[1] In a case where a stock company issued new shares and allocated new shares to a third party for the purpose of defending management rights or control rights, whether it infringes on existing shareholders' preemptive rights (affirmative)

[2] Criteria for determining invalidation in a lawsuit that invalidates issuance of new stocks

[1] Article 418(1) and (2) of the Commercial Act provides that when a stock company issues new stocks and allocates new stocks to a third party who is not a shareholder, it would, in principle, cause a decline in the value of the stocks held by the existing shareholders, loss of control over the company, etc. In light of the fact that the issuance of new stocks is likely to cause disadvantages to the existing shareholders, and thus, such allocation of new stocks to a third party is allowed only as prescribed by the articles of incorporation. The purpose of the provision is to strengthen the protection of preemptive rights of existing shareholders by limiting the inevitable cases, such as the introduction of new technology and the improvement of financial structure, to the extent necessary to achieve the managerial purpose of the company, such as the introduction of new technology in the issuance of new stocks and the improvement of financial structure, etc. Therefore, the allocation of new stocks to a third party to achieve the objective of the management right or the defense of control over the company, violates the preemptive rights of shareholders in violation of Article 418(2)

[2] In light of the fact that the issuance of new shares after the issuance of new shares is likely to undermine the safety of transaction and legal stability, the grounds for invalidation should be strictly interpreted as much as possible in a lawsuit seeking nullification of the issuance of new shares. However, in a case where the issuance of new shares is in violation of statutes or the articles of incorporation, and is contrary to the essence of a corporation or the basic principles of the company law, or is likely to seriously affect the interests of the existing shareholders and the management or control of the company, and where it is deemed that the issuance of new shares is considerably unacceptable even if considering the safety of transaction related to the shares,

[1] Article 418(1) and (2) of the Commercial Act / [2] Articles 418(1) and (2), and 429 of the Commercial Act

[2] Supreme Court Decision 2000Da37326 decided Jun. 25, 2004 (Gong2004Ha, 1207)

Plaintiff (Law Firm, Attorneys Kim Hong-moo et al., Counsel for the plaintiff-appellant)

Defendant Co., Ltd. (Law Firm Gyeongsung, Attorneys Lee Ho-won et al., Counsel for the defendant-appellant)

Busan High Court Decision 2007Na19723 decided June 13, 2008

The appeal is dismissed. The costs of appeal are assessed against the defendant.

We examine the grounds of appeal.

1. As to the grounds of appeal Nos. 1, 3, and 4

The reasoning of the lower judgment and the evidence duly admitted by the lower court, i.e., ① the Plaintiff’s regular shareholders’ meeting held 24.25% of the shares of the Defendant Company, which was proposed to be added to the Plaintiff and the Plaintiff’s personnel as directors and auditors around January 207. On February 9, 2007, when the Plaintiff refused to apply for inspection and copying of the Plaintiff’s account books, etc., then the Plaintiff and the Defendant Company’s current management were subject to the lower court’s decision upon application for inspection and provisional disposition of the account books, etc., and ② the Defendant Company’s issuance of new shares to domestic and foreign financial institutions for the purpose of raising funds, was able to exclude the Plaintiff from the preemptive right to new shares and assign them to the third party only when the Plaintiff issued the new shares for the purpose of raising funds, and there was no need to set the number of shares issued by Nonparty 1 and the lower court’s general shareholders’ meeting for improvement by 30% of the total number of shares issued.

2. Regarding ground of appeal No. 2

Article 418 of the Commercial Act provides that "a shareholder shall have the right to share new shares