C&K International Co., Ltd. (Law Firm LLC, Attorneys Nam Young-gu et al., Counsel for the plaintiff-appellant)

Korea Exchange (Attorney Cho Jae-sik et al., Counsel for defendant-appellant)

June 29, 2016

Seoul Southern District Court Decision 2015Kahap104238 Decided December 18, 2015

1. The plaintiff's appeal is dismissed.

2. The costs of appeal shall be borne by the Plaintiff.

The judgment of the first instance is revoked. On March 31, 2015, the Defendant confirms that the decision of delisting made against the Plaintiff’s issued share certificates is null and void.

1. Basic facts

A. Status of the parties

The defendant is a company that carries out the business of opening and operating the securities market, the KOSDAQ market, etc., and the plaintiff is a company that performs the business of exploration and development of domestic and overseas resources such as Damond Won, gold, and SP, and whose shares are listed in the KOSDAQ market operated by the defendant, but whose shares have been ruled de-listing by the defendant.

B. Procedures for delisting the KOSDAQ market pursuant to the regulations on listing of the KOSDAQ market (hereinafter referred to as the “Listing Regulations”) and the regulations on listing of the KOSDAQ market (hereinafter referred to as the “laws”).

1) Article 38 of the Listing Regulations lists reasons why the Defendant may make a decision of delisting on the securities of a company listed on KOSDAQ. Among them, Paragraph 1 of this Article prescribes the reason why the listing should be removed as necessary, and Paragraph 2 of this Article stipulates the reasons why the listing may be abolished following the substantive examination of the KOSDAQ Enterprise Examination Committee (hereinafter “Corporate Examination Committee”)’s eligibility for listing.

2) Article 38(2)5(b) of the Listing Regulations provides that “Where the suspicion of embezzlement and breach of trust of the size prescribed by the Enforcement Rule is confirmed through public disclosure, etc., due to the commencement of the substantive examination of qualifications for listing, the case where delisting is deemed necessary in full view of the continuity, transparency in business management, and soundness of the KOSDAQ, etc. of the relevant company.” Article 33(11)2 of the Enforcement Rule provides that “an officer with respect to the scale of embezzlement and breach of trust, which serves as the ground for commencing the substantive examination of qualifications for listing, shall be deemed to have more than 3/100 of equity capital, or the amount of embezzlement and breach of trust is more than one billion won.”

3) Detailed delisting procedures applicable in the event that reasons set forth in Article 38(2) of the Listing Regulations arise are as follows:

Article 38(2) of the Listing Regulations provides that “The ○ Company Review Committee may file an objection against the abolition of listing and the fact that it may file an objection against the delisting” after determining whether to delisting or not (Article 38-2(4) of the Listing Regulations). Article 40(1) of the Listing Regulations provides that the ○ Company Review Committee shall notify the corporation subject to delisting in writing of the grounds for, grounds for, and grounds for, the abolition of listing after determining whether to delisting or not (Article 38-2(4) of the Listing Regulations). A corporation subject to delisting may file an objection with the Defendant within seven days from the date of receipt of the above notification, and if there is an objection, the Defendant shall decide whether to delisting or delisting after deliberation and resolution by the KOSDAQ Market Committee (hereinafter referred to as the “Market Committee”) (Article 40(2) and (3) of the Listing Regulations) (Article 40(3) of the Listing Regulations). The Defendant may allow the trading of the relevant securities to the extent that it does not exceed seven days (7 days (based on the date of delisting and investment in securities).

C. Progress of delisting procedure against the Plaintiff’s share certificates

The Defendant followed the procedures for delisting of the Plaintiff’s share certificates (hereinafter referred to as “instant delisting”) in accordance with the following procedures:

(1) Deliberation by the Corporate Review Committee and granting the improvement period;

On July 9, 2014, the non-party representative director of the plaintiff was prosecuted for the violation of the Act on the Aggravated Punishment, etc. of Specific Economic Crimes (Misappropriation) on the ground that he/she committed a breach of trust, etc. against the plaintiff about about 11 billion won (Seoul Central District Court 2014Dahap812). The above case was consolidated with the case of Seoul Central District Court 2013Dahap160 and 2014Kahap413 (No. 413). On July 10, 2014, the Corporate Review Committee selected the plaintiff as a subject of the substantive examination of listing eligibility under Article 38(2)5 (b) of the Listing Regulations and Article 33(11)2 of the Enforcement Rule. On September 2, 2014, the period for the improvement of management normalization was granted to the plaintiff on September 2, 2014.

