Plaintiff (Attorney Kim Jong-soo et al., Counsel for the plaintiff-appellant)

Sam Pu Industrial Co., Ltd. (Law Firm Barun, Attorneys Park Jae-chul et al., Counsel for the plaintiff-appellant)

November 19, 2014

Suwon District Court Decision 2013Gahap21106 Decided April 17, 2014

1. Revocation of the judgment of the first instance, and the plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff in both the first and second instances.

1. Purport of claim

The issuance of separate type of bonds with warrants listed in the attached Table as stated by the defendant on April 19, 2013 shall be null and void.

2. Purport of appeal

The same shall apply to the order.

1. Basic facts

The following facts are not disputed between the parties, or can be acknowledged by comprehensively taking account of the whole purport of pleadings in each entry in Gap evidence Nos. 1 through 4, Gap evidence No. 7, Eul evidence No. 8 (the same as evidence No. 21, Eul evidence No. 55), Eul evidence No. 12, Eul evidence No. 26, Eul evidence No. 48, Eul evidence No. 53-1 through 3, Eul evidence No. 54, Eul evidence No. 57, and Eul evidence No. 57:

A. Defendant’s management relationship, etc.

1) The Defendant was established on April 9, 1946 and operated various paints, synthetic resin manufacturing and sales business, etc. At the time of its incorporation, Nonparty 1, a joint start-up business owner, was in charge of the business and production sector, and Nonparty 2, a joint start-up business owner, also has been in charge of accounting and management. After that, Nonparty 3 and Nonparty 2, a child, died in around 1993 and died in around 2004, and Nonparty 4, a child, maintained the joint start-up representative system, following the division of roles.

2) As the non-party 4 was hospitalized in a hospital on or around January 2007, the board of directors held on February 20, 2007, which decided not to recommend again the non-party 4 whose term of office expires as a director candidate, as of March 20, 2007, as the board of directors held on February 20, 2007.

3) Accordingly, on February 27, 2007, Nonparty 4 entered the minutes of the board of directors with Nonparty 3, who is the representative director of the Defendant, into the meeting of the board of directors, stating that “The thickness of president, considering one’s personal reasons, is written. It is difficult for Nonparty 4, who would not recommend the principal who is a second generation partner as a candidate for the board of directors due to that reason, and, in addition, he would not have been expressed in advance from the president that he would do so, he would have expressed that he would not substitute the business spirit of the Defendant company. I would like to say that he would have passed the resolution of the chairman’s recommendation once before the expiration of his term of office and would have been presented to the prime minister.” (m) It cannot be accompanied by the above measures taken by Nonparty 4’s representative director’s statement that he would have been aware of the fact that he would not have been appointed by the president’s representative director, and that he would be sufficiently aware of his health condition during his most recent medical treatment and practice.

4) On March 8, 2007, the defendant seems to have interfered with the non-party 4's non-party 4's non-party 4's failure to recommend she as a candidate for directors at the board of directors' meeting on the recommendation of candidates for directors. First, the defendant replys as follows: (a) it is time to cause misunderstanding while she has held office as a representative director for a long time. (b) under these circumstances, the rapid and accurate decision-making related to major policies of the company is essential. Under our company, this decision shall be made by the board of directors, and if the representative director and the members of the board of directors such as directors fail to perform their duties on a regular basis or perform their duties in good faith, this is not only a legal liability for the violation of the duty of care and good faith of the director, but also a big amount of contribution to the company and investors of the company (as soon after the end of this decision).

5) Ultimately, on March 20, 2007, Nonparty 4 retired from office as the Defendant’s director and the representative director at the expiration of the term of office, and Nonparty 5 was appointed as the Defendant’s representative director on the same day, and there was no case where the Defendant’s existing director was retired or a new director was appointed until the issuance of the instant bonds as seen below.

6) Nonparty 4 died on April 25, 2008, and thereafter, Nonparty 2 did not participate in the Defendant’s management as an officer, such as a director, among the descendants of Nonparty 2.

