 and repaid the total amount of the bonds.

11) At the temporary general meeting of shareholders of the instant company held on February 10, 2014, the agenda for removal of Nonindicted 4 was rejected, and the agenda for removal of Nonindicted 6 was passed. The board of directors of the instant company was again appointed Nonindicted 4 as the representative director on February 18, 2014.

C. Examining the above facts in accordance with the legal principles as seen earlier, it is reasonable to view that the Defendant does not fall under subparagraph 2 among the major shareholders under item (b) subject to the approval of the change of major shareholders.

1) On July 15, 2013, the Defendant, in accordance with the instant investment agreement, intended to appoint one outside director and one auditor of the instant company as his/her own intent, but failed to appoint a representative director or a majority of directors of the instant company.

2) From around August 2013, the Defendant received a report on the change of corporate governance from the executive officers and employees of the instant company, and delivered Nonindicted 4, the representative director of the instant company, to take charge of a specific business under the overall control of the Defendant, etc. However, such circumstance alone does not lead to the Defendant’s continued exercise of dominant influence with the grounds for de facto binding control over the major decision-making or execution of business affairs, such as the management strategy, etc., and thus, did not constitute a continuous exercise of dominant influence.

3) Furthermore, in light of the following points, it is difficult to recognize that Nonindicted 4, who is a major shareholder and representative director of the instant company, did not comply with the request or instruction of the Defendant, an investor, in regard to major decision-making or execution of business, such as management strategies, etc., or rather, Nonindicted 4 continued to have a dominant influence, and instead, it seems that Nonindicted 4 was in conflict with the Defendant or was able to secure the basis of control through additional investment,

A) Nonindicted 4 was a major shareholder of the instant company. Under the instant agreement between the shareholders, Nonindicted 4 was granted the right to purchase all of the shares and bonds with warrants acquired by the Defendant, and the status of the representative director was guaranteed for at least three years. On the other hand, according to the agreement between the shareholders of the instant case, the Defendant, upon obtaining approval for the change of a major shareholder, could have the right to appoint the majority of the directors of the instant company where the number of voting rights that the Defendant could exercise exceeds that of Nonindicted 4.

B) Although the issuance of the instant bonds was necessary for the Defendant to secure the basis for control over the instant company, Nonindicted 4 opposed to the instant bonds issued at the board of directors of the instant company on November 28, 2013. Ultimately, Nonindicted 5 Company, a representative director, acquired the instant bonds on December 8, 2013, but the instant company repaid the entire principal and interest of the instant bonds on February 7, 2014.

C) The board of directors of the instant company dismissed Nonindicted 4 as the respective representative directors of the instant company on December 24, 2013, but eventually, at the general meeting of shareholders from February 10, 2014 of the instant company, the agenda for removal of Nonindicted 4 was rejected, and the agenda for removal of Nonindicted 6, who approved the resolution for dismissal of the said representative director as to Nonindicted 4, was resolved, and Nonindicted 4 was again appointed as the representative director of the instant company on February 18, 2014.

4) In addition, there is no circumstance to deem that the Defendant continued to exercise dominant influence with the grounds for de facto binding decisions or directions with respect to major decisions, such as management strategies, or business executions.

D. Nevertheless, the lower court erred by misapprehending the legal doctrine regarding “controlling influence” under Article 9 subparag. 2 of the former Enforcement Decree of the Capital Markets Act, thereby adversely affecting the conclusion of the judgment, on the grounds that the Defendant constituted a major shareholder under subparagraph 2 among the major shareholders under subparagraph (b).

4. Conclusion

Therefore, without further proceeding to decide on the remainder of the grounds of appeal, 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

Justices Min You-sook (Presiding Justice)