2) Determination of delisting by the Corporate Review Committee

On March 31, 2015, the Corporate Review Committee rendered a decision of delisting against the plaintiff according to the result of the review on listing eligibility as follows.

A) From the perspective of business continuity, there is uncertainty in business continuity, such as continuing operations of the existing business and failing to implement the improvement plan, such as gold and multimond distribution business, which is a new business.

B) From the perspective of financial soundness, from the perspective of financial soundness, the financial structure is weak by continuing capital erosion, and the improvement plan for financial soundness, such as liquidation of defective affiliated companies, has not been implemented.

C) From the perspective of the transparency in management, the improvement plan was implemented, such as replacement of management, the internal control regulation, and the improvement of the internal accounting management system. However, three of the non-party, including the non-party, who is a breach of trust, was in office as an unregistered executive, and the acquisition of the non-party’s share was not implemented.

3) Plaintiff’s objection and review result of the market committee

On April 10, 2015, the Plaintiff filed an objection against the said de-listing decision by the Corporate Review Committee. However, on May 6, 2015, the Market Committee decided to de-listing of the share certificates issued by the Plaintiff based on the judgment that there is vulnerability in the management stability. The Market Committee set the period of de-listing as “from May 8, 2015 to May 18, 2015,” respectively, as “from May 19, 2015,” the period of de-listing was set as “from May 19, 2015,” and the procedure of de-listing was fully implemented.

D. Progress of a criminal case against the Nonparty

1) On January 23, 2015, the Seoul Central District Court sentenced the non-party to a suspended sentence of two years for a criminal case against the non-party on one year and six months (the case in which the non-party was sentenced to a suspended sentence of two years for a criminal case against the non-party (the same court) (the case in which the non-party committed a breach of trust with property damage equivalent to about 11 billion won). In relation to the violation of the Act on the Aggravated Punishment, etc. of Specific Economic Crimes (Misappropriation) that the non-party committed a breach of trust with property damage equivalent to about 11 billion won against the plaintiff, the Seoul Central District Court found the non-party guilty only for the 1.15 billion won and acquitted the other part

2) The prosecutor appealed the above judgment, and the Seoul High Court sentenced the non-party to a suspended sentence of five years on February 3, 2016 at the appellate court (Seoul High Court 2015No548; hereinafter “relevant criminal judgment”). The relevant criminal judgment found the non-party guilty of all the charges in relation to the violation of the Act on the Aggravated Punishment, etc. of Specific Economic Crimes (Misappropriation) that the non-party committed the non-party with property damage equivalent to about 11 billion won to the plaintiff, and found him guilty of the violation of the Financial Investment Services and Capital Markets Act due to fraudulent illegal transactions by the plaintiff and the non-party. The appeal against the relevant criminal judgment was filed by the plaintiff and the prosecutor, respectively, and the final appeal is pending in the Supreme Court (Supreme Court 2016Do3411).

[Reasons for Recognition] The facts without dispute, Gap evidence 1, 4, and 23 each 1, 2, Gap evidence 2, 5 through 8, Gap evidence 3-1 to 5, Eul evidence 3, and the purport of the whole pleadings

2. Determination on the defense prior to the merits

A. The defendant's argument

Since the execution of reorganization trading procedures, which are subsequent procedures following the decision of delisting of this case, has already been completed, and it is de facto impossible to restore to the prior decision of delisting of this case, there is no benefit to seek confirmation to nullify the decision of delisting of this case.

B. Determination

In light of the following circumstances, the Defendant’s prior defense on the merits that the Plaintiff did not have any interest to seek confirmation of invalidity of the delisting decision is without merit.

1) The reorganization trading procedure is merely a procedure that gives an opportunity to make a transaction in the KOSDAQ market for a certain period to the shareholders holding the share certificates for which delisting becomes final and conclusive, and the validity of the share certificates issued by the Plaintiff is not extinguished upon completion of the reorganization trading procedure. Therefore, the share certificates issued by the Plaintiff may be traded in the KOSDAQ market if the decision of delisting becomes invalid.

2) Pursuant to the Financial Investment Services and Capital Markets Act, a stock-listed corporation may enjoy special cases such as more lenient restrictions on the issuance and allocation of stocks and the limit of nonvoting stocks (see, e.g., Articles 165-6, 165-15).

