[1] In a case where a director who embezzled the company's property did not know the aggravation of the financial structure through bad faith or gross negligence on the securities market, and the stock price of the company was formed higher than normal share price, and the stock purchaser acquired shares without knowledge, but thereafter, published such fact on the securities market, thereby falling short of the stock price, whether the shareholder may claim damages against the director pursuant to Article 401 (1) of the former Commercial Act (affirmative)

[2] In a case where Eul et al. claimed compensation for damages under Article 401 (1) of the former Commercial Code because Eul et al., a shareholder of Eul et al, suffered damages from the decline in stock price caused by Byung's embezzlement, stock price manipulation, and false disclosure against Byung, the case holding that the court below erred in the misapprehension of legal principles as to the interpretation of Article 401 (1) of the former Commercial Code and proximate causal relation with the interpretation of Article 401 (1) of the former Commercial Code and proximate causal relation in the judgment of the court below which accepted Eul et al, without due consideration as to when Byung made a false disclosure of any circumstance that may affect the stock price formation, or whether Eul et al. made a price manipulation, as a result of a false disclosure or price manipulation, and acquired a price higher than

[1] Where a shareholder of a stock company suffers direct loss due to a director's bad faith or gross negligence due to a director's breach of duty, he/she may claim damages against the director under Article 401 of the former Commercial Act (amended by Act No. 10600, Apr. 14, 201; hereinafter "the Commercial Act"). However, inasmuch as indirect loss, such as loss caused by a director's misappropriation of company's assets and the decrease of company's company's assets, which caused loss to stockholders' economic interests, is not included in the concept of loss under Article 401 (1) of the Commercial Act, it cannot be claimed as damages under the said provision. However, where a director who embezzled company's assets, was not known in the securities market because the deterioration of the financial structure was not known, and the stock price of the company's issued stocks was formed higher than normal stock price due to the failure of the purchaser to obtain shares, and thereafter the stock price fell on the securities market, the shareholder may claim damages directly due to the decline in the company's assets.

[2] In a case where Eul et al. filed a claim against Byung for damages under Article 401(1) of the former Commercial Act (amended by Act No. 10600, Apr. 14, 2011; hereinafter “the Commercial Act”) on the ground that Eul et al. suffered damages due to the decline in stock price caused by Byung’s embezzlement, stock price manipulation, and false disclosure, the case holding that the judgment below erred in the misapprehension of legal principles as to the interpretation of Article 401(1) of the Commercial Act and proximate causal relation as to the interpretation of Article 401(1) of the Commercial Act, where Byung et al., a shareholder of Eul et al. filed a claim against Byung for compensation for damages under Article 401(1) of the former Commercial Act (amended by Act No. 10600, Apr. 14, 2011; hereinafter “the Commercial Act”), after examining the circumstances that may affect the stock price formation, and whether Eul et al acquired shares at a higher price than the normal share price manipulation

[1] Article 401 of the former Commercial Act (Amended by Act No. 10600, Apr. 14, 2011) / [2] Article 401 of the former Commercial Act (Amended by Act No. 10600, Apr. 14, 201)

[1] Supreme Court Decision 2003Da29661 decided Oct. 24, 2003 (Gong2003Ha, 2250)

Plaintiff 1 and one other

Defendant

Seoul High Court Decision 2009Na27973 decided August 20, 2010

The part of the lower judgment against the Defendant is reversed, and that part of the case is remanded to the Seoul High Court.

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

1. Where a shareholder of a stock company has suffered direct damage due to a director's bad faith or gross negligence, he/she may file a claim against the director for damages under Article 401 of the former Commercial Act (amended by Act No. 10600, Apr. 14, 2011; hereinafter "the Commercial Act"). However, such indirect damages as losses suffered by the company due to the decrease in its company's assets by embezzlement of the company's assets and resulting in the company's economic interests are not included in the concept of damages under Article 401 (1) of the Commercial Act, and thus, he/she cannot claim damages under the said provision (see Supreme Court Decision 2003Da29661, Oct. 24, 2003, etc.).

