[1] The method and effect of transferring shares before the issuance of share certificates

[2] Whether a shareholder may claim damages under Article 401(1) of the Commercial Act for indirect damages suffered by a shareholder due to a director's breach of duty (negative)

[1] The transfer of shares before the issuance of share certificates under Article 335 (3) of the Commercial Act is effective against the company at the expiration of six months after its incorporation. In this case, the transfer of shares takes effect only by the declaration of intention of the parties in accordance with the general principle as to the transfer of nominative claim. The transfer of shares in the register of shareholders under Article 337 (1) of the Commercial Act is merely a requisite to set up against the transferee of shares in relation to the company.

[2] Where a shareholder of a stock company suffers direct damage due to a director's bad faith or gross negligence, he/she may claim damages against the director pursuant to Article 401 of the Commercial Act. However, the director's embezzlement of company's assets and reduction of company's assets, thereby causing loss to the company and infringing company's economic interests, such as loss, is not included in the concept of damages under Article 401 (1) of the Commercial Act, and thus, he/she cannot claim damages under the above provision.

[1] Articles 335(3) and 337(1) of the Commercial Act / [2] Article 401(1) of the Commercial Act

[1] Supreme Court Decision 94Da36421 delivered on May 23, 1995 (Gong1995Ha, 2226), Supreme Court Decision 96Da12726 delivered on June 25, 1996 (Gong1996Ha, 2309), Supreme Court Decision 2000Du1850 Delivered on March 15, 2002 (Gong2002Sang, 91Da36093 Delivered on January 26, 1993 (Gong193Sang, 845)

Plaintiff (Law Firm International, Attorneys Kim Tae-soo et al., Counsel for the plaintiff-appellant)

Defendant (Law Firm Shinsung, Attorneys Cho Yong-jin et al., Counsel for defendant-appellant)

Busan High Court Decision 2002Na10424 delivered on May 16, 2003

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

We examine the grounds of appeal.

1. On the first ground for appeal

The transfer of shares before the issuance of share certificates under Article 335(3) of the Commercial Act is effective against the company at the expiration of six months after its incorporation. In this case, the transfer of shares takes effect only by the declaration of intention of the parties in accordance with the general principle as to the transfer of nominative claim. The transfer of shares in the register of shareholders under Article 337(1) of the Commercial Act is merely a requisite for the transferee of shares to exercise shareholder's rights in relation to the company (see Supreme Court Decision 94Da36421 delivered on May 23, 1995).

The court below rejected the plaintiff's claim on the ground that, although the plaintiff did not voluntarily express his/her intent to transfer 4,653 shares of the Busan Construction Center (hereinafter referred to as " Busan Construction Center") to the defendant, the defendant arbitrarily prepared a certificate of transfer of shares with respect to the above 4,653 shares, and submitted a statement of transfer of shares to the tax office in which the shareholder's name of the above shares was prepared, thereby causing losses to the plaintiff to lose ownership of the above shares by acquiring the above shares, as alleged by the plaintiff, although the plaintiff did not express any intent to transfer shares to the defendant as alleged by the plaintiff, even if the defendant stated that the transfer of shares was made by the plaintiff, such as the certificate of transfer of shares or the statement of transfer of shares held in the tax office, the above shares still remains as owned by the plaintiff, and therefore, the court below rejected the plaintiff's claim on the ground that the above shares did not interfere with the law in exercising the shareholder's right as the owner of the above shares, and further, it did not err in the misapprehension of legal principles as to the plaintiff's share transfer and the record.

2. On the second ground for appeal

Where a shareholder of a stock company directly sustains damages due to a director's bad faith or gross negligence, he/she may claim damages against the director pursuant to Article 401 of the Commercial Act. However, the director's embezzlement of company's assets and reduction of company's assets, thereby causing damages to the company and resulting in infringement of shareholder's economic interests, such as damages, are not included in the concept of damages under Article 401 (1) of the Commercial Act, and thus, he/she cannot claim damages under the above provision (see Supreme Court Decision 91Da36093, Jan. 26, 1993).

In the same purport, the decision of the court below is just in holding that even if the defendant, a director of the Busan Construction Center, embezzled the loan and reduced the assets of the Busan Construction Center, thereby causing damage to the plaintiff's economic interest, which is premised on the plaintiff's ownership, this is merely an indirect damage, and it cannot be claimed as damages, and there is no error in the misapprehension of legal principles as to the director's liability under Article 401

Therefore, without examining further whether the above loan is the property of the Busan Construction Center and the property of the Newjin Co., Ltd., the argument in the grounds of appeal related to the embezzlement of loan cannot be accepted.

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 Shin Shin-chul (Presiding Justice)