[1] In a case where a company allocates new shares to a third party to achieve the purpose of defending management rights or controlling rights in a situation where a management dispute is realized even though there is no reason provided for in Article 418(2) of the Commercial Act, whether it infringes on a shareholder's preemptive right (affirmative)

[2] The validity of issuance of new shares in a case where the issuance of new shares violates laws and regulations or the articles of incorporation in violation of the essence of the corporation or the basic principles of the corporation law, or seriously affects the interests of the existing shareholders and the management rights of the company (negative in principle

[1] Article 418(1) and (2) of the Commercial Act / [2] Articles 418(1) and (2), and 429 of the Commercial Act

[1] [2] Supreme Court Decision 2008Da50776 Decided January 30, 2009 (Gong2009Sang, 247) Supreme Court Decision 2015Da202919 Decided December 10, 2015 (Gong2016Sang, 120)

U.S. and one other (Law Firm, Kim & Lee LLC, Attorneys Kim Jong-soo et al., Counsel for the plaintiff-appellant)

P&C Co., Ltd. (Law Firm Construction, Attorneys Kim Sun-soo et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2017Na2037858 decided October 26, 2018

All appeals are 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. A. Article 418(1) and (2) of the Commercial Act provides that where a company issues new shares, it shall, in principle, allocate new shares to the existing shareholders, and only when the articles of incorporation provide for the issuance of new shares, the company may allocate them to a third party, and protect the preemptive rights of existing shareholders by limiting to cases where it is necessary to achieve managerial objectives, such as the introduction of new technologies and the improvement of financial structure. Therefore, in a situation where a management dispute arises without the aforementioned grounds, allocating new shares to a third party in order to achieve the purpose of management’s protection of management right or management right, it infringes on the preemptive rights of shareholders in violation of Article 418(2) of the Commercial Act (see Supreme Court Decision 2008Da50776, Jan. 30, 200

B. Meanwhile, the invalidation of the issuance of new shares is likely to undermine the safety of transaction. Therefore, the grounds for invalidation should be strictly interpreted in a lawsuit seeking invalidation of the issuance of new shares. However, in a case where there is an error in violation of the statutes or the articles of incorporation, and it is contrary to the essence of the company or the basic principles of the company law, or has a significant impact on the interests of the existing shareholders and the management rights or control rights of the company, in principle, the issuance of new shares shall be deemed null and void (see Supreme Court Decision 2015Da202919, Dec.

2. According to the reasoning of the lower judgment, the lower court acknowledged the following circumstances by comprehensively taking account of the facts as stated in its reasoning and the evidence duly admitted by the lower court.

A. First of all, it does not seem that there was a need for urgent financing, which is the ground for issuance of new shares, to the extent that new shares are to be issued by a third party under the Defendant’s articles of incorporation to the extent that it excludes existing shareholders at the time of the issuance of new shares and allocates new shares to a third party. In other words, the Defendant secured cash amounting to KRW 3.2 billion by issuing the instant convertible bonds on December 24, 2015, which is three months before the issuance of new shares. ② Even based on the audit report or statement of financial position against the Defendant, it is difficult to view that the Defendant had experienced serious liquidity crisis to issue new shares until the time when the Defendant restricted shareholders’ preemptive rights to new shares and issued new shares. ③ Meanwhile, considering the fact that the “written opinion on cash flow review” of March 10, 2016, which stated on the “the need for securing funds”, was written by a certified public accountant stating the need for the issuance of new shares, it is difficult to see that the Defendant had prepared the aforementioned ground for the issuance of new shares in question.

