[1] The case where an action can be brought to nullify the reduction of capital under Article 445 of the Commercial Act

[2] Whether the use of a different method with the same legal effect is illegal to avoid the withdrawal system of minority shareholders through the compulsory purchase system of minority shares (affirmative), and whether it can be deemed unlawful in itself in a case where minority shareholders lose their status due to the consolidation of shares (negative)

[3] The case holding that the court below erred in misapprehending legal principles in holding that the shareholders holding less than 10,000 shares including B et al. lose their status as shareholders, in case where Gap corporation held a temporary shareholders' meeting to consolidate the shares of 10,000 to 5,000,000 won per share of 5,000 won and below 10,000 won per share and passed a resolution to pay 5,000 won per share per share to shareholders holding shares below 10,000 won; and accordingly, shareholders holding less than 10,000 shares including B et al. lose their status

[1] Any shareholder, director, auditor, liquidator, trustee in bankruptcy, or creditor who has not approved the reduction of capital due to the reduction of capital through the consolidation of shares may file a lawsuit for invalidation of capital reduction within six months from the date of registration of alteration due to the reduction of capital (Article 445 of the Commercial Act). Since the Commercial Act does not list individual grounds for invalidation with respect to the invalidation of capital reduction, any method or other procedure of reduction of capital is contrary to the principle of equality of shareholders, a lawsuit for invalidation may be instituted in cases where it violates other Acts and subordinate statutes or articles of incorporation or violates the principles of trust and good faith, which are general principles of civil law. In other words, the principle of equality of shareholders refers to equal treatment of shares held by it. If capital reduction is made at a different rate depending on the number of shares held by shareholders, this may be the cause of invalidation of capital reduction contrary to the principle of equality of shareholders. In addition, even in cases where the reduction of capital through the consolidation of shares is remarkably unfair and is contrary to the principle of prohibition of abuse of rights or the principle of trust and good faith.

[2] In light of the legislative intent of introducing the compulsory purchase system of minority shares through the revision of the Commercial Act in 2011 and its contents, it is unlawful to utilize other unlawful means with the same effect in order to avoid the decline system of minority shareholders permitted under strict conditions. However, the compulsory purchase system of minority shares does not necessarily necessarily have to be exercised by a controlling shareholder due to the right recognized by the Act, but does not have any specific limitation on the purpose or requirement of consolidating shares in connection with the introduction of the compulsory purchase system of minority shares under the Commercial Act. In addition, in order for a controlling shareholder to monopoly control over the company through the consolidation of shares, it is necessary to retire shares treated as a single share or acquire shares handled as a single share by the controlling shareholder or the company, and to do so, the court’s permission is necessary. In order to sell shares handled as a single share by the consolidation of shares at will, the representative director must obtain the court’s permission by clarifying the reasons therefor (Article 83 of the Non-Contentious Case Litigation Procedure Act), and thus, it is similar to the court’s decision on the price of shares.

[3] In a case where Company A passed a resolution on the consolidation of shares with a face value of 10,00:1 to increase the par value per share from 5,000 to 50,000,000 won, and shareholders holding less than 10,000 shares per share to pay 5,000 won per share, and accordingly, shareholders holding less than 10,000 shares including B lose their status as shareholders, the case holding that the aforementioned consolidation of shares took place in the same proportion of all shares through a special resolution of shareholders' meeting and procedures for protecting creditors pursuant to the law, and that shareholders holding less than 10,000 shares lose their status as shareholders regardless of their will, but since such method of consolidation of shares is an exception to the principle of equality of shareholders recognized under the Commercial Act, the majority of shareholders did not unilaterally change the status of shareholders as a result of the above consolidation of shares, and thus, it cannot be deemed that the majority of shareholders did not constitute an abuse of rights without consent of the shareholders’ consent and principle of equality.

[1] Articles 232, 369(1), 434, 438, 439, 440, 443, 443, 445, 530(3), and 530-11(1) of the Commercial Act; Article 2 of the Civil Act / [2] Articles 360-24, 440, and 443 of the Commercial Act; Articles 82 and 83 of the Non-Contentious Case Litigation Procedure Act / [3] Articles 232, 369(1), 434, 438, 439, 440, 443, 443, and 445 of the Commercial Act; Article 2 of the Civil Act

Plaintiff

Hoba Co., Ltd. (formerly: Hoba Construction Industry, Ltd., Ltd.) (Attorney Seo-jin, Counsel for the plaintiff-appellant)

Seoul High Court Decision 2018Na2008901 decided October 12, 2018

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

1. Review of the reasoning of the lower judgment and the record reveals the following facts.

A. Ulsan Construction Co., Ltd. (hereinafter “Suld Construction”) is a company aimed at civil engineering and construction work, and obtained the rehabilitation plan approval on October 22, 2014, upon which the rehabilitation plan was decided on July 1, 2015. Pursuant to the rehabilitation plan, the amount of face value of the common and preferential share issued prior to the rehabilitation plan approval is reduced by combining four shares with one share of shares, and the amount of 5,000 won rehabilitation claim is converted into one share of 5,000 won with a face value of 5,000 won, and the remaining shares are recombined with one share of 5,000 won with a share of 5,00 won after the reduction of capital and the debt-equity swap of rehabilitation claims were completed.