3. Judgment on the merits

A. The plaintiff's assertion 1) Summary

1) The assertion that Article 38(2)5(b) of the Listing Regulations becomes invalid

Article 38(2)5(b) of the Listing Regulations, which provides that a certain size of embezzlement and breach of trust may commence the substantive examination of listing eligibility if it is confirmed through public disclosure, etc., is null and void as it constitutes a provision contrary to the concept of justice or excessively restricting the rights of listed corporations for the following reasons. Accordingly, the delisting of this case is also null and void.

A) Article 38(2)5 of the Listing Regulations provides that “Where it falls under any of the following and it is deemed necessary to de-listing considering the continuity, transparency in management, and soundness of the KOSDAQ market as a whole.” Therefore, Article 38(2)5(b) of the Listing Regulations does not merely constitute the requirements for the commencement of the substantive examination of listing eligibility, but also constitutes part of the requirements for de-listing.

B) The mere fact that there is a suspicion of embezzlement and breach of trust so that the subject of the substantive examination of listing eligibility is contrary to the principle of presumption of innocence, and may be abused as an unfair means to receive confession during the investigation process, and thus, excessively restricting the rights of listed corporations.

C) In the case of rehabilitation procedures, an application for commencing rehabilitation procedures itself is not subject to the substantive examination of listing eligibility, while taking the subject of the substantive examination of listing eligibility as the subject of the substantive examination solely on the ground that the occurrence of embezzlement and breach of trust occurred is contrary to the principle of equity. In addition, Article 38(2)5(b) of the Listing Regulations provides for cases where specific facts, such as serious violation of regulations, loss from damage, and change of management rights, are confirmed, whereas Article 38(2)5 of the Listing Regulations provides for cases where only the suspicion is suspected, rather than the fact of embezzlement and breach of trust, it does not conform to the equity among the requirements for the substantive examination

D) The abstract contents, such as the continuity of a company, transparency in business management, and soundness of the KOSDAQ market, are prescribed as the requirements for the substantive examination of listing eligibility. Therefore, it is difficult to predict whether it falls under those requirements, and it is inevitable to determine whether it is eligible for listing according to arbitrary requirements.

2) The assertion that the de-listing decision of the instant case is invalid without going through lawful procedures

Even if the listing regulations and enforcement regulations that served as the basis for the decision of delisting of this case are valid, in light of the following circumstances, the decision of delisting of this case is null and void due to its ruling that was issued without going through legitimate procedures and without any grounds for delisting.

A) After being selected as a subject of the substantive examination of listing eligibility, the Plaintiff submitted a management improvement plan to obtain the improvement period, and Article 33-4(4)2 of the Enforcement Rule provides that the improvement period shall not exceed six months unless there exist any special reasons. However, since the Plaintiff could not perform normal business activities due to the strong and concentrated investigation conducted by an investigative agency on the Plaintiff at that time, the Defendant granted the improvement period only for six months, despite the recognition of a special reason for granting the improvement period exceeding six months.

B) Although the substantive examination of listing eligibility was commenced based on the Nonparty’s embezzlement and breach of trust, the examination of whether there was a reason for delisting by the Plaintiff ought to be conducted separately. However, since the profitability of the Dmond business that the Plaintiff is proceeding in Kamera, corporate continuity is recognized. Furthermore, prior to the decision of delisting, the Plaintiff received an audit opinion from the audit report submitted by the Plaintiff to the Defendant (i.e., the Plaintiff’s audit report) prior to the decision of delisting, and (ii) was assessed on April 15, 2015 that the company’s stability ratio was more favorable than the average industry. Accordingly, the Plaintiff’s reason for delisting cannot be recognized.

B. Determination

1) Determination as to the assertion that Article 38(2)5(b) of the Listing Regulations is invalid

A) Listing Regulations are regulations that are naturally applicable to all listed corporations and those applying for listing, based on the provisions of the relevant Act, and have a practical normative nature. Therefore, matters that do not conform to the purport of the relevant Act cannot be said to be its content. If a specific provision of the Listing Regulations violates the concept of justice by significantly violating the principle of proportionality or the principle of equity, or contains contents that are contrary to the legislative purpose or purport of other Acts by excessively restricting the rights of listed corporations that are guaranteed by other Acts, such provision shall be deemed null and void (see Supreme Court Decision 2007Da1753, Nov. 15, 2007, etc.).

B) However, in light of the following circumstances that are recognized based on the overall purport of the oral argument in the facts acknowledged earlier, Article 38(2)5(b) of the Listing Regulations cannot be deemed as going against the concept of justice or to have reached the degree of excessive restriction on the rights of the listed corporation, and thus, the Plaintiff’s assertion on this part cannot be accepted.

