The legislative purport of Article 174(3)6 of the former Financial Investment Services and Capital Markets Act / The meaning of the “person who became aware of any material nonpublic information regarding the implementation or discontinuance of mass acquisition or disposal of stocks, etc.” (i.e., a person who acquires or disposes of stocks, etc., or a person who receives the pertinent information from a person falling under any of subparagraphs 1 through 5) and whether the information recipient must have awareness of the fact that the information provider delivers undisclosed information acquired in the course of performing his/her duties to recognize that the information was received from the information provider (affirmative)

Article 174(3)6 of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013; hereinafter “former Financial Investment Services and Capital Markets Act”) provides that “a person who becomes aware of any material nonpublic information regarding the execution or suspension of mass acquisition or disposal of stocks, etc. from a person who acquires or disposes of stocks, etc., or from a person falling under any of subparagraphs 1 through 5, shall not use or allow another person to use nonpublic information for the sale or purchase of specific securities, etc. related to the stocks, etc. or any other transaction.

The above provision is intended to prohibit an insider in connection with the acquisition and disposal of stocks, etc. from trading by using undisclosed information on the implementation or suspension of large-scale acquisition and disposal of stocks, etc., in a case where the insider is prohibited from trading by using such undisclosed information. Thus, the legislative purport of the above provision is to prevent the insider from trading or trading of specific securities, etc. by acquiring undisclosed information from the insider and using such undisclosed information.

Article 174(1)6 and Article 174(2)6 of the former Capital Markets Act deeming the “person who received” information from an internal entity falling under any of subparagraphs 1 through 5 of the same paragraph, including a tender offeror, regarding the commencement or discontinuance of a tender offer for material nonpublic information or stocks related to the business of a listed corporation as the recipient of the information, and prohibits the person from using the information recipient. However, the legislative purport of Article 174(1)6 and Article 174(2)6 of the former Capital Markets Act does not differ from those of Article 174(3)6 of the former Capital Markets Act. Moreover, considering the structure, form, and language of Article 174(1)6 and Article 174(2)6 of the former Capital Markets Act, there is no reasonable ground to view the “person who received material nonpublic information or nonpublic information” and the “person who became aware of material nonpublic information” under Article 174(3)6 of the former Capital Markets Act.

Furthermore, a person who acquires or disposes of stocks, etc. in bulk or a person who becomes aware of nonpublic information regarding the implementation or suspension of the acquisition or disposal of stocks, etc. from a person falling under any of subparagraphs 1 through 5 of Article 174(3) of the former Capital Markets Act, in violation of Article 174(3)6 of the former Capital Markets Act, thereby using nonpublic information, is subject to punishment pursuant to Article 443(1)3 of the former Capital Markets Act. If a person becomes aware of nonpublic information from an internal person related to the acquisition or disposal of stocks, etc., all cases are deemed to fall under Article 174(3)6 of the former Capital Markets Act, such as where the scope of punishment is unclear or excessively broad, and infringing on legal stability, and thus, it is necessary to interpret it by limiting it.

Therefore, “a person who becomes aware of any material nonpublic information regarding the implementation or discontinuance of mass acquisition or disposal of stocks, etc.” under Article 174(3)6 of the former Capital Markets Act refers to a person who acquires or disposes of stocks, etc. or a person who receives information from any of subparagraphs 1 through 5.

However, in order to recognize that the information recipient received the information from the information provider, there is no sufficient objective fact that there was the transfer of information, and there is a perception that the information provider delivers the undisclosed information known to the information provider in connection with his/her duties.

On the other hand, the undisclosed information acquired by the information recipient should be specific to the extent that it can be known that the implementation or suspension of mass acquisition or disposition is carried out. The information provided by the information recipient is not merely suggesting the existence of the undisclosed information, or is ambiguous and abstract so that the information recipient still bears the economic risk equivalent to ordinary investors even if he/she uses the information, barring special circumstances, it does not constitute the undisclosed information under the above provision.

Article 12(1) of the Constitution of the Republic of Korea; Article 1(1) of the Criminal Act; Article 174(1)6, (2)6, and (3)6, and Article 443(1)3 of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 11845, May 28, 2013)

Defendant

Prosecutor

Law Firm Squa, Attorneys Kim Tae-tae et al.