B. Thereafter, on March 21, 2016, Ulsan Construction entered into an investment contract with Hoban Construction Co., Ltd. (hereinafter “Haban Construction”) and obtained a decision to revise the rehabilitation plan on July 20, 2016. According to the foregoing investment contract, Hoban Construction paid KRW 20.8 billion to Ulsan Construction, and accepted KRW 4,168,400 of ordinary shares, based on the revised rehabilitation plan, purchased four shares as one share for common share and preferential share shares of Ulsan Construction, and re-merged 32 shares as one share for shares after consolidation (i.e., 2,560:1).

C. On September 26, 2016, Ulsan Construction: (a) held a board of directors on September 26, 2016 after the completion of rehabilitation procedures and sent a notice of convening a temporary general meeting of shareholders to approve the consolidation of shares of 10,000 and the reduction of capital incidental thereto (hereinafter “the consolidation of shares and the reduction of capital”). At the time, Ulsan Construction decided to convene a temporary general meeting of shareholders and sent a notice of convening a meeting of shareholders. At the same time, the amount of par value per share of Ulsan Construction was KRW 5,000, but was 10,000,000, which was raised by 50,000 won per share; and (b) notified shareholders holding shares of 10,000,000 won per face value.

D. As of October 11, 2016, the Plaintiff owned 147 common shares and 31 common shares of Ulsan Construction as of November 1, 2016. A general meeting of shareholders was held on November 4, 2016, and the instant shares consolidation and capital decrease agenda with the consent of 4,180,486 shares out of 4,309,209 shares issued by Ulsan Construction, which were 97% of the total number of shares issued by Ulsan Construction. The instant shares consolidation and capital decrease agenda were resolved upon (9.9% of the number of shares present). Of the shareholders present, only the Plaintiff opposed to the relevant agenda.

E. Pursuant to the resolution of the general meeting of shareholders, Ulsan Construction carried out the procedures for consolidating the instant shares and reducing capital. The shareholders holding less than 10,000 shares as of December 8, 2016, which was the effective date of the consolidation of shares, lost their status as shareholders by receiving cash equivalent to 5,000 won per share. As a result, the remaining shareholders, including the Plaintiff, lost their status as shareholders, except for Hobin Construction with 416 share and the Gangwon-do Compensation Center for Small Credit Union with 3 share.

F. Meanwhile, on April 20, 2017, Ulsan Construction changed its trade name to the Hoban industry, and was merged with the Defendant, a stock company with the purpose of housing construction and housing management business on August 31, 2017.

2. The lower court determined that the consolidation of shares and capital decrease in the instant case not only contravenes the principle of shareholder equality, but also contravenes the principle of good faith and the principle of prohibition of abuse of rights.

A. Reduction in capital due to the consolidation of shares occurs according to the merger ratio, and this may be abused as a means to reduce minority shareholders. As such, the consolidation of shares is likely to be abused by a majority strike and to put a disadvantage to the shareholders who lose shareholder rights according to the content thereof. Therefore, it cannot be said that all the consolidation of shares is permitted on the ground that a special resolution of the general meeting of shareholders is passed, and if the resolution may cause a significant inequality between the shareholders who lose shareholder rights and the shareholders who lose shareholder rights, the resolution shall be null and void in violation of the principle of equality of shareholders.

The revised Commercial Code allows a controlling shareholder holding 95% or more of the total issued and outstanding shares of a company to request the sale of shares held by minority shareholders at a fair price upon approval by the general meeting of shareholders, if necessary to achieve the management purpose of the company. As long as the compulsory purchase system of minority shares is introduced, the use of the consolidation with the same effect to avoid strict requirements for the withdrawal system of minority shareholders is likely to be null and void since it violates the principle of trust and good faith and the prohibition of abuse of rights.

B. The consolidation and reduction of capital of this case is based on the reduction of capital, rather than a reduction in capital, and is in itself unlawful. There is no reason to deem that the consolidation of this case was necessarily necessary for the normalization of Ulsan Construction or it was difficult to use the compulsory purchase system. Although the Defendant could sufficiently achieve the managerial necessity intended to achieve through the compulsory purchase system of minority stocks, it is intended to legally avoid the reduction of minority shareholders’ withdrawal scheme permissible under strict requirements by executing the consolidation and reduction of capital. In addition, it is difficult to readily conclude that the price of the share consolidation and capital of this case is sufficient for compensation to be unilaterally determined without reflecting the intent of shareholders. Accordingly, the consolidation and reduction of capital of this case not only contravene the principle of shareholder equality, but also contravenes the principle of trust and good faith and the principle of prohibition of abuse of rights.

