[1] The validity of issuance of new shares in a case where new shares are issued to a third party for the purpose of defending the existing management right without an urgent need for management to avoid shareholders' preemptive rights in a situation where management right disputes arise (negative)

[2] In a case where Gap corporation issued new shares and allocated new shares to Eul, the largest shareholder of the corporation, and its family members by the third party allocation method, the case holding that the issuance of the new shares was null and void by unfairly infringing on existing shareholders' preemptive rights

[1] The purpose of Article 418(1) and (2) of the Commercial Act is to: (a) allocate new stocks to existing shareholders in principle when a corporation issues new stocks to a third party who is not a shareholder in the course of issuing new stocks, taking into account that there is a risk of causing a decline in the value of stocks held by the existing shareholders, loss of control over the company; and (b) allocate new stocks to a third party only under the articles of incorporation; and (c) strengthen the protection of existing shareholders’ preemptive rights by limiting the inevitable cases in light of the need for corporate management, such as the introduction of new stocks and the improvement of financial structure. Therefore, even though there is no reason prescribed by the articles of incorporation within the necessary scope to achieve the managerial purpose of the company, allocating new stocks to a third party in order to achieve the managerial purpose of the company, such as the introduction of new stocks and the improvement of financial structure, may infringe upon the preemptive rights of shareholders in violation of Article 418(2) of the Commercial Act. Whether an act of a company allocating new stocks to a third party, other than the existing shareholders, is strictly necessary to achieve management rights of the existing shareholders.

[2] In a case where Gap corporation issued new shares and allocated new shares to Eul, its largest shareholder, and its family members by the third party allotment method, the case holding that the above issuance of new shares was null and void by unfairly infringing the existing shareholders' preemptive rights, on the ground that it was the main purpose of protecting management rights of the current management when issuing new shares, since it does not seem that there was a demand for funds from Gap corporation at the time of issuing new shares in light of all circumstances, but there was no urgent need for management to avoid preemptive rights of shareholders; thus, it would not be deemed that there was an urgent need for management to exclude shareholders from preemptive rights.

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

[1] Supreme Court Decision 2008Da50776 decided Jan. 30, 2009 (Gong2009Sang, 247)

Plaintiff 1 and three others (Law Firm Gyeong, Attorney Kang Sung-won, Counsel for the plaintiff-appellant)

Han Chang District Co., Ltd. (Law Firm New Light, Attorneys Lee Ho-soo et al., Counsel for the defendant-appellant)

January 23, 2013

1. The Defendant’s issuance of new shares of 7,974,482 shares at par value of 500 won per April 6, 2012 ought to be invalidated.

2. The costs of the lawsuit are assessed against the defendant.

The same shall apply to the order.

1. Basic facts

A. The total number of shares issued as of December 31, 201 by the Defendant Han Chang Chang District Co., Ltd. (hereinafter “Defendant Co., Ltd.”) is 51,693,004 shares (50 won per share, 500 won per share, and 524 won per share) and the current status of shareholders are as follows.

- Nonparty 1 (Largest Shareholder, Defendant In-house Directors) and their relatives: 8,821,972 Shares (17.07%)

- Claim List: 26,105,960 Shares (50.50%)

- Plaintiffs: 4,294,540 note (8.31% note 3)

- Other shareholders: 12,470,522 note (24.12%)

B. On April 2, 2012, Defendant Company: (a) held a board of directors on April 2, 2012 to issue common shares of Defendant Company and distribute them to Nonparty 1 and his/her family members; and (b) passed a resolution for capital increase with new shares as follows.

- Class and number of new shares to be issued: Ordinary Shares 7,974,482

- Total number of outstanding shares before the increase of capital: 51,693,004 shares

- Purpose of raising funds: 5,000,000,214 won of facility funds;

- Method of capital increase: Third party allocation;

- New shares: 627 won (the increase rate of 7.36% for the base share price)

- The payment date of new shares: April 5, 2012

- Grounds for the articles of incorporation for third party allotment: Article 9(2)6 of the articles of incorporation

- The Korea Securities Depository (one year) ;

C. On April 6, 2012, Nonparty 1 and his/her family members (hereinafter “Nonindicted 1, etc.”) acquired shares (hereinafter “instant issuance of new shares”) on April 6, 2012 after Nonparty 1, 3 (Nonindicted 1’s wife), and 4 (Nonindicted 1’s shareholder) paid shares to Defendant Company on April 6, 2012, Nonparty 1 and their family members (hereinafter “Nonindicted 1, etc.”) acquired shares from 16,796,454 shares (28.15%) out of the total number of shares issued by Defendant Company 59,67,486 shares (28.15%) and decreased from 8.34 shares owned by the Plaintiffs from 7%) to 7.23%.