B. The Plaintiff, Nonparty 3, etc.’s share relationship

1) The total number of shares issued by the Defendant is 22,400,000 shares, and as of December 31, 2012, Nonparty 3, as the largest shareholder of the Defendant Company, owns 6,208,036 shares of the Defendant Company (27.71%). The shares ratio of Nonparty 3 and its related parties (hereinafter “non-party 3”) against the Defendant is 30.34% [6,796,145 shares (= non-party 36,208,036 shares + non-party 6408,643 shares + non-party 587,00 shares of officers + non-party 792,46 shares)/22,40,000 shares].

2) As of December 31, 2012, the Plaintiff is the deceased non-party 4’s wife holding 1,165,639 shares of the Defendant Company (5.20%) as of December 31, 201, and the shares ratio of the Plaintiff and its related parties (hereinafter “Plaintiff”) against the Defendant Company is 26.91% [6,028,972 shares (= Nonparty 2’s 81,501,881 shares (= Plaintiff 1,165,639 shares + Nonparty 1,165,639 shares + Nonparty 91,87,352 shares + Nonparty 2’s 10396,85 shares + Nonparty 2’s 11,712 shares + Nonparty 2’s 1237,530,530 shares).

(c) Issuance of bonds with warrants and purchase of warrant certificates.

1) On April 11, 2013, the Defendant completed the internal resolution on April 11, 2013, following consultation with the underwriters of landp partnership, Dog Capital Co., Ltd. (hereinafter “pump partnership, etc.”) to issue bonds with warrants, and decided to hold a board of directors on April 19, 2013 to issue bonds with warrants 15 separate types of bonds with warrants (hereinafter “instant bonds”) with the total face value of KRW 10 billion in the face value of the bonds in the instant bonds with warrants as stated in the attached Form No. 15 (hereinafter “instant bonds”). On the same day, the Defendant issued bonds with warrant amounting to KRW 5 billion in the face value among the bonds in the instant case to the pump partnership, and allocated bonds with warrant amounting to KRW 5 billion in each of the bonds with warrants to the pump partnership and the dete third party in the form of capital capital capital and new capital.

2) On April 19, 2013, Nonparty 3 purchased the separate type of warrant certificates of bonds with warrants (hereinafter “instant warrant certificates”) equivalent to KRW 10 billion per unit right from among the instant bonds from the market partners, etc., in total, KRW 350 million per unit right of KRW 173 million, and the Defendant Company publicly announced the aforementioned contents through a report on material facts.

2. The parties' assertion

A. The plaintiff's assertion

1) Nonparty 3 acquired only the instant preemptive right corresponding to KRW 10 billion from the date of issuance of the instant bonds by separating them. The instant bonds are issued without satisfying the requirements under the statutes or the articles of incorporation in order to enhance the equity ratio of Nonparty 3, and to publicly announce the sole management right against the Defendant by Nonparty 3. The Defendant asserted that the instant bonds were issued on the ground of Article 15(1)4 of the articles of incorporation (hereinafter “the articles of incorporation”). However, at the time of issuance of the instant bonds, the Defendant did not have any need to urgently raise funds. Thus, the issuance of the instant bonds cannot be deemed to have been issued pursuant to the articles of incorporation, and otherwise, the issuance of the instant bonds by a third party without a special resolution of the general meeting of shareholders or the articles of incorporation.

2) Of the instant bonds, the issuance of the part of KRW 10 billion which Nonparty 3 acquired the instant preemptive right to new stocks constitutes a transaction between Nonparty 3, the representative director, and Nonparty 3, the largest shareholder, and the Defendant, which are subject to the approval of the board of directors under Article 398 of the Commercial Act, and thus, the issuance of the instant bonds is null and void.

3) The instant bonds were issued at an unreasonably low price (173 won per preemptive right) by evaluating the value of the instant preemptive right by excessively lowering the value of the instant bonds. As a result, Nonparty 3, who purchased the instant preemptive right, obtained profits from the lower price, while the Defendant incurred a decrease in cash flow to be introduced into the issuance of the instant bonds, and thus, the issuance of the instant bonds is remarkably unfair and invalid.