3. However, the lower court’s determination is difficult to accept for the following reasons.

A. 1) The term “stock consolidation” means an act of consolidating a number of shares to create a minority number of shares. The Commercial Act provides for the procedures of stock consolidation involving reorganization, such as reduction of capital (Article 440) and merger (Article 530(3) and division (Article 530-11(1)). In order to reduce capital through stock consolidation, a special resolution of the general meeting of shareholders, procedures for the protection of creditors, etc. shall be conducted (Articles 438 and 439). In order to reduce capital through stock consolidation, a single owner arising from stock consolidation shall be disposed of by means of an auction (main sentence of Article 443). However, stocks having exchange price may be sold through an exchange without exchange price through an auction with the permission of the court (proviso to Article 443). In selling shares with the permission of the court, the court shall determine the propriety of the sale price after determining the propriety of the sale price after taking into account all the elements, such as the sale price of shares to maintain fairness between stockholders holding a minority number of shares, par value per stock, value per share price per share.

2) Any shareholder, director, auditor, liquidator, trustee in bankruptcy, or creditor who has not approved the reduction of capital due to the reduction of capital through the consolidation of shares may file a lawsuit for invalidation of capital reduction within six months from the date of registration of alteration due to the reduction of capital (Article 445 of the Commercial Act). Since the Commercial Act does not list individual grounds for invalidation with respect to the invalidation of capital reduction, any method or other procedure is contrary to the principle of equality of shareholders, and thus, may bring a lawsuit for invalidation in cases where it violates other statutes or articles of incorporation or violates the principles of trust and good faith, which are general principles under the Civil Act. In other words, the principle of equality of shareholders means equal treatment of shares held by them. If capital reduction is made at a different rate depending on the number of shares held by shareholders, this may be the cause of invalidation of capital reduction contrary to the principle of equality of shareholders. In addition, even in cases where the reduction of capital through the consolidation of shares is remarkably unfair and is contrary to the principle of prohibition of abuse of rights or the principle of trust and good faith.

B. Examining the above facts in light of the above legal principles, the following is determined.

1) First, we examine whether the consolidation of shares and capital reduction in the instant case violate the principle of equality of shareholders. The consolidation of shares in the instant case took place at the same ratio of all shares through a special resolution of the general meeting of shareholders and creditor protection procedures in accordance with the procedures prescribed by the Act. As pointed out in the lower court, minority shareholders holding the number of shares short of the percentage of shares in the process of single-stock consolidation lose their shareholder status regardless of their own will. However, this method of single-stock consolidation is an exception to the principle of equality of shareholders as explicitly acknowledged under the Commercial Act (Article 443). Therefore, the change in shareholder percentage position did not occur as a result of the consolidation of shares in the instant case, and barring any circumstance where the Plaintiff did not receive equal treatment by the number of shares owned by it, it cannot be deemed as

2) Next, we examine whether the consolidation and capital decrease in the instant case violate the principle of trust and good faith and the prohibition of abuse of rights. In light of the legislative intent and the content of the provision of the Commercial Act introduced the compulsory purchase system of minority stocks through the revision of the Commercial Act in 2011, it is unlawful to use a method that has the same legal effect to avoid the accumulation system of minority shareholders allowed under strict requirements. However, the compulsory purchase system of minority stocks does not necessarily have to exercise its rights against the controlling shareholder by the right recognized by the Act, but does not impose any specific limitation on the purpose or requirement of the consolidation in our Commercial Act while adopting the compulsory purchase system of minority stocks. In addition, in order for the controlling shareholder to monopoly the control of the company through the consolidation, it is necessary to invalidate the shares treated as a single share or acquire shares handled as a single share by the controlling shareholder or the company, and it is necessary to obtain the court’s permission. It is also necessary to clarify the reasons for the representative director of the court’s permission (Article 83 of the Non-Contentious Case Litigation Procedure Act).

The consolidation and decrease in capital of this case was conducted through the affirmative votes of 99.99% of the shareholders present at the general meeting of shareholders (the affirmative votes of 97% of the total number of outstanding shares). The decision of this company can be deemed to have been made not only by the controlling shareholders but also by the majority of the minority shareholders, and it is difficult to deem that there is a substantial unfairness in the company’s collective legal act. Also, in the explanation of the agenda of the general meeting of shareholders, the amount of single-principal compensation was presented as KRW 5,00 per share, and even with knowledge of such fact, it is difficult to view that the amount of single-principal compensation is an unfair

C. Nevertheless, the lower court determined that the consolidation and capital decrease in this case violated the principle of shareholder equality, the principle of good faith and the principle of prohibition of abuse of rights despite having gone through the procedures prescribed by the Commercial Act, such as a special resolution of the general meeting of shareholders. In so determining, the lower court erred by misapprehending the legal doctrine on the principle of shareholder equality and the principle of good faith and the principle of prohibition of abuse of rights, thereby failing to exhaust all necessary deliberations, thereby adversely affecting

4. Therefore, 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 on the bench.

Justices Noh Jeong-hee (Presiding Justice)