Seoul Central District Court Decision 2014No4227 Decided May 15, 2015

The appeal is dismissed.

The grounds of appeal are examined.

1. Article 174(3)6 of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013; hereinafter “former Financial Investment Services and Capital Markets Act”) provides that a person who acquires or disposes of shares, etc. in bulk, or a person who falls under any of subparagraphs 1 through 5, “person who becomes aware of any material nonpublic information regarding the implementation or suspension of the acquisition or disposal of shares, etc., shall not use such material nonpublic information for the sale and purchase of specific securities, etc. or any other transaction related to the shares, etc. or allow another person to use such material nonpublic information.

The above provision is intended to prohibit an insider in connection with the acquisition and disposal of stocks, etc. from trading by using undisclosed information on the implementation or suspension of large-scale acquisition and disposal of stocks, etc., in a case where the insider is prohibited from trading by using such undisclosed information. Thus, the legislative purport of the above provision is to prevent the insider from trading or trading of specific securities, etc. by acquiring undisclosed information from the insider and using such undisclosed information.

Article 174(1)6 and Article 174(2)6 of the former Capital Markets Act deeming the “person who received” information from an internal entity falling under any of subparagraphs 1 through 5 of the same paragraph, including a tender offeror, regarding the commencement or discontinuance of a tender offer for material nonpublic information or stocks related to the business of a listed corporation as the recipient of the information, and prohibits the person from using the information recipient. However, the legislative purport of Article 174(1)6 and Article 174(2)6 of the former Capital Markets Act does not differ from those of Article 174(3)6 of the former Capital Markets Act. Moreover, considering the structure, form, and language of Article 174(1)6 and Article 174(2)6 of the former Capital Markets Act, there is no reasonable ground to view the “person who received material nonpublic information or nonpublic information” and the “person who became aware of material nonpublic information” under Article 174(3)6 of the former Capital Markets Act.

Furthermore, a person who acquires or disposes of stocks, etc. in bulk or a person who becomes aware of nonpublic information regarding the implementation or suspension of the acquisition or disposal of stocks, etc. from a person falling under any of subparagraphs 1 through 5 of Article 174(3) of the former Capital Markets Act, in violation of Article 174(3)6 of the former Capital Markets Act, is punished pursuant to Article 443(1)3 of the former Capital Markets Act if he/she uses nonpublic information. When it is deemed that any of the cases becomes aware of nonpublic information from an internal person related to the acquisition or disposal of stocks, etc. falls under Article 174(3)6 of the former Capital Markets Act, the scope of punishment is not clear or excessively broad, and it is contrary to the principle of no punishment without law, and thus, it is necessary to interpret it by limiting it.

Therefore, “a person who becomes aware of any material nonpublic information regarding the implementation or discontinuance of mass acquisition or disposal of stocks, etc.” under Article 174(3)6 of the former Capital Markets Act shall be deemed to have been delivered by a person who acquires or disposes of stocks, etc. or a person who falls under any of subparagraphs 1 through 5.

However, in order to recognize that the information recipient received the information from the information provider, there is no sufficient objective fact that there was the transfer of information, and there is a perception that the information provider delivers the undisclosed information known to the information provider in connection with his/her duties.

On the other hand, the undisclosed information acquired by the information recipient should be specific to the extent that it can be known that the implementation or suspension of mass acquisition or disposition is carried out. The information provided by the information recipient is not merely suggesting the existence of the undisclosed information, or is ambiguous and abstract so that the information recipient still bears the economic risk equivalent to ordinary investors even if he/she uses the information, barring special circumstances, it does not constitute the undisclosed information under the above provision.

2. Review of the reasoning of the lower judgment and the evidence duly admitted and examined by the lower court reveals the following facts.

A. The Defendant was aware that Nonindicted Co. 2, who is the business partner of Nonindicted Co. 1 (hereinafter “Nonindicted Co. 2”) that he/she would immediately sell the shares of Nonindicted Co. 2 (hereinafter “Nonindicted Co. 2”). On March 2012, the Defendant informed Nonindicted Co. 3 (hereinafter “Nonindicted Co. 3”) the Chairperson of Nonindicted Co. 3 (hereinafter “Nonindicted Co. 3”) of the foregoing awareness, and purchased the shares of Nonindicted Co. 2 from March 20, 2012.