B. The defendant company's assertion

1) At the time of the issuance of the instant bonds, there was a need for urgent financing to repay the bonds 12 times with the maturity on July 8, 2013 to the Defendant, and around October 2012, the company issued the instant bonds by the method of investors’ preference according to business judgment in the situation where the company’s corporate bonds market worsens, such as the company’s implementation of public offering of corporate bonds and outstanding experience in entertainment, etc., and actually repaid the bonds 12 times with the funds raised from the issuance of the instant bonds. The instant bonds were legally issued based on the provisions of the instant articles of incorporation.

2) In addition, Nonparty 3 did not have a superior relationship with investors who subscribed to the instant bonds, and there is no room for the issuance of the instant bonds to constitute a company’s own transaction. The value of the instant preemptive right is calculated in accordance with the method of calculating the value generally utilized in the capital market, and the issuance of the instant bonds does not constitute an unfair issuance.

3. Determination

A. Whether the issuance of the bonds of this case violates the statutes or the articles of incorporation

1) Relevant legal principles

Article 418(1) of the Commercial Act provides that a shareholder shall have the right to receive new shares according to the number of shares he/she holds, and Paragraph (2) of the same Article provides that a company may allocate new shares to a person other than a shareholder under the conditions as prescribed by its articles of incorporation, notwithstanding the provisions of paragraph (1). In this case, it shall be limited to cases where it is necessary to achieve managerial objectives of the company, such as the introduction of new shares and the improvement of financial structure. The purport of the provision is to allocate new shares to a third party who is not a shareholder in the course of issuing new shares is to ensure that the issuance of new shares is likely to cause a decline in the value of shares held by the existing shareholders or loss of management rights over the company, and to allocate new shares to a third party only under the conditions as prescribed by the articles of incorporation, and to strengthen the protection of existing shareholders' preemptive rights by limiting the issuance of new shares to inevitable cases such as the introduction of new shares and the improvement of financial structure. Therefore, it shall be strictly determined whether the existing company allocation of new shares to a third party in violation of management right to achieve 20.

2) Whether it is necessary to raise urgent funds

As one of the articles of incorporation of the case where bonds with warrants can be issued, the defendant provides that "in cases where bonds with warrants are issued to domestic or foreign financial institutions or institutional investors for urgent financing within the scope not exceeding 30 billion won in total face value of the bonds." As to whether the requirements under the articles of incorporation of the case at the time of the issuance of the bonds of this case are satisfied, Gap evidence 8 (the same shall apply to Gap evidence 21, Eul evidence 55), Eul evidence 1-2, Eul evidence 3-1, Eul evidence 3-1, Eul evidence 5-1, Eul evidence 5-2, Eul evidence 8-1, Eul evidence 8-2, Eul evidence 9, Eul evidence 10, Eul evidence 12, Eul evidence 22, Eul evidence 22, Eul evidence 23, Eul evidence 24-1, 30-1, Eul evidence 30-1, defendant's testimony and evidence 20-1, 30-1, 30-1, 30-1, respectively.

① On November 3, 2004, the Defendant issued the 5th non-guaranteed corporate bonds with the maturity of KRW 15 billion on the 5th anniversary of the issuance of the said 5th non-guaranteed corporate bonds, and thereafter, issued the 8th corporate bonds with the maturity of KRW 20 billion on September 20, 2007 for the repayment of the 5th corporate bonds, and once again issued the 8th corporate bonds with the maturity of KRW 12,000,000 on July 8, 2010 for the repayment of the 12th corporate bonds with the maturity of KRW 20 billion on July 8, 2013. As such, the Defendant has re-issued the corporate bonds with the maturity of KRW 3 years after the issuance of the bonds in 2004.

② However, since around September 2012, there was a decline in the investment demand for corporate bonds to be publicly issued by some companies with a high credit rating, the Defendant, like the Defendant, in the case of a company with credit rating + a company with a high credit rating, was extremely difficult to raise funds through the issuance of corporate bonds. In fact, the Defendant conducted a demand forecast to issue corporate bonds with a five-year maturity maturity of 20 billion won on October 23, 2012, but only one location’s institutional investment did not participate in the demand forecast and was completely un sold, and then the IBK Securities Co., Ltd., the competent manager completed the sale on November 1, 2012 and sold at a lower price to the market, thereby causing losses.