D. Meanwhile, Article 9(1) of the articles of incorporation of the defendant company provides that the shareholders of the defendant company have the right to receive new shares in proportion to the number of shares owned by them in issuing new shares. Article 9(2)6 of the same Act provides that where new shares are issued to domestic and foreign financial institutions, individuals, corporations, etc. for the purpose of restructuring or management environment improvement, financial restructuring, improvement of financial structure, facility investment, merger and acquisition, etc., within the scope not exceeding 40 billion won in total, new shares may be allocated by a resolution of the board of directors, notwithstanding the provisions of

[Reasons for Recognition] Facts without dispute, Gap 4, 5, 8, 10 evidence (including each number), Eul 6 evidence, the purport of the whole pleadings

2. The parties' assertion

A. Summary of the plaintiff's assertion

Although there is no urgent need to make facility investments, since the defendant company issued new shares by a third party for the purpose of defending the management rights of the existing large shareholders, the issuance of new shares in this case is null and void because it violates Article 418 of the Commercial Act.

B. Summary of the defendant's assertion

1) The Defendant Company established a plan for investment in facilities (29 billion won) around May 201 due to the deterioration of production facilities for not less than 20 years, which requires investment in facilities. Accordingly, around June 201, the Defendant Company suspended investment in facilities of KRW 14 billion, and on September 13, 2011, the Defendant Company’s factory caused a fire to a considerable amount of KRW 9 billion as a result of a fire and a part of a producer, which was scheduled for the cost of investment in facilities to be used for fire recovery. In 2012, a partial plan of KRW 5 billion out of the said investment plan was withheld and invested in facilities requiring investment in KRW 580,000,000,000 from the above investment plan was to be financed as a whole out of funds.

2) The claim group of the Defendant Company was a shareholder holding a total of 50.5% shares through debt-equity swap, and refused to participate in the issue of new shares at the time of the issuance of the instant shares. The Defendant Company was a company established in the workshop, and the claim group, the major shareholder of 50.5%, did not participate in the issue of new shares. It was difficult to expect that the Defendant Company would participate in the issue of new shares at the price increased by ordinary investors due to the circumstances such as the rapid decrease in net income in 2011 due to the fire in the factory. Therefore, the Defendant Company was bound to promote the issue of new shares through a third party allocation rather than the shareholder allocation method. Accordingly, the Defendant Company did not have to find a person who will invest in the Defendant Company with a total of 5 billion won or more for the same reason, and thus, Nonparty 1, the major shareholder of the Defendant Company, etc.

3) Nonparty 1, etc., etc., even after the issuance of the new shares in this case, share ratio of the Defendant Company is limited to 28.15%, and the subject who may exercise the right of management of the Defendant Company is financial institutions (50.5% of shares before issuance of new shares and 43.7% after issuance of new shares). If the joint management procedures of the claim group are terminated or terminated in the future, the shares of the claim group will be sold in a lump sum and the transferee of the shares will secure the right of management of the Defendant Company. Thus, there is no room for dispute over management rights

4) Therefore, the issuance of the instant new shares by the Defendant Company is lawful and effective since it is not for Nonparty 1, etc.’s defense of management rights but for the management necessity of the Defendant Company’s facility investment.

3. Determination

A. Article 418(1) of the Commercial Act provides that “A shareholder shall have the right to be allocated new shares according to the number of shares he/she holds,” and Article 418(2) of the same Act provides that “A company may, notwithstanding the provisions of paragraph (1), allocate new shares to persons other than a shareholder, as prescribed by its articles of incorporation, but in such cases, it shall be limited to cases where it is necessary to achieve managerial objectives of the company, such as introducing new technologies and improving the financial structure.” The purport of the provision is to allocate new shares to a third party when issuing new shares, taking into account that there is a risk of undermining the value of the shares held by the existing shareholder when allocating new shares to a third party other than a shareholder, such as decline in the stock ownership or loss of management rights over the company, and to allocate new shares to a third party only as prescribed by the articles of incorporation, and to strengthen the protection of the existing shareholder’s preemptive rights by placing an inevitable dispute over the management purpose of the company, such as the introduction of new shares and improvement in the financial structure, etc. Therefore, the issuance of new shares to a third party.

B. First, we examine whether there was a need to issue new shares to the Defendant Company at the time of the issuance of the instant shares.

