2018Da283315 Action to nullify the reduction of capital

Plaintiff

Hocom Industries Co., Ltd. (formerly: State prior to the change)

Food Company’s Hocom Construction Industry

Attorney Seo-jin et al., Counsel for the defendant-appellant

Seoul High Court Decision 2018Na2008901 Decided October 12, 2018

November 26, 2020

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 referred to as "Fulra Construction") was established on October 2, 2014 with the commencement order of rehabilitation procedures on July 1, 2015. Pursuant to the rehabilitation plan, par value of common shares and preferential shares issued prior to the authorization order was reduced by 1 share, 5,000 won was changed to 1 share value of 5,000 won, and 200 shares were consolidated to 1 share shares for all remaining shares after the completion of the above capital reduction and the debt-equity swap of 00 shares. The Ulsan Construction Co., Ltd. (hereinafter referred to as "Sulra Construction") concluded 100 shares and 200 shares increase to 00 shares, and 1.6 shares increase to 200 shares and 400 shares were decided on July 21, 2016.

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. The instant case’s consolidation and capital decrease agenda with the consent of 4,180,486% of the total outstanding shares of Ulsan Construction’s 4,309,209, and with the consent of 97% of the total issued shares of Ulsan Construction, the instant case was resolved (9.9% of the number of shares present). E. Ulsan Construction took the procedure of consolidating and capital decrease as of the resolution of the general meeting of shareholders. The shareholders holding less than 10,000 shares as of December 8, 2016, who held the number of shares of less than 10,000 shares, lost their status as shareholders and lost their status as shareholders except for the remaining shares held by the Plaintiff’s 34,000 shares.

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, and may put a disadvantage to the shareholders who lose shareholder rights according to the content of the said merger at a disadvantage not to be equal to that of the shareholders who lose shareholder rights. 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 substantial 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 recruitment of minority shareholders is likely to be null and void since it violates the principle of trust and good faith and the principle of 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 and procedures for the protection of creditors should be followed (Articles 438 and 439), and a single owner arising from stock consolidation may be disposed of by auction (main sentence of Article 443). However, stocks having an exchange market price may be sold by means other than 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 acquisition price after determining the validity of the sale price by discretionary means, such as the sale price of shares, to maintain fairness between the shareholders holding a minority number and shareholders who do not own the stocks.

2) A shareholder, auditor, liquidator, trustee in bankruptcy, or creditor who did not approve 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 change 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, a lawsuit for invalidation may be brought in cases where the method or other procedures of a lawsuit for reduction of capital are contrary to the principle of equality of shareholders, in violation of other Acts and subordinate statutes or the articles of incorporation, or against the principle of trust and good faith, which is the general principles of the Civil Act. In other words, the principle of equality of shareholders means equal treatment of shares held by the shareholder. If the reduction of capital is made at a different rate depending on the number of shares held by the shareholder, this may be a cause 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 thus 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 shareholder equality. The consolidation of shares in the instant case took place at the same ratio of all shares through a special resolution of shareholders’ general meeting and creditor protection procedure in accordance with the procedures prescribed by the Act. As pointed out in the lower court, minority shareholders holding shares that do not reach the ratio of consolidation in the process of single-form disposal lose their shareholder status regardless of their own will. However, the method of single-form disposal is an exception to the principle of shareholder equality acknowledged explicitly in the Commercial Act (Article 443). Therefore, the result of the consolidation of shares in the instant case did not change the shareholder’s percentage position as a result of the consolidation of shares, and barring any circumstance where the Plaintiff did not receive equal treatment by the number of shares owned by the Plaintiff, this cannot be deemed

2) Next, we examine whether the instant consolidation and capital decrease violated the principle of trust and good faith and the principle of prohibition of abuse of rights. In light of the legislative intent of introducing the compulsory purchase system of minority shareholders through the revision of the Commercial Act in 2011, it is unlawful to use a method having the same legal effect to avoid the accumulation system of minority shareholders permissible under strict requirements. However, the compulsory purchase system of minority shares does not necessarily have to be exercised by the controlling shareholder as the right recognized by the Act, but does not put any specific limitation on the purpose or requirement of the consolidation in our Commercial Act regarding the introduction of compulsory purchase system of minority shares. In addition, in order for the controlling shareholder to monopoly control over the company by means of the consolidation, it is necessary to retire the shares treated as a single share or acquire shares handled as a single share, and thus, it is difficult to view that the majority shareholder was 9% of the total amount of shares issued by the company without the consent of the court (Article 83 of the Non-Contentious Case Litigation Procedure Act) and thus, it is difficult to view that the majority shareholder would have been 9%’s ex officio.

Although a resolution was made in accordance with the procedures prescribed by the Commercial Act, it was determined that the principle of shareholder equality, the principle of good faith and the principle of prohibition of abuse of rights are violated. In so determining, the lower court erred by misapprehending the principles 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 affecting the conclusion of the judgment.

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

Chief Justice Park Sang-ok

Justices Noh Jeong-chul