[1] The method of disputing the effect of consolidation of stocks under Article 5 (2) of the Addenda of the Commercial Act (amended by April 10, 1984) (=the lawsuit nullifying consolidation of stocks)

[2] The method of disputeing where procedural and practical defects of the consolidation are extremely serious

[3] The method of disputing any error in omission of public announcement at the time of consolidation of shares pursuant to Article 5 of the Addenda to the Commercial Act ( April 10, 1984)

[1] Article 445 of the former Commercial Act (amended by Act No. 4372 of May 31, 1991); Article 5 (2) of the Addenda of the Commercial Act (amended by Act No. 4372 of April 10, 1984) / [2] Article 445 of the former Commercial Act (amended by Act No. 4372 of May 31, 1991) / [3] Article 5 (2) of the Addenda of the Commercial Act (amended by Act No. 4372 of May 31, 1991); Article 440 of the former Commercial Act (amended by Act No. 4372 of May 31, 191)

[3] Supreme Court Decision 2004Da40306 decided Dec. 9, 2005 (Gong2006Sang, 111)

Plaintiff 1 and one other (Law Firm Simat Law, Attorneys Seo Seo-seok et al., Counsel for the plaintiff-appellant)

Defendant corporation

Intervenor (Attorney Cho Jong-soo et al., Counsel for the intervenor-appellant)

Seoul Eastern District Court Decision 2005Na3900 decided January 16, 2008

The judgment of the court below is reversed, and the case is remanded to the Seoul Eastern District Court Panel Division.

Judgment ex officio is made.

1. The part demanding nullification of the consolidation of stocks among the primary claims

A. (1) Pursuant to Article 5(2) of the Addenda of the former Commercial Act (amended by Act No. 4372 of May 31, 191; hereinafter the same shall apply), the consolidation of shares conducted to take the amount of one share to at least 5,00 won does not entail a reduction of capital, unlike the consolidation to reduce capital. However, in that it entails the invalidation of the former shares and the issuance of new shares by means of the consolidation of shares, there is no difference in the case of a consolidation for reduction of capital. However, if any person can assert the effect of the former shares and the new shares issued to him/her by the aforementioned consolidation of shares without any restriction at the time, method, etc., if it is possible to assert the effect of the consolidation of shares without being subject to any restriction, the legal relationship surrounding the material foundation and shareholders of the company and the interests of third parties cannot be determined promptly and uniformly. Accordingly, it might thereby undermine the internal stability of the company and the safety of external transactions. Therefore, it is reasonable to nullify the consolidation within the extent not contrary.

(2) Meanwhile, the term “action” under Article 445 of the former Commercial Act refers to a form action. It is not, in principle, permissible to seek nullification of the consolidation by means of a lawsuit seeking nullification of the consolidation of shares or assert the invalidity of the consolidation of shares as a preliminary issue in other legal relations through a lawsuit seeking confirmation of invalidity of the consolidation of shares by means of a general civil lawsuit. However, in cases where the procedural and real defects of the consolidation of shares are extremely serious, such as the existence of appearance registered as a result of the consolidation of shares without any substance of the consolidation of shares, it can be viewed that there is no consolidation of shares due to extremely serious procedural and real defects, such as the case where there is no substance registered as a result of the consolidation of shares, unlike the lawsuit seeking nullification of the invalidation of the consolidation of shares, the absence of the consolidation of shares can be asserted

B. According to the reasoning of the judgment below and the records, the defendant's articles of incorporation state 10,00 won per share; the transcript of corporate register states that the defendant combined 73,500 won per share with new shares of 10,000 won per share of 1989, and stated that the defendant combined 7,350 won per share of 10,000 won with new shares of 7,350,000 won (hereinafter "the consolidation of shares of this case"); the defendant stated that the merger of this case was completed on June 12, 1989; the defendant's new shares issued through the consolidation of shares on June 17, 1994; the defendant's share of 3,087 shares of the defendant's predecessor; the defendant's share of 2,352,752 shares of the defendant; the defendant's share of 2,350 shares of the defendant; the defendant's share of 2,475 shares of the defendant's new shares of 2, and 305 shares of the defendant.