③ According to the annual estimated trademark (Evidence B No. 8-1) that the Defendant drafted on January 17, 2013, the Defendant’s funds to be used by the Corporation may be carried over from the previous year to KRW 1386 million as of January 3, 2013, and KRW 10,711 million as of January 3, 2013, and KRW 31,49 million as of the end of 2013 if the Defendant’s funds were combined with revenues and expenditures for the year 2013. The Defendant’s expenditure was anticipated to include KRW 20 billion as of January 12, 2013 as well as KRW 183.5 billion as of the corporate bond repayment fund of KRW 12,500,000,000,000,000,000 from the financial institution was expected to borrow additional KRW 8.8 billion as of the end of the above contract amount, and in particular, the Defendant’s loans were expected to have been issued as of KRW 13.5 billion.

④ Nonparty 13, the head of the Defendant’s fund team, established the Defendant’s annual fund plan in 2013, which was the Defendant’s head of the fund team, anticipated that, even if operating profits accrue, such as capital expenditures, including investment in plants, personnel expenses, and purchase funds as essential, including raw material payments, will be disbursed in the first half of the year 2013, and thus, the dividends, corporate tax, and public carbon plant investments will be disbursed during the second half of the year 2013. In fact, the Defendant was holding cash and cash assets worth KRW 273.8 billion on December 31, 2012, but continued to decrease as KRW 171 billion on March 31, 2013, and KRW 600,600 on June 30, 2013.

⑤ Also, according to the Defendant’s comprehensive income statement (Evidence A 8) out of the Defendant’s audit report in 2012, the Defendant acquired operating income of KRW 197.5 billion from January 1, 2012 to December 31, 2012, and all of the above operating income was realized in cash. Among them, KRW 5 billion was the borrower’s interest, KRW 2.2 billion as corporate tax, and KRW 5 billion as the dividend, and KRW 7 billion as the investment required for the construction of an official coal plant. Ultimately, the Defendant need to raise funds of KRW 20 billion from outside to repay corporate bonds until the maturity of the 12th corporate bonds ( July 8, 2013).

6) The Defendant used the total amount of KRW 20 billion raised through the issuance of the instant bonds as the repayment fund for the maturity of the corporate bonds 12 times.

3) Whether Defendant management’s purpose is to defend or strengthen management rights

The issue of whether the bonds of this case were issued in order to achieve the purpose of management right or management right defense in the situation where the defendant's management right dispute is imminent or realized, the non-party 4 retired from office and was commissioned as adviser on March 20, 207. The defendant's representative director sent an answer to the non-party 3 who was the defendant's representative director, about the non-party 4's non-party 5's testimony and evidence Nos. 12, 23, 38, 17-1, 2, 18-1 through 5, 19, 25-2, 26-1, 4-4, 3-4, 4-2, 4-4, 5-2, 4-4, 5-2, 4-1, 4-4, 5-2, 4-4, 5-2, 5-2, 4-4, 5-1, 4-2, and 5-3

① On February 20, 2007, Nonparty 4 was not recommended as a candidate for the Defendant’s director and representative director, considering that it is difficult for Nonparty 4 to perform his duties as the Defendant’s director and representative director on a regular basis due to navigational cancer treatment for multi-presidential species.

② Around June 2007, Nonparty 4 accepted Nonparty 4’s appointment as the Defendant’s adviser by reviewing that the content of the advisory contract presented by the Defendant should be restored to the representative director of the Defendant, and that the advisory contract should be automatically renewed unless there is any written agreement. In fact, Nonparty 4 was employed as the Defendant’s adviser from March 21, 2007 to death.

③ There may be an act of demanding the convocation of a special general meeting for the appointment of directors by taking part in the management of the company or exercising the right of management, or demanding the inspection of accounting books, or increasing the equity ratio by collecting the shares of the company. However, even though the Plaintiff was represented by Nonparty 4 for all acts related to the management rights of the Sam Puot, the Plaintiff did not engage in any particular act that can be seen as exercising the above management rights or participating in management prior to the filing of the instant lawsuit (as stated in the evidence No. 12, the Plaintiff attempted to communicate with Nonparty 3, the representative director of the Defendant, only once after Nonparty 4’s death, and did not demand direct management or take any measure for exercising the right of management). Furthermore, the Plaintiff did not attend each general meeting of shareholders in 2010 and 201 and did not object to the appointment of directors or the amendment of the articles of incorporation, nor did it pass a resolution at the general meeting of shareholders that was directly related to the participation in the acquisition or the right of management.

