[1] The meaning of "material facts" under Article 429 (1) 1 of the former Financial Investment Services and Capital Markets Act

[2] In a case where a nominal shareholder is indicated in the registration statement as the largest shareholder even though a person who owns shares on his/her own account and a nominal shareholder are different, whether such legal principle constitutes “when a false statement is made concerning a material fact in the registration statement” under Article 429(1)1 of the former Financial Investment Services and Capital Markets Act (affirmative), and whether such legal principle equally applies to a case where the issuer who submits the registration statement for the purpose of public offering and sale of securities is a foreign company established under the foreign law (affirmative in principle)

[1] In cases where the underwriter, etc. of securities has made a false description or representation of a material fact in the registration statement (including the registration statement and the documents to be submitted), or without stating or indicating a material fact therein, and an intentional or gross negligence has occurred in relation to such a violation, a penalty surcharge of up to 3/100 of the subscription price and the sale price on the registration statement (up to two billion won if the amount exceeds two billion won) may be imposed (Articles 429(1)1 and 430(1) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013). Here, “material fact” refers to “matters that may have a significant impact on the investor’s reasonable judgment on investment or the value of the pertinent financial investment instrument”.

[2] According to Article 119(6) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013; hereinafter “Capital Markets Act”), Article 125(3) of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act (amended by Presidential Decree No. 22197, Jun. 11, 2010); Article 2-6(9) of the former Regulations on Issuance and Public Disclosure of Securities (amended by Presidential Decree No. 2009-41, Jul. 6, 2009); the standards for preparing a public announcement form established by the Governor of the Financial Supervisory Service pursuant to consecutive delegation of Article 8-1-1 of the former Financial Investment Services and Capital Markets Act on the name of the largest shareholder and the number of shares owned by the largest shareholder; according to Article 1-1-2 subparag. 7 of the former Financial Investment Services and Capital Markets Act on the one’s own account, a person who owns the largest shares under his/her name and voting shares shall be included in his/her own shares.

Matters related to the largest shareholder constitute an important matter that is highly probable for reasonable investors to consider in making decisions on investment. Accordingly, where a nominal shareholder is indicated in a registration statement even though a person who owns shares on his/her own account and a nominal shareholder are different, it constitutes “when a false description is made in relation to a material fact in a registration statement” under Article 429(1)1 of the Capital Markets Act.

This legal doctrine applies to a foreign company established under the foreign laws of the Republic of Korea, even if the issuer who submits a registration statement for the purpose of public offering and sale of securities is a foreign company established under the international law of the Republic of Korea.

[1] Articles 429(1)1 and 430(1) of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 11845, May 28, 2013) / [2] Articles 119(6) and 429(1)1 of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 11845, May 28, 2013); Article 125(3) of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act (Amended by Presidential Decree No. 22197, Jun. 11, 2010)

[1] Supreme Court Decision 2014Du36259 Decided February 18, 2016

KF Securities Co., Ltd. (former name: Hyundai Securities Co., Ltd.) (Law Firm Sejong, Attorneys Kim Yong-dam et al., Counsel for the plaintiff-appellant)

Securities and Futures Commission

Seoul High Court Decision 2015Nu82 decided June 16, 2015

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

The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

A. The underwriter, etc. of securities is entitled to impose a penalty surcharge not exceeding 3/100 of the subscription price and sales price on the relevant registration statement (or KRW 2 billion, if the subscription price exceeds KRW 2 billion) if there is an intentional or gross negligence in relation to a material fact in the registration statement (including the registration statement and documents to be submitted). Here, the term “material fact” refers to “matters that may have a significant impact on investors’ reasonable judgment on investment or the value of the relevant financial investment instruments” (see, e.g., Supreme Court Decision 2014Du36259, Feb. 18, 2016).

According to Article 119(6) of the Financial Investment Services and Capital Markets Act, Article 125(3) of the Enforcement Decree of the said Act (amended by Presidential Decree No. 22197, Jun. 11, 2010); Article 2-6(9) of the former Regulations on Issuance and Public Disclosure of Securities (amended by Presidential Decree No. 2009-41, Jul. 6, 2009); and Article 8-1-1 of the former Regulations on Standards for Preparation of Public Notice Form enacted by the Governor of the Financial Supervisory Service in consecutive delegation, the name and the largest shareholder of the relevant registration statement and the number of shares owned by each type shall be stated in the relevant registration statement. According to Article 1-1-2 subparag. 7 of the Standards for Preparation of Public Notice Form, the largest shareholder refers to the largest shareholder under Article 9(1)1 of the Financial Investment Services and Capital Markets Act, i.e., where a person and his/her specially related persons with him/her as prescribed by Presidential Decree together with stocks owned by him/her on his/her own account, regardless of whose name the title.

Matters related to the largest shareholder constitute an important matter that is highly probable for reasonable investors to consider in making decisions on investment. Accordingly, where a nominal shareholder is indicated in a registration statement even though a person who owns shares on his/her own account and a nominal shareholder are different, it constitutes “when a false description is made in relation to a material fact in a registration statement” under Article 429(1)1 of the Capital Markets Act.