The reasoning of the judgment below is examined in light of the aforementioned legal principles and the above facts. In this case where there is no evidence to support the finding that the lawsuit seeking nullification of the consolidation was filed within six months from June 12, 1989, which is the date of registration of the consolidation of this case, and the judgment that invalidated the consolidation of this case became final and conclusive, the part of the lawsuit seeking nullification against the defendant is unlawful because it is contrary to Article 45 of the former Commercial Act which provides that the plaintiffs may assert invalidation of the consolidation of this case only by means of a form of action within six months from the date of registration of the consolidation of this case. However, according to the records, it is difficult to view that the part of the lawsuit seeking nullification of the said consolidation of this case is to seek non-existence of the consolidation of this case (the plaintiff's request seeking nullification of the consolidation of this case's claim and supplement of cause of claim as of January 18, 207, etc.). The plaintiffs should have deliberated only to the purport that the defendant corporation seeks nullification of the consolidation of this case's shares.

C. Nevertheless, the lower court determined that the consolidation of this case by the Defendant was null and void solely based on its stated reasoning. In so determining, the lower court erred by failing to exhaust all necessary deliberations or by misapprehending the legal doctrine on the consolidation of stocks pursuant to Article 5(2) of the Addenda of the former Commercial Act

2. Among the primary claims, part of the claim for confirmation of shareholder status based on the old shares and the claim for implementation of transfer procedure

A. The purport of Article 5(2) of the Addenda to the former Commercial Act, applying mutatis mutandis Article 440 of the former Commercial Act, which requires the procedures of public announcement and notification by setting a certain period in the consolidation of shares, is to identify a person who is to receive new share certificates and to prevent effective distribution of share certificates (see Supreme Court Decision 2004Da40306, Dec. 9, 2005). Where a company does not follow the aforementioned procedures such as public announcement, barring any special circumstance, grounds for invalidation of the consolidation exist. However, where a company completes the registration of consolidation by the resolution, etc. of a general meeting of shareholders on the consolidation of shares but only omits such public announcement, it cannot be deemed that the procedural and practical defects of the consolidation are very serious. Therefore, in order to seek invalidation of the consolidation of shares only on the grounds of defects in the omission of public announcement and omission of announcement pursuant to Article 5(2) of the Addenda to the former Commercial Act, the invalidation of the consolidation of shares should not be claimed within six months from the date of registration under Article 445 of the former Commercial Act.

B. Examining the reasoning of the judgment below in light of the aforementioned legal principles, without filing a lawsuit seeking invalidation of consolidation within a lawful period of release pursuant to Article 445 of the former Commercial Act, the Plaintiffs’ assertion of invalidation of the consolidation of this case as a preliminary issue of the claim for confirmation of shareholders’ status based on the former shares is not permitted in principle. However, only if the existence of the consolidation of this case can be deemed as nonexistent, it can be asserted as a preliminary issue. However, the mere fact that the announcement of Article 40 of the former Commercial Act was omitted in relation to the consolidation of this case’s shares cannot be deemed to have existed. Thus, unless the Plaintiffs prove non-existence of the consolidation of shares, the part demanding confirmation of shareholders’ status based on the former shares among the Plaintiffs’ primary claims cannot be acknowledged by taking advantage of seeking confirmation of past legal relations based on the former shares already invalidated, and the part demanding the execution of the transfer of shares based on the premise that the Plaintiffs were based on the former shares cannot be dismissed.

C. Nevertheless, without examining and determining whether there exists a non-existence of the consolidation of this case’s stocks, the lower court determined to the effect that the Defendant should implement transfer procedures on the old stocks as the Plaintiffs are justifiable shareholders of the Defendant Company, on the sole basis that the Defendant was found to have failed to make a public announcement for more than three months pursuant to Article 440 of the former Commercial Act while consolidating the stocks of this case. In so doing, the lower court erred by failing to exhaust all necessary deliberations or by misapprehending the legal doctrine on the profits of consolidation and confirmation under Article 5(2) of the Addenda of the former Commercial Act, thereby adversely affecting the conclusion of the judgment.

3. Therefore, without examining the grounds of appeal, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Cha Han-sung (Presiding Justice)