④ As above, Nonparty 4 maintained the Defendant’s photograph at the time of the issuance of the instant bonds after his retirement from the director and the representative director at the expiration of the term of office, and there was no attempt to raise his share holding ratio by Nonparty 3 or Nonparty 4 on the part of Nonparty 3 or on the part of Nonparty 4. In fact, from 207 to 2013, the share in Nonparty 3 was 29.54% and the share in Nonparty 4 was maintained at a certain level as 26.92%.

⑤ In addition, Japan Accent Accent Co., Ltd. is a shareholder who owns more than 10% of the shares of the Defendant Company and has a strategic partnership with the Defendant to establish Accent Accent Accent Accent Accent Accent Accent Accent Accent Accentaccenta Co., Ltd., and expressed his intention to support the current management, including Nonparty 3, and actively cooperate in the management of the Company. In view of the fact that Nonparty 3 is supported by such a pro rata shareholder, it is unnecessary to issue the instant bonds in order

④ Article 165-10(2)5 of the Financial Investment Services and Capital Markets Act was newly established on May 28, 2013 and enforced on August 29, 2013, which became impossible to transfer only the warrant certificates separately. The bonds of this case are urgently issued for the purpose of avoiding the above restriction provision, and there is doubt that the bonds of this case are ultimately issued for the purpose of strengthening the management rights of Nonparty 3. However, the maturity of the bonds of this case 12, which the Defendant intended to issue and redeem the bonds of this case, had already arrived before the above restriction provision was enforced on July 8, 2013, and as seen earlier, it is difficult to view that it was for the strengthening of management rights of Nonparty 3, as long as it is deemed necessary to raise funds to the Defendant at the time of issuing the bonds of this case.

7) Even if the Defendant’s management right dispute is imminent or realized, the instant preemptive right can be exercised from the time one year has elapsed since the issuance of the instant bonds, so it is difficult to readily conclude that the issuance of the instant bonds can achieve the purpose of management right or management right defense ( further, the Gu or Nonparty 3 stated that he/she had an intention to sell the instant bonds to the public to the public to prevent any controversy over the expansion of shares by selling them to the public).

4) Sub-determination

Therefore, it is reasonable to see that the bonds of this case were legitimately issued in accordance with the statutes and the articles of incorporation of the defendant. Therefore, the above assertion by the plaintiff on a different premise is without merit.

B. Whether the issuance of the bonds of this case is null and void in violation of Article 398 of the Commercial Act

On the other hand, Article 398 of the Commercial Act provides that a director responsible for the management of the company shall obtain the approval of the board of directors for the transaction between a director and a company. Since a director responsible for the management of the company intends to make direct transactions with the company using his status or make transactions with the company and a third party for his own interest and to prevent the loss to the company and its shareholders, one of the parties to the transaction shall be the company at least. As seen above, the parties to the transaction of the bonds in this case shall be the underwriter of the bonds such as the defendant and the trial partner, and the non-party 3 shall be the party to the transaction, merely because the defendant and the non-party 3 purchased the warrant certificates separated from the bonds acquired by the trial partner from the market partnership, it is difficult to view that the

Even if the issuance of the bonds in this case constitutes a self-transaction between the defendant and the non-party 3, in light of the purport of Article 398 of the Commercial Act as seen earlier, a person who can assert that a transaction between a director and a company violates Article 398 of the Commercial Act is limited to the company and, barring any special circumstance, there is no benefit to assert that the transaction is invalid (see, e.g., Supreme Court Decision 201Da67651, Dec. 27, 2012). Thus, the plaintiff who is merely the defendant's shareholder has no benefit to assert that the issuance of the bonds in this case is invalid, even in that there is no benefit to assert that the plaintiff is invalid.