B. On March 25, 2012, immediately after the Defendant became aware of the lawsuit regarding the sale of Nonindicted Co. 2, Nonindicted Co. 4 agreed to take over the shares and management rights of Nonindicted Co. 2 with the chairperson of the board of directors representing the major shareholders of Nonindicted Co. 2.

C. On April 9, 2012, the Defendant, on Nonindicted Co. 2’s building, inspected Nonindicted Co. 2 on Nonindicted Co. 2, 2012, and met Nonindicted Co. 6’s executive director.

D. Non-Indicted 6 merely referred to as “the Defendant had actually died,” who was asked to be “garnment”, and did not say that the subject of the actual inspection was Non-Indicted 2.

3. According to the above facts, it is difficult to deem that Nonindicted Co. 6 was aware of the fact that Nonindicted Co. 3 was providing the Defendant with undisclosed information on the mass acquisition of the listed stocks of Nonindicted Co. 2, beyond examining M&A of a certain company at the time of Nonindicted Co. 6’s statement that “the Defendant was actually dead,” and the said statement cannot be deemed as falling under the material nonpublic information.

A. Although the Defendant delivered a lawsuit related to the sale of Nonindicted Company 2 to Nonindicted 4, it may be indirectly perceived that Nonindicted 6 provided the Defendant with the information that Nonindicted 4’s acquisition of Nonindicted Company 2 was promoted when Nonindicted 6 knew that Nonindicted 6 would have come to know of the fact that Nonindicted 6 would trade the shares of Nonindicted Company 2. However, it is difficult to readily conclude that Nonindicted 6 was aware of the fact that Nonindicted 6 was aware of the fact that at the time, Nonindicted 6 was aware of the fact that Nonindicted 6 would have come to know of the fact that he would have come to contact with the Defendant in the prosecutor’s office and the first instance court, and it was stated that Nonindicted 6 was unable to talk with the Defendant from the standpoint of promoting the merger and acquisition. In light of the content of the statement, it is probable that Nonindicted 6 intended not to disclose the information. Therefore, even if Nonindicted 2’s lawsuit was filed at the time, it appears that Nonindicted 6 did not have known Nonindicted 2’s acquisition through the foregoing speech.

B. According to the record, it can be known that the building occupied by Nonindicted Co. 2 was occupied by several corporations or private companies. Accordingly, the phrase that it was inspected on the building at issue does not necessarily mean that it was inspected on Nonindicted Co. 2. At the time, the conversation between Nonindicted Co. 6 and the Defendant was merely a simple personnel or response that can be easily between the people who were in a remote situation, but is not based on the premise that Nonindicted Co. 2 was subject to the inspection. Ultimately, the horses made by Nonindicted Co. 6 cannot be deemed to have received the Defendant’s nonpublic information in a physical condition.

If the Defendant did not attract Nonindicted Co. 4 to acquire Nonindicted Co. 2 or did not have any interest in the situation related to the acquisition of Nonindicted Co. 2, he was heard only from Nonindicted Co. 6, and did not leave the acquisition of Nonindicted Co. 2. Considering such circumstances, it can be seen that the Defendant’s purchase of Nonindicted Co. 2’s shares in an intensive bringing a large amount of money from April 2012 was derived from the judgment based on the Defendant’s solicitation for acquisition and the current situation at the time of the purchase. Therefore, it is difficult to presume that Nonindicted Co. 6 provided the Defendant with the undisclosed information that is in reliance on such intensive purchase.

4. Although the reasoning of the lower court partially inappropriate or insufficient, the lower court’s conclusion that the Defendant cannot be deemed to have received nonpublic information from Non-Indicted 6 is acceptable as it is based on the legal doctrine as seen earlier. In so doing, the lower court did not err by misapprehending the legal doctrine on the concept of nonpublic information and internal person under Article 174 of the former Capital Markets Act, contrary to what is alleged in the grounds of appeal.

Therefore, the prosecutor's appeal is dismissed as it is without merit. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Chang-suk (Presiding Justice)