(1) Article 38(2)5 of the Listing Regulations provides that a listed company shall be subject to the substantive examination of listing eligibility by comprehensively taking into account the continuity of the company, transparency in its management, soundness of the KOSDAQ market, etc. Therefore, Article 38(2)5(b) of the Listing Regulations cannot be deemed the requirements of delisting, and only the intent of Article 38(2)5(b) of the Listing Regulations is the beginning of the commencement of the substantive examination of listing eligibility in cases where the suspicion of embezzlement and breach of trust was disclosed. In the reality that it is impossible to conduct the substantive examination of listing eligibility for all listed companies, there is a policy need to provide that a listed company shall be subject to the substantive examination of listing eligibility by comprehensively taking into account the following factors: (a) the disclosure of the suspicion of embezzlement and breach of trust exceeding a certain size

(2) The principle of presumption of innocence refers to the principle that a criminal suspect who has not yet been prosecuted as well as a criminal suspect who has not yet been prosecuted should, in principle, be treated as a person without a crime until a final and conclusive judgment of conviction has been rendered, and a disadvantage shall not be inflicted, and even if such disadvantage may be inflicted, it shall be limited to the minimum necessary extent (see, e.g., Constitutional Court Order 2010Hun-Ma418, Sept. 2, 2010). However, the defendant has a duty to assess whether to maintain the listing eligibility of a listed corporation in order to protect investors in good faith in the future, and a listed corporation has a duty to recognize it. Thus, it is difficult to evaluate that the listed corporation has suffered disadvantage by itself after the judgment of conviction of embezzlement and breach of trust becomes final and conclusive. In addition, if it is possible to conduct the substantive examination of listing eligibility after the judgment of conviction of embezzlement and breach of trust, there is a concern that investors may be confusion in relation to the listing eligibility of the relevant listed corporation for a considerable period of time.

(3) An application for commencing a procedure for commencing a procedure for commencing a procedure for commencing a procedure for commencing a procedure for commencing a procedure for commencing a procedure for commencing a procedure for commencing a procedure for commencing a procedure for commencing a procedure for commencing a procedure for commencing a procedure for commencing a procedure for commencing a procedure is likely to be avoided to arrange the insolvency early by a listed company, and this is presumed to have been a political consideration that such provision goes against the idea of early withdrawal of an insolvent company, the stabilization of trading in the stock market, and the delisting system for protecting investors (see Supreme Court Decision 2007Da1753, Nov. 15, 2007). On the other hand, there is no need to find a policy need to keep the listed company from deeming it as the beginning of a procedure for conducting a procedure for public disclosure of the suspicion of embezzlement

(3) Article 38(2)5 of the Listing Regulations provides that “the continuity of a company, transparency in business management, and soundness of the KOSDAQ market” as the requirements for the substantive examination of listing eligibility. In addition, the “Standards Table for the substantive examination of listing eligibility for the KOSDAQ market” under the Guidelines for the substantive examination of listing eligibility provides detailed items for the substantive examination of listing eligibility. Accordingly, it may be sufficiently determined that a listed company is subject to the substantive examination of listing eligibility. The Plaintiff is not given marks to each of the items under the Listing Regulations or the Guidelines for the substantive examination of listing eligibility for the KOSDAQ market. However, the Plaintiff is not easy to take measurements due to the characteristics of the items to be assessed in the listing eligibility examination, and it is difficult to deem that the objective of the items is lacking or that it is difficult to predict what the items are subject to the examination, solely on the grounds that each item was not allocated. Therefore, it is difficult to deem that there was an error in the misapprehension of Article 38(2)5(b) of the Listing Regulations by making it invalid.

2) Determination as to the assertion that the delisting decision of this case is invalid

In light of the following circumstances acknowledged earlier and the evidence Nos. 6, 20, and 29 comprehensively based on the purport of the entire pleadings, it cannot be readily concluded that there was a serious fault in the decision of delisting, and there is no other evidence to acknowledge it. Accordingly, the Plaintiff’s assertion premised on this cannot be accepted.

A) Article 33-4(4)2 of the Enforcement Rule provides that the improvement period may not exceed six months, barring any special reason. Although the investigation of embezzlement and breach of trust was under way at the time of the substantive examination of listing eligibility with the Plaintiff, such investigation does not constitute a special reason for granting the improvement period exceeding six months as a natural procedure for the suspicion of embezzlement and breach of trust. Furthermore, as seen earlier, there is no ground to deem that the investigation was unfair, such as the charge of embezzlement and breach of trust in the relevant criminal judgment is judged guilty at the appellate court. Even if there is no special reason as alleged by the Plaintiff, the issuance of the improvement period is merely a discretionary measure for the corporate review committee to determine that the improvement period was unreasonably short of six months, it is difficult to deem that there was a procedural violation of delisting.