However, in a case where the director who embezzled the company's assets did not know the aggravation of the financial structure due to bad faith or gross negligence in the securities market and thereby, the stock price of the company's issued stocks is higher than the normal stock price. In a case where the stock purchaser acquired the shares without knowing such fact, and thereafter the fact was announced on the securities market, and thereby the stock price drops, the relevant shareholder may claim damages against the director in accordance with Article 401 (1) of the Commercial Act, since he purchased the shares at a price higher than the normal stock price due to the false disclosure by the director, but incurred a loss directly due to the decline in the

2. According to the reasoning of the lower judgment, the lower court acknowledged the facts as indicated in its reasoning, and determined that: (a) the Defendant, who actually operated the observer Capital Co., Ltd. (hereinafter “Nonindicted Company”) around July 30, 2001 and around 21 times from October 26, 2001, embezzled KRW 31,910,638,421, which exceeded 160% of the size of Nonparty Company’s capital; (b) made a false public announcement in order to maximize the profits that may take place in the process; (c) caused capital erosion; and (d) caused the cancellation of Nonparty Company’s registration on July 2002; and (d) caused the Defendant’s unlawful act of breach of duty and revocation of its registration on KOSDAQ, thereby, constituted the most reasonable causation between the Plaintiffs’ damages incurred by the Plaintiffs’ stocks at the time of their holding stocks at the time of the same time and the amount of damages incurred by the Defendant’s immediate cancellation of the registration under Article 10 of the Commercial Act.

3. However, in light of the above legal principles, it is difficult to accept such judgment of the court below.

According to the facts established by the court below, the following facts are revealed: (a) Plaintiff 1 acquired the shares of the non-party company from February 28, 2001 to February 27, 2002; and (b) Plaintiff 2 from November 7, 2001 to February 26, 2002; and (c) Plaintiff 1 held 70,000 shares as of March 2002 and Plaintiff 2 held 141,50 shares; (b) the Defendant made a false disclosure or price manipulation of any content at any time for circumstances that may affect the formation of the shares of the non-party company; and (c) the Plaintiffs acquired shares at any price higher than the normal share price without knowledge of fact due to a false disclosure or price manipulation; and (d) the Plaintiffs acquired shares at any price higher than the normal share price.

If the plaintiffs acquired shares at a price higher than normal share price without knowing the aggravation of the financial structure due to the embezzlement, bad faith, or gross negligence of a large amount of the non-party company's property, and the fact that the fact was published thereafter, the non-party company's loss of capital has been revoked, and the share price has fallen in the process, the plaintiffs can be deemed to have suffered direct loss due to the non-party company's false disclosure. Thus, the plaintiffs can claim damages against the defendant pursuant to Article 401 (1) of the Commercial Act.

However, in the event that, after the plaintiffs acquired shares, the embezzlement and the false disclosure on the embezzlement of the defendant and the aggravation of the financial structure of the non-party company were made public later, and the cancellation of the registration of the non-party company's KOSDAQ was caused by the capital erosion and the stock price drop in the process, the damage equivalent to the stock price drops in the process, which is ultimately an indirect loss incurred by the aggravation of the financial structure of the non-party company due to the defendant's embezzlement, is nothing more than an indirect loss caused by the deterioration of the financial structure of the non-party company by the non-party's embezzlement. In such a case, the plaintiffs cannot claim against the defendant for damages under Article 401 (1) of the Commercial Act.

In addition, if the share price of the non-party company’s shares was formed higher than normal share price due to the defendant’s price manipulation, and the plaintiffs suffered damages by acquiring shares without knowing such fact, the plaintiffs may claim damages against the defendant pursuant to Article 401(1) of the Commercial Act. However, if the plaintiffs acquired shares prior to the defendant’s price manipulation or acquired shares after the price manipulation, there cannot be a proximate causal relation between the defendant’s price manipulation and damages caused by the price fluctuation after the plaintiffs’ share price manipulation. In such a case, it is difficult to view that the plaintiffs can claim damages against the defendant pursuant to Article 401(1) of the Commercial Act.

If so, the court below should examine the circumstances that may affect the share price formation, such as large embezzlement, and whether the defendant made a false disclosure or made a stock price manipulation at any time, and whether the plaintiffs acquired a price higher than the normal share price of the non-party company's share price with no knowledge of the truth caused by the false disclosure or the stock price manipulation, and then examine whether the damage caused by the price decline of the non-party company's share price, as alleged by the plaintiffs, can be recognized as a proximate causal relationship between the damage and the defendant's embezzlement, stock price manipulation, and the act of the non-party company's embezzlement, stock price manipulation, and the false disclosure, etc., and then the amount of the damage shall be calculated after the recognized year.

Nevertheless, without examining these matters properly, the court below did not err by misapprehending the legal principles as to the interpretation of Article 401(1) of the Commercial Act and proximate causal relation, and thereby adversely affecting the conclusion of the judgment, on the grounds that the damages suffered by the plaintiffs due to the cancellation of the non-party company’s registration on the ground that the damages incurred by the plaintiffs constitute damages under Article 401(1) of the Commercial Act. The acts such as embezzlement, stock price manipulation, false public disclosure, etc. by the defendant and the damages suffered by the plaintiffs due to the decline in the share price before the cancellation of the non-party company’s registration

4. Therefore, without examining the remaining grounds of appeal, the part against the defendant among the judgment below is reversed, and that part of the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim So-young (Presiding Justice)