The standard for determining whether a shareholder who exercises the right at a general meeting of shareholders satisfies the requirement for mutual ownership of shares with limited voting rights as stipulated in Article 369(3) of the Commercial Act on the basic date for determining a shareholder who exercises the right at a general meeting of shareholders (negative); and whether a company, etc. has more than 1/10 of shares issued by another company

Article 369(3) of the Commercial Act provides that “If a company, parent company, or subsidiary or subsidiary company holds shares in excess of 1/10 of the total number of shares issued by another company, the shares of the company or parent company holding such another company shall not be voting rights.” The primary purpose of regulating mutual ownership of shares between the parent company and the non-subsidiary company is to prevent distortion of the resolution of the general meeting of shareholders and the governance structure of the company by exercising voting rights by a person who does not own shares through mutual shares. Meanwhile, the basic date stipulated in Article 354 of the Commercial Act is to determine a certain date as a shareholder of a dispute and to determine the shareholders recorded in the register of shareholders as a shareholder of another company. Thus, even if the basic date does not meet the requirements stipulated in Article 369(3) of the Commercial Act, the shares owned by the parent company, subsidiary company, or subsidiary company are not voting rights if the above requirements are met. In this case, whether the shares are held in excess of 10/10 of the total number of shares issued by the company should be determined on the basis of the number of shares issued.”

Articles 335(3), 336, 337(1), 354, and 369(3) of the Commercial Act

Plaintiff 1, et al. (Law Firm Spah, Attorneys Park Han-chul et al., Counsel for the plaintiff-appellant)

Defendant Co., Ltd. (Law Firm Sejong, Attorneys Seo Sung-sung et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2005Na74384 Delivered on April 12, 2006

All appeals are dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

1. As to the grounds of appeal Nos. 1 and 2

Article 369(3) of the Commercial Act provides that “If a company, parent company, or subsidiary or subsidiary company holds shares in excess of 1/10 of the total number of shares issued by another company, the shares of the company or parent company holding such another company shall not be voting rights.” The main purpose of regulating the mutual ownership of shares between the parent company and the non-subsidiary company is to prevent distortion of the resolution of the general meeting of shareholders and the governance structure of the company by exercising voting rights by a person who does not own shares through mutual shares. Meanwhile, the basic date stipulated in Article 354 of the Commercial Act is to determine a certain date as a shareholder of a dispute and to determine the shareholders recorded in the register of shareholders as a shareholder of another company. Thus, even if the basic date does not meet the requirements stipulated in Article 369(3) of the Commercial Act, if the above requirements are met at the general meeting of shareholders exercising voting rights, the shares are mutually owned by the parent company, subsidiary company, or subsidiary company, and whether the shares are in excess of 10/10 of the total number of shares issued by the other company.”

According to the reasoning of the judgment below, the defendant company is the parent company under the Commercial Act which owns 92% of the total issued shares of the non-party 1 company; the defendant company held a regular shareholders' meeting on March 18, 2005 (hereinafter "the general shareholders' meeting of this case"). Article 14(2) of the articles of incorporation of the defendant company provides that "the company shall be the shareholders who are recorded in the final shareholders' meeting of December 31 of each year as shareholders who shall exercise their rights at the regular shareholders' meeting on the period for the settlement of accounts." The non-party 2 corporation held 3,563,080 shares equivalent to 8,205,043.4% of the total issued shares of the defendant as of December 31, 2004, which are the basic date of the shareholders' general meeting of this case (the above shares are stated in the shareholders' list of the defendant company as above); however, the non-party 1 corporation, the subsidiary company of the defendant company, at the time of acquisition by transfer of shares of the non-party 297.

Since the transfer of shares prior to the issuance of share certificates takes effect only by the parties’ declaration of intent (see Supreme Court Decision 2005Da45537, Sep. 14, 2006), the non-party 1 corporation acquired shares equivalent to 27% of the total number of shares issued by the non-party 2 corporation around January 26, 2005 and came to own shares. As above, as long as the non-party 1 corporation, which is the subsidiary of the defendant company, owned shares exceeding 1% of the total number of shares issued by the non-party 2 corporation, the non-party 2 corporation did not have voting rights pursuant to Article 369 (3) of the Commercial Act.

In the same purport of the judgment below, the above 3,563,080 shares issued by the Defendant Company Nos. 3,563,080 are not recognized, and each resolution of the general meeting of shareholders of this case is an unlawful resolution that recognized a voting right with respect to a trade name without voting right, and its method of resolution shall be revoked in violation of Acts and subordinate statutes. The court below did not err in the misapprehension of legal principles as to the timing of and criteria for determining the trade name-owned shares under Article 369(3) of the Commercial Act, or in the violation

2. Regarding ground of appeal No. 3

Article 379 of the Commercial Act provides that a court may dismiss an action for revocation of a resolution of a general meeting of shareholders at its discretion in cases where a lawsuit is filed for revocation of the resolution. This purport is to prevent damage to the company or damage to the safety of general transactions and prevent abuse of the lawsuit for revocation of the resolution by cancelling the resolution even though the resolution was revoked, because the resolution was not beneficial to the company or shareholders, or has already been executed, even if the resolution was revoked, and to prevent the occurrence of damage to the company or damage to the safety of general transactions and to prevent the abuse of the lawsuit for revocation by its own discretion in cases where the above circumstance is acknowledged (see Supreme Court Decision 2001Da45584, Jul. 11, 2003).

However, solely on the circumstances that are indicated in the resolution contents of the general meeting of shareholders of this case, the current status of the defendant company, defects in the method of resolution as seen earlier, and other records, it is not adequate to recognize dismissal by discretion. Therefore, the allegation in the grounds of appeal that the revocation of the resolution of the general meeting of shareholders of this case ought to be dismissed at discretion cannot

3. Conclusion

Therefore, all appeals are 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 on the bench.

Justices Park Ill-sook (Presiding Justice)