This legal doctrine applies to a foreign company established under the foreign laws of the Republic of Korea, even if the issuer who submits a registration statement for the purpose of public offering and sale of securities is a foreign company established under the international law of the Republic of Korea.

B. The reasoning of the lower judgment and the evidence duly admitted reveal the following.

(1) Around September 2007, the Korea Exchange (hereinafter “Korea Exchange”) entered into a representative supervision agreement with the Plaintiff in order to list stocks on the securities market operated by the Korea Exchange (hereinafter “Korea Exchange”). Accordingly, the Plaintiff became an underwriter of the securities issued by the Korea Exchange (hereinafter “Korea Exchange”).

(2) On July 30, 2008, the Korea Exchange filed a request for a listing preliminary examination with the Korea Exchange, notified the Korea Exchange of the results of the qualified listing preliminary examination, and on May 22, 2009, the Korea Exchange listed the stock certificates on the securities market of the Korea Exchange.

(3) On April 14, 2009, China Resources submitted a registration statement (hereinafter “instant registration statement”) to the Financial Services Commission pursuant to Article 119(1) of the Financial Investment Services and Capital Markets Act. The instant registration statement states that the largest shareholder of China Resources is “non-party 1” and also states that the Plaintiff’s “consignor’s opinion” included in the instant registration statement is identical.

(4) On April 13, 2012, the Defendant imposed a penalty surcharge of KRW 319,90,000 on the Plaintiff on the ground that the instant registration statement states that the largest shareholder was “Nonindicted 2,” but the largest shareholder was “Nonindicted 1.”

(5) The relationship between Nonparty 2, Nonparty 1, and China's deep-sea resources is as follows.

(A) Nonparty 2 (China’s nationality) is a substantial shareholder and a representative director of the Dogdong-do Han River Limited Corporation (hereinafter “Dogdong-do Fishery”) in China.

(B) On August 27, 2007, Nonparty 2 established a Chinese raw resources in Hong Kong. At the time, Nonparty 2 paid the full amount of its capital, and thereafter paid the full amount of the subscription price for new shares at the time of capital increase, but Nonparty 1 ( Singapore’s nationality) was listed as a shareholder in the Hong Kong corporate register.

(C) Around that time, Nonparty 2 transferred the entire shares of the annual fishery to the Hanyang Resources, thereby becoming one shareholder of the annual fishery.

(D) On August 20, 2007, Nonparty 2 and Nonparty 1 entered into an option contract with Nonparty 2, at the time of Nonparty 2’s choice, to transfer all the shareholders’ rights of the Chinese raw resources to Nonparty 2 to Nonparty 1 Hong Kong, but rescinded on July 24, 2008, immediately before the request for listing preliminary examination.

(E) On August 18, 2009, after the China Resources listed the share certificates on the Korea Exchange’s securities market, Nonparty 2 and Nonparty 1 entered into a trust name, and the major contents are as follows. ① Nonparty 2 entrusted Nonparty 1 with the shares of the Chinese Resources, and Nonparty 1 holds on behalf of Nonparty 2. ② Nonparty 1 must transfer, pay, and process the shares and dividends and profits accrued therefrom at the request of Nonparty 2. ③ Nonparty 1 may not exercise its voting rights without Nonparty 2’s instruction.

C. We examine these facts in light of the legal principles as seen earlier.

China's deep sea resources is a foreign company established in accordance with the Hong Kong Act, but in order to offer securities on the securities market operated by the Korea Exchange, a registration statement must be submitted to the Financial Services Commission. However, since China's deep sea resources did not use the form of a registration statement set forth by the Governor of the Financial Supervisory Service in accordance with the disclosure standards established by the International Organization for Securities and Exchange (IOSCO), the largest shareholder under Article 9 (1) 1 of the Financial Investment Services and Capital Markets Act shall be stated in the registration statement. At the time of the establishment of China's deep sea resources and the capital increase for the acquisition of China's deep sea resources, although Nonparty 2 acquired the stocks under the name of Nonparty 1, the funds for the acquisition of the stocks were made by Nonparty 2's contribution, and the profits and losses from the acquisition of the stocks also belong to Nonparty 2. Accordingly, the largest shareholder of the Chinese deep sea resources included in the registration statement is Nonparty 2. Nevertheless, since Nonparty 1, the nominal shareholder, is indicated as the largest shareholder, it constitutes a false entry in the registration statement.

In so doing, the lower court did not err by misapprehending the legal doctrine regarding the criteria for determining the largest shareholder of a foreign company established pursuant to foreign statutes or the entry of the largest shareholder in the registration statement, or by exceeding the bounds of the principle of free evaluation of evidence.

2. Regarding ground of appeal No. 2

After compiling the adopted evidence, the lower court determined that the Plaintiff, who was an underwriter of securities, knew or was unaware of the false description of the largest shareholder, which was a material fact in the instant registration statement, due to gross negligence.

Examining in light of the relevant legal principles and records, the lower judgment did not err by misapprehending the legal doctrine regarding intentional or gross negligence with respect to the largest shareholder’s false statement, or by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules.

3. 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 on the bench.

Justices Park Jung-hwa (Presiding Justice)