B. The developments leading up to raising funds for acquiring new stocks of the instant company are extremely doubtful. In other words, considering the size and credit conditions of the instant company, it seems that these companies immediately pay large amounts of new stocks. ② The amount of money transferred by these companies to the Defendant at the time of the issuance of new stocks, compared to the previous sales transaction with the Defendant of the instant company, appears to be significantly low compared to the previous sales transaction with the Defendant. This is supported by the Plaintiffs’ assertion that the Defendant offered credit to these companies in a manner that does not timely recover sales claims, and that these companies used funds as new stocks by discounting sales claims for selling the goods supplied by the Defendant. ③ In light of the circumstances that part of the new stocks paid by the instant company was transferred from the Defendant’s officers or business partners, and that the same amount was transferred from the Defendant’s officers on the same day after the issuance of the new stocks, it is doubtful that the instant company acquired new stocks with strong credit from the Defendant.

C. Nonparty 1 appears to have issued the instant new shares as a means of securing the right of management by increasing the shares of the Defendant. In other words, Nonparty 2 had already undergone Nonparty 1 and the management right dispute by filing a lawsuit against the Defendant for confirmation of the existence of the resolution of the general meeting of shareholders in 2014, etc. After which Nonparty 2 opened a large quantity of shares, the Plaintiffs purchased shares from the parties who caused the management right dispute as above, and on December 22, 2015, Nonparty 1 also came to know that the Plaintiffs were in possession of shares (14.02%) at the meeting of the board of directors (17.60%) and that Nonparty 1 was in possession of shares at the meeting outside of the board of directors, and Nonparty 1 was also aware of the fact that the Plaintiffs were in possession of shares at the meeting of the Defendant’s 10 billion won for the purpose of issuing new shares. However, Nonparty 2 was able to promptly change the Plaintiffs’ new shares from 200 million won to 30 billion won for the purpose of issuing new shares.

3. Examining these circumstances cited by the lower court in light of the aforementioned legal principles and records, the lower court is justifiable to have determined that the issuance of new stocks of this case is null and void on the grounds that the issuance of new stocks of this case is not a reason prescribed by Article 418(2) of the Commercial Act, such as improvement of the financial structure, but by the third party allocation method to secure management control over the present management, and thus, it infringes on existing shareholders, including the Plaintiffs, in violation of the provisions of the Commercial Act and the Defendant’s articles of incorporation, and thus, it may result in a significant change in the Defendant’s governance structure, and may have a significant impact on the Plaintiffs, which are the existing shareholders, considerably weak, and thus is considerably unfair. In so doing, contrary to what is alleged in the grounds of appeal, the lower court did not err by failing to exhaust all necessary deliberations or by failing to exhaust all necessary deliberations by misapprehending the legal doctrine on the requirements for violation of

4. Meanwhile, on the other hand, a judgment on the party’s assertion and other means of offence and defense should be indicated to the extent that the text of the judgment is recognizable to be fair, and there is no need to determine all of the parties’ allegations or means of offence and defense (see Article 208(2) of the Civil Procedure Act). Even if no specific and direct determination on a party’s assertion is indicated in the judgment, if it is possible to know that the assertion was cited or rejected in light of the overall purport of the reasoning of the judgment, the omission of judgment cannot be deemed as an omission of judgment. Even if the decision was not actually made, if it is obvious that the assertion was rejected even if it was rejected, it cannot be said that there was an omission of judgment because the outcome of the judgment did not affect the conclusion of the judgment (see, e.g.

In this case where it is strongly doubtful that the company acquiring new shares of this case paid new shares with funds raised with credit from the defendant, the court below's decision that the issuance of new shares of this case was made by the third party for the purpose of securing the current management's control rather than the grounds prescribed by the articles of incorporation of the defendant, shall be deemed to include the judgment rejecting the defendant's assertion that the new shares of this case were issued for the purpose of sales cooperation with the company acquiring new shares of this case as well as for the reason prescribed by the articles of incorporation of the defendant. Even if the decision was omitted, as long as it is obvious that such assertion was rejected even if it was omitted, the ground for appeal pointing this out of omission of judgment is also rejected.

5. Therefore, all appeals are 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 Kwon Soon-il (Presiding Justice)