Comprehensively taking account of the aforementioned basic facts and evidence Nos. 2 and 1 to 5 (including each number) of the instant statements, the following facts were revealed: ① In the mid- and long-term investment plan prepared by the Defendant Company on May 25, 201, the content that it invests 29 billion won in the equipment between June 201 and October 201; ② in the case of Damt Accounting Corporation, the principal creditor bank of the Defendant Company, 9) and the Korea Development Bank established a review report on the implementation of management normalization plan on August 10, 201 in accordance with the service agreement concluded with the Defendant Company; ② in the content of the “examination on the current status of equipment”, the production efficiency of the Defendant Company was reduced by providing equipment for at least 20 billion won after the lapse of 20 years, and ④ in the content of the plan, it is reasonable for the Korea Development Bank to recognize the investment in the equipment to be 300 billion won out of its financing plan.

C. Next, we examine whether there was a dispute over the management rights of the defendant company between the plaintiffs, non-party 1, etc. at the time of issuance of the new shares in this case.

(4) At the time of December 31, 201, the shares held by Nonparty 1 and others were 17.07%; the Plaintiffs were 50.5% of the bonds issued by financial institutions; the Plaintiffs were 28.15% of the shares issued by Nonparty 1 and others; the Plaintiffs’ share ratio decreased to 7.23% of the above evidence and evidence No. 3 and No. 9 (including each number) were found to have been as follows. On the other hand, the Plaintiff Company 2’s new shares issued by Defendant 1 and the Plaintiff Company’s new shares issued at the shareholders’ general meeting of 10.5% of the total number of shares issued by the Plaintiff Company 1 and the Plaintiff Company 2’s new shares issued at the shareholders’ general meeting of 10.5% of the total number of shares issued by the Plaintiff Company 2 and the Plaintiff Company 1 and the Plaintiff Company’s new shares issued shares at the shareholders’ general meeting of 20.6% of the total number of shares issued by the Plaintiff Company 1 and the Plaintiff Company 2 were assigned to Defendant 1 and the Plaintiff 2.6.4% of the new shares.

According to the above facts, it is reasonable to view that disputes over the management rights, etc. have been realized between the plaintiffs and the non-party 1, who is the major shareholder, at the time of issuance of the new shares (at the time of issuance of the new shares, even though there was 50.5% shares, this does not change the fact that the non-party 1, who is the major shareholder, has been holding the management rights under the limitation of the management of the claim group, and at the time of issuance of the new shares, the circumstance that the bond group will sell shares in a lump sum and make it difficult to expect that the bond group will become a new shareholder and that it would become a transferee. Thus, the defendant's assertion that there is no dispute over the

D. Although there was a demand for funds in the Defendant Company, it does not seem that there was an urgent need for management to avoid the preemptive right of shareholders to the extent that it would have been urgently needed to issue new stocks. As such, it was possible to achieve a sufficient purpose even through the method of accepting major shareholders if the forfeited stocks were to be conducted for general shareholders. It is reasonable to view that the issuance of new stocks for only Nonparty 1, etc. was the primary purpose of protecting management rights of the Defendant company’s current management by setting up against the Plaintiffs. Accordingly, the issuance of new stocks for this case was made in an unfair manner of

4. Conclusion

The plaintiffs' claims are accepted.

Judges Dogjin (Presiding Judge)

1) Nonparty 18,763,084 note (16.95%) + 58,88 note (0.1%) 58,88 note (0.1%) and 1% are set off to the third decimal place.

2) 11 financial institutions converted into investment after the work of Defendant Company, including 12.40% of the Industrial Bank, 8.11% of the New Bank, and 6.85% of the Seoul Guarantee Insurance.

3) Plaintiffs 1,500,000 shares (2.90%) and 1,065,80 shares (2.06%) for Plaintiff 1 (representative director), Plaintiff 21,493,740 shares (2.89%) and Plaintiff 4235,00 shares (0.45%) for the Plaintiffs’ shares on February 8, 2012.

4) It is composed of Nonparty 2 (2.08%) 0.5% to 1% to 3 shareholders holding 2.26% to 19.78% to the remainder of the minority shareholders.

5) Nonparty 13,189,794 + Nonparty 32,392,344 + Nonparty 42,392,344 shares

Note 6) Share 8,821,792 + New Shares Shares 7,794,482

Note 7) As seen earlier, KRW 4,313,070 (Plaintiff 1,50,000 + Plaintiff 1,065,800 + Plaintiff 21,490,490 + Plaintiff 425,780 note)/59,67,486 note 59,67,486 note

Note 8) An energy-specialized contracting company (ESCO) investment amounting to 10 billion won, 11 billion won internal funds of the company, and 8 billion won external financing.

9) At the time of debt-equity swap, the two shareholders of the Defendant Company (12.40%) followed Nonparty 1 at the time of debt-equity swap.

Note 10) The mid- and long-term facility investment plan of 2012 KRW 5.580 million + the ordinary ordinary ordinary investment plan of 2012 KRW 920 million

Note 11) The accurate time of acquisition is not revealed but seems to have acquired a relatively short-term equity share.