[1] In a case where a company allocates new shares to a third party to achieve the purpose of the management's defense of management right or management right in a situation where the management right dispute is realized even though there is no reason prescribed in Article 418 (2) of the Commercial Act (affirmative), and whether such a legal principle likewise applies to the case where bonds with warrants are issued to a third party (affirmative)

[2] In a case where the issuance of new shares violates the law or the articles of incorporation, and such violation is contrary to the essence of the corporation or the basic principles of the corporation law or significantly affects the interests of the existing shareholders and the management rights or control rights of the company, the validity of the issuance of new shares (in principle invalid) / In a case of the issuance of bonds with warrants, whether Article 429 of the Commercial Act concerning the action for nullifying the issuance of new shares is applied by analogy (affirmative), and whether the legal principles

[1] Article 418(1) and (2) of the Commercial Act provides that a company may, in principle, allocate new shares to the existing shareholders when it issues new shares, and only when the articles of incorporation provide for the allocation of new shares to a third party, thereby protecting the preemptive rights of existing shareholders by limiting the grounds therefor to cases where it is necessary to achieve management objectives, such as the introduction of new technologies or the improvement of financial structure. Therefore, in a situation where a dispute over management rights arises without the aforementioned grounds, allocating new shares to a third party to achieve the purpose of the management’s right of management or the defense of management right is in violation of Article 418(2) of the Commercial Act. Such legal principle likewise applies to cases where bonds with warrants are issued to a third party (the latter part of Article 516-2(4) and the proviso of Article 4

[2] The grounds for invalidation after the issuance of new shares are to be strictly interpreted in a lawsuit seeking invalidation of the issuance of new shares because it is likely to undermine the safety of transaction. However, the issuance of new shares is null and void, in principle, in a case where there is an error in violation of the statutes or the articles of incorporation in violation of the essence of the company, or in violation of the basic principles of the company law, or where it seriously affects the interests of the existing shareholders and the management right or management right of the company. The issuance of new shares is substantially similar to the issuance of new shares in the case of the issuance of bonds with warrants in that it affects the physical foundation of the company and the interests of the existing shareholders even in the case of the issuance of bonds with warrants, since Article 429 of the Commercial Act is applied mutatis mutandis to

[1] The latter part of Articles 418(1) and (2), and 516-2(4) of the Commercial Act / [2] Articles 418(1) and (2), 429, and 516-2 of the Commercial Act

[1] [2] Supreme Court Decision 2008Da50776 decided Jan. 30, 2009 (Gong2009Sang, 247)

Plaintiff (Attorney Son Ji-yol et al., Counsel for the plaintiff-appellant)

Sam Pu Industrial Co., Ltd. (LLC Law LLC, Attorneys Park Il-hwan et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2014Na2013141 decided December 19, 2014

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

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. As to the grounds of appeal Nos. 1 to 3 and 5

A. Article 418(1) and (2) of the Commercial Act provides that a company may, in principle, allocate new shares to the existing shareholders when it issues new shares, and only when the articles of incorporation provide for the allocation of new shares to a third party, thereby protecting the preemptive rights of existing shareholders by limiting the grounds therefor to cases where it is necessary to achieve management objectives, such as the introduction of new technologies and the improvement of financial structure. Therefore, in a situation where a company does not have the aforementioned grounds, allocating new shares to a third party in order to achieve the purpose of the management’s right of management or the defense of management right, in the absence of such grounds, is in violation of Article 418(2) of the Commercial Act (see Supreme Court Decision 2008Da50776, Jan. 30, 200). This legal doctrine likewise applies to cases where bonds with warrants are issued to a third party (see the latter part of Article 516-2(4) and the proviso of Article 418(

B. Meanwhile, the ex post facto nullification of the issuance of new shares is likely to undermine the safety of transaction. Therefore, the grounds for invalidation should be strictly interpreted in a lawsuit seeking nullification of the issuance of new shares. However, in a case where the issuance of new shares violates the Acts and subordinate statutes or the articles of incorporation, and it is contrary to the essence of the corporation or the basic principles of the Company Act or seriously affects the interests of the existing shareholders and the management right or control right of the company, in principle, the issuance of the new shares should be deemed null and void (see the above Decision 2008Da5076, supra). The bonds with warrants are similar to the issuance of new shares in that the bonds with warrants are issued with preemptive rights to claim certain number of new shares at a predetermined price in advance, which practically affects the physical foundation of the corporation and the interests of the existing shareholders. As such, Article 429 of the Commercial Act regarding the lawsuit seeking nullification of the issuance of

C. Based on its stated reasoning, the lower court rejected the Plaintiff’s assertion that the issuance of the instant bonds with warrants is invalid, on the grounds that the instant bonds with warrants is issued for the urgent financing of such funds as stipulated in the Defendant’s articles of incorporation, and it is difficult to view that they were issued to achieve the purpose of management’s right or management right protection in the situation where management disputes are imminent or realistic.

Examining the record in light of the aforementioned legal principles, such determination by the lower court is justifiable. In so doing, contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine regarding the necessity for urgent financing for the allocation of new shares to a third party, the validity of allocation of new shares to a third party, and a significant unfairness in the issuance of new shares or the grounds for invalidation

2. Regarding ground of appeal No. 4

Examining the record in light of the relevant legal principles, the lower court is justifiable to have rejected the Plaintiff’s assertion that the issuance of the instant bonds with warrants was null and void in violation of Article 398 of the Commercial Act’s provision regarding self-transaction by directors. In so doing, contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on Article 39

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.

Justices Park Poe-young (Presiding Justice)