C. Whether the issuance of the instant bonds is substantially unfair and invalid

Once convertible bonds are issued, there is a need to consider the interests of the underwriters, and the shares issued by the exercise of convertible bonds or convertible rights are distributed as securities, so it is necessary to protect the safety of transaction. In light of the fact that the claim for the maintenance of convertible bonds is a remedy against illegal issuance, and that the lawsuit for the nullification of the issuance of convertible bonds is null and void ex post facto and is highly likely to undermine the safety and legal stability of transaction. Therefore, the ground for invalidation shall be strictly interpreted as much as possible. Thus, it is against the essence of the corporation or the basic principles of the Company Act or seriously affects the interests of the existing shareholders and the interests of other interested parties, etc., even if considering the safety of transaction related to convertible bonds and the interests of shareholders and other interested parties, the issuance of convertible bonds or convertible rights by the exercise of convertible rights can be invalidated only if it is judged that it is considerably impossible to interpret it as invalid, and so long as the ground for invalidation in the lawsuit for the nullification of the issuance of convertible bonds should be strictly interpreted as above, the ground for conversion is ordinarily low in light of the stock price at the time of the issuance.

However, the above ground for the plaintiff's assertion cannot be seen as the ground for nullifying the bonds of this case which are already issued, regardless of the fact that the above ground for the issuance and maintenance of bonds with warrants can generally be the ground for the claim, and it is not sufficient to recognize that the above ground for the issuance and maintenance of the bonds of this case was excessively low in the value of the preemptive rights of this case out of the bonds of this case (in addition, there is no evidence to recognize that there is no different value of the preemptive rights of this case). Rather, the above provision of Article 5-22 (1) of the Act on Issuance and Public Notice of Bonds of this case (amended by the Financial Services Commission No. 2013-29 of Sep. 17, 2013) provides that the above subscription price of the bonds of this case shall be 20 billion average of the average of the prices of the bonds of this case calculated retroactively from the date preceding the date when the issuance of convertible bonds is commenced, and the subscription price of this case shall be 30 billion average of the average of the prices of the bonds of this case No. 13 weeks.

Therefore, the plaintiff's above assertion on a different premise is without merit.

4. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit. Since the judgment of the court of first instance is unfair with different conclusions, the judgment of the court of first instance is revoked and the plaintiff's claim of this case is dismissed. It is so decided as per

[Attachment]

Judges Kim Jong-Un (Presiding Judge)

1) Where the non-party 3 exercises de facto influence over the important management matters of the defendant, such as appointment and dismissal of officers, etc. pursuant to Article 9(1)1 of the Financial Investment Services and Capital Markets Act and Article 8(1)1(j) of the Enforcement Decree of the Financial Investment Services and Capital Markets Act, the executive officers of the defendant shall be included

2) Article 15 (Issuance of Bonds with Warrants) 1. In any of the following cases, a company may issue bonds with warrants to persons other than shareholders by a resolution of the board of directors: 4) Where a company issues bonds with warrants to domestic or foreign financial institutions or institutional investors for urgent financing within the scope not exceeding 30 billion won in total face value of bonds:

3) In the evaluation of corporate bonds, BB grade contains the possibility of lowering the ability to pay the principal and interest in the future due to economic conditions or environmental deterioration compared to higher grade (Evidence A 41).

4) See the evidence No. 52, see the evidence No. 52: (1) excluded the number of non-party 5 and non-party 7 from the calculation of the shares of the non-party 3; and (2) the shares ratio of the non-party 4 changed from 2010 to 26.91%.

5) Notwithstanding Article 516-2 (2) 4 of the Commercial Act, when a stock-listed corporation issues bonds under Article 516-2 (1) of the stock-listed corporation, it shall not issue bonds for which bondholders are able to transfer only warrant certificates.

Note6) The price under subparagraph 1 of Article 5-22(1) of the Regulations on the Issuance, Public Notice, etc. of Securities is the 4,934.90 won [((4,913.12 won by the weighted average of a month, 4,940.57 won by the weighted average of a week, 4,951.02 won by the weighted average of the last day) ±3] of the price under subparagraph 2, 4,951.02 won by subparagraph 2, 4,951.02 won by subparagraph 3, which is the highest of the 4,916.32 won by subparagraph 2, which is the highest of the 4,951.02 won by selecting the price under subparagraph 2.