[1] The method of disputing the effect of consolidation of stocks under Article 5 (2) of the Addenda of the Commercial Act (amended by April 10, 1984) (=the lawsuit nullifying consolidation of stocks)

[2] The method of disputeing where procedural and practical defects of the consolidation are extremely serious

[3] The method of disputing any error in omission of public announcement at the time of consolidation of stocks pursuant to Article 5 of the Addenda to the Commercial Act ( April 10, 1984)

[1] Pursuant to Article 5(2) of the Addenda to the Commercial Act (amended by Act No. 4372, May 31, 1991); unlike the consolidation for the purpose of reducing capital, a decrease of capital is not involved. However, in that the effect of a consolidation for the purpose of invalidation and issuance of new shares is accompanied by the consolidation for the purpose of capital reduction, there is no difference between the cases of a consolidation for the purpose of capital reduction. However, if any person can contest the effect of a stock invalidated and issued new shares without any restriction at that time or method, it is impossible to promptly and uniformly determine the material foundation of a company and legal relationship surrounding shares that have a serious effect on a third party’s interest, and accordingly, it is likely to undermine the external stability of a company as well as the external stability of a transaction. Therefore, in such a case, it is reasonable to construe the invalidation of a consolidation by applying Article 45 of the former Commercial Act (amended by Act No. 4372, May 31, 191) to the extent contrary to its nature.

[2] “Lawsuit” under Article 445 of the former Commercial Act (amended by Act No. 4372 of May 31, 1991) refers to a formative action. It is not, in principle, permissible to assert the invalidity of consolidation as a preliminary question in a lawsuit seeking nullification of the consolidation of shares by means of a lawsuit seeking nullification of invalidation of the consolidation of shares or in a lawsuit concerning other legal relations. However, in a case where the procedural and practical defects of the consolidation of shares are extremely serious, such as in a case where there is no substance of the consolidation of shares, and the existence of appearance registered as a result of the consolidation of shares does not exist as a result of the procedural and practical defects of the consolidation of shares, the absence of consolidation of shares can be asserted as a preliminary issue in a lawsuit seeking confirmation of non-existence of the consolidation of shares to remove the external appearance without seeking a restriction of the period of release, unlike the lawsuit seeking nullification of the consolidation of shares.

[3] The purport of Article 5(2) of the Addenda to the Commercial Act (amended by Act No. 4372 of May 31, 1991) that Article 5(2) of the former Commercial Act applies mutatis mutandis to the consolidation of shares by setting a certain period and requires the procedures of announcement and notification. The purport of the aforementioned announcement lies in seeking to recover old share certificates in advance in order to identify a person who is to receive new share certificates and prevent distribution of effective old share certificates. In a case where the company does not follow the aforementioned announcement procedures, barring any special circumstance, the grounds for invalidation of the consolidation exist. However, in a case where the company did not complete the consolidation by the resolution, etc. of the general meeting of shareholders and omitted only such announcement, it cannot be deemed that there is no consolidation of shares because the procedural and practical defect of the consolidation of shares is extremely serious. Therefore, in order to seek invalidation of the consolidation of shares based on Article 5(2) of the Addenda to the Commercial Act only on the omission of announcement within 4 months from the date of the consolidation of shares.

[1] Article 5 (2) of the Addenda of the Commercial Act (amended by Act No. 4372 of May 31, 1991) / [2] Article 445 of the former Commercial Act (amended by Act No. 4372 of May 31, 1991) / [3] Article 5 (2) of the Addenda of the Commercial Act (amended by Act No. 4372 of May 31, 1991), Article 440 of the former Commercial Act (amended by Act No. 4372 of May 31, 1991

[2] Supreme Court Decision 2004Da40306 decided Dec. 9, 2005 (Gong2006Sang, 111)

Plaintiff 1 and two others (Law Firm Simat Law, Attorneys Seo Seo-seok et al., Counsel for the plaintiff-appellant)

Defendant (Attorney Cho Jae-soo et al., Counsel for the defendant-appellant)

Seoul Eastern District Court Decision 2006Na2331 Decided January 16, 2008

Of the primary claims against the Defendant by the lower judgment, the part of the claim for nullification of the consolidation is reversed, and that part of the lawsuit is dismissed. The remainder of the lower judgment against the Defendant is reversed, and that part of the case is remanded to the Panel Division of the Seoul Eastern District Court.