B) Article 38(2)5(b) of the Listing Regulations provides that where a suspicion of embezzlement and breach of trust exceeds a certain size is confirmed through public disclosure, etc., the commencement of the substantive examination of listing eligibility shall be the beginning of the substantive examination. Article 33(11)2 of the Enforcement Rule provides that “In the case of an executive, at least 3/100 of equity capital or at least 1 billion won” shall be the amount of embezzlement and breach of trust. As seen earlier, the Nonparty, an executive officer of the Plaintiff, was indicted for the charge of embezzlement and breach of trust of KRW 11 billion, and the relevant criminal judgment in the appellate trial is pending in the Supreme Court by recognizing the conviction of all the facts charged, which satisfies the requirements as the beginning of the substantive examination required by the Enforcement Rule.

C) The fact that the suspicion of embezzlement and breach of trust exceeding a certain size is confirmed is nothing more than the beginning of whether the listing eligibility is subject to the substantive examination pursuant to Article 38(2)5(b) of the Listing Regulations. The main reason for which the substantive examination of listing eligibility has commenced against the Plaintiff is that it is recognized that delisting is necessary when comprehensively considering the continuity, transparency in management, and soundness of the KOSDAQ pursuant to the main sentence of Article 38(2)5 of the Listing Regulations. The Defendant’s Corporate Review Committee and the Market Committee determined that the Plaintiff did not have the listing eligibility on the grounds that the sales performance was not simply based on the delisting’s embezzlement and breach of trust, but rather on the ground that the Nonparty’s embezzlement and breach of trust was low, multimond production was unclear, the capital erosion deepened, the operational transparency was damaged, and the managerial stability was weak.

D) In determining the Plaintiff and the Nonparty guilty of the violation of the Financial Investment Services and Capital Markets Act due to the fraudulent unfair trading, the relevant criminal judgment determined that the Damond estimated quantity (420 million Won) of the Kamanae mine promulgated by the Plaintiff cannot be considered as supporting figures based on objective and scientific exploration results. Accordingly, the Plaintiff’s assertion that the Kamere mine did not have any ground for delisting because the profitability of the Kamere mine was recognized, cannot be accepted.

E) The proper opinion in the accounting audit report is merely the meaning that financial statements, etc. were prepared appropriately in accordance with the accounting standards, and it cannot be deemed that there was no reason for delisting in terms of corporate continuity, financial soundness, business transparency, etc. on the ground that the Plaintiff received an adequate opinion in the audit report. Furthermore, the review of whether the Plaintiff’s assertion that the Plaintiff received from the said accounting corporation constituted the de-listing requirement and the review of the stability ratio is not an audit result in accordance with the accounting audit standards. Moreover, the conclusion that the Plaintiff was merely based on the data provided by the Plaintiff and the result alone cannot determine

F) Even if, as alleged by the Plaintiff, according to the review of the de-listing requirements of Bad Accounting Firm, the instant delisting did not meet the requirements for de-listing under Article 38(1) of the Listing Regulations, as seen earlier, rather than Article 38(1) of the Listing Regulations that provides for de-listing if certain formal requirements are satisfied, and pursuant to Article 38(2) of the Listing Regulations that provides for the examination of the necessity of de-listing and determination of de-listing. Therefore, the Plaintiff’s assertion in this part

3. Conclusion

Thus, the plaintiff's claim of this case shall be dismissed as it is without merit. Since the judgment of the court of first instance is just in conclusion, the plaintiff's appeal is dismissed as it is without merit.

Judges Lee Sung-hee (Presiding Judge)

(1) In addition to the following arguments, the Plaintiff asserts that ① Article 33-4(4) of the Enforcement Rule is null and void. ② The instant delisting was null and void because the right to state opinions or the right to submit materials is not granted. However, on April 19, 2016, the Plaintiff did not dispute the part concerning the judgment of the first instance court on the said assertion. Accordingly, the content to be explained by the court on this part of the Plaintiff’s assertion and judgment is the same as that on the 14th to 12th to 7th to the 12th to 14th, respectively, under the main sentence of Article 420 of the Civil Procedure Act.