Judgment ex officio is made.

1. The part demanding nullification of the consolidation of stocks among the primary claims

A. (1) Pursuant to Article 5(2) of the Addenda of the former Commercial Act (amended by Act No. 4372 of May 31, 191; hereinafter the same shall apply), the consolidation of shares conducted to take the amount of one share to at least 5,00 won does not entail a reduction of capital, unlike the consolidation to reduce capital. However, in that it entails the invalidation of the former shares and the issuance of new shares by means of the consolidation of shares, there is no difference in the case of a consolidation for reduction of capital. However, if any person can assert the effect of the former shares and the new shares issued to him/her by the aforementioned consolidation of shares without any restriction at the time, method, etc., if it is possible to assert the effect of the consolidation of shares without being subject to any restriction, the legal relationship surrounding the material foundation and shareholders of the company and the interests of third parties cannot be determined promptly and uniformly. Accordingly, it might thereby undermine the internal stability of the company and the safety of external transactions. Therefore, it is reasonable to nullify the consolidation within the extent not contrary.

(2) Meanwhile, the term “action” under Article 445 of the former Commercial Act refers to a formative action. It is not, in principle, permissible to seek nullification of the consolidation by means of a lawsuit seeking nullification of the consolidation of shares or assert the invalidity of the consolidation of shares as a preliminary issue in other legal relations. However, in a case where the procedural and practical defect of the consolidation of shares is extremely serious, such as a case where there is no substance of the consolidation of shares although there is no substance of the consolidation of shares, the procedural and practical defect of the consolidation of shares can be deemed as nonexistent, unlike the lawsuit seeking nullification of the consolidation of shares, the absence of the consolidation of shares can be asserted as a preliminary issue in a lawsuit seeking confirmation of non-existence of the consolidation of shares to remove its appearance, etc. or in another legal relationship without seeking a limitation of the period of release. However, in a case where there is a dispute as to the status of shareholders based on the previous shares which are non-existence of the consolidation between a third party and a third party, the lawsuit cannot be seen as the most effective and adequate means to resolve such dispute, barring special circumstances.

B. According to the reasoning of the lower judgment and the record, the articles of incorporation of ○○○ Distribution Co., Ltd. (hereinafter “○○○ Distribution”) describe a par value of 10,00 won per share. A certified copy of the corporate register provides that the ○○ Distribution shall combine the shares of 73,500 won per share with the new shares of 7,350 won per share of 10,000 won per share of June 9, 1989 (hereinafter “the consolidation of shares”). The following facts are stated as follows: (a) the consolidation of shares was completed on June 12, 1989; (b) the combination of shares between Nonparty 2 and the Defendant’s 00,000 won per share; (c) the list of shareholders from June 17, 1994 stated that the inheritee’s new shares were owned by Nonparty 3,087; (d) the list of shareholders from Nonparty 2 to 3,087; and (e) the Defendant’s new shares were listed in Nonparty 2, 3, 25, and 445, and 1.

The reasoning of the judgment below is examined in light of the aforementioned legal principles and the above facts. In this case where there is no evidence to acknowledge that the lawsuit seeking nullification of the consolidation of this case was filed within six months from June 12, 1989, which is the date of registration of the consolidation of this case, and the judgment was pronounced and finalized, this case’s consolidation is null and void, and the part seeking nullification against the defendant is contrary to Article 445 of the former Commercial Act, which provides that the plaintiffs can assert invalidation of the consolidation of this case’s consolidation only by means of a form of action within six months from the date of registration of the consolidation of this case’s consolidation of this case’s shares. Furthermore, even if the purport of the claim seeking nullification of the said consolidation of this case’s consolidation is the purport of seeking non-existence of the share consolidation of this case’s claim, the plaintiffs’ claim seeking nullification of the purport and supplement of the claim as of January 18, 207 and the legal brief, etc. cannot be seen as the lack of the Plaintiffs’ status by lack of legitimate means and form.

C. Nevertheless, the lower court determined that the part of the claim for nullification of the consolidation among the primary claims against the Defendant was lawful. In so doing, the lower court erred by misapprehending the legal doctrine on the interests of consolidation and confirmation under Article 5(2) of the Addenda of the former Commercial Act, thereby adversely affecting the conclusion of the judgment.

2. Part of the claim for confirmation of shareholder status based on the old shares among the primary claims

A. The purport of Article 5(2) of the Addenda to the former Commercial Act, applying mutatis mutandis Article 440 of the former Commercial Act, which requires the procedures of public announcement and notification by setting a certain period in the consolidation of shares, is to identify a person who will receive new share certificates and prevent effective distribution of share certificates (see Supreme Court Decision 2004Da40306, Dec. 9, 2005). In a case where a company does not go through the aforementioned procedures such as public announcement, the grounds for invalidation of the consolidation exist unless there are special circumstances. However, in a case where a company completes the registration of consolidation by the resolution, etc. of a general meeting of shareholders on the consolidation of shares but only omits such public announcement, it cannot be deemed that the procedural and practical defects of the consolidation are extremely serious and lack of the consolidation of shares. Therefore, in order to only claim invalidation of the consolidation on the grounds of defects in the omission of public announcement under Article 5(2) of the Addenda to the former Commercial Act, the invalidation of the consolidation should not be claimed within six months from the registration date of consolidation.

B. Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine, the Plaintiffs’ assertion of invalidity of the consolidation of shares as a preliminary issue of the claim for confirmation of shareholder status based on the old shares without filing a lawsuit for invalidation of the consolidation within a lawful period of release pursuant to Article 445 of the former Commercial Act is not permitted in principle. However, the Plaintiffs’ assertion of invalidity of the consolidation of shares based on the old shares cannot be asserted as a preliminary issue only when it can be deemed that the consolidation of shares does not exist. However, the mere fact that the announcement of Article 440 of the former Commercial Act was omitted in relation to the consolidation of shares is insufficient cannot be deemed as the absence of the consolidation of shares. Thus, unless the Plaintiffs prove the absence of the absence of the reason, the part of the claim for confirmation of shareholder status based on the former shares out of the Plaintiffs’ primary claim cannot be acknowledged by taking advantage of seeking confirmation

C. Nevertheless, the lower court, without examining and determining whether there exists a non-existence of consolidation in the consolidation of this case, determined to the effect that the mere fact that ○○ distribution was not a public announcement for more than three months pursuant to Article 440 of the former Commercial Act while consolidating the consolidation of this case is recognized, the consolidation of this case is null and void, the old shares were not invalidated, and the Plaintiffs possessing old share certificates representing the old shares were justifiable shareholders of ○○○○ distribution. In so determining, the lower court erred by misapprehending the legal doctrine on the share consolidation and confirmation interest under Article 5(2) of the Addenda of the former Commercial Act, thereby adversely affecting the conclusion of the judgment.

3. Therefore, without further proceeding to decide on the grounds of appeal, the part concerning the claim seeking nullification of the consolidation of stocks among the primary claims against the Defendant by the lower judgment is reversed, and this part of the case is sufficient to be directly tried by the Supreme Court, and thus, this part of the lawsuit is dismissed, and the remaining part of the lower judgment against the Defendant is reversed and 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 Cha Han-sung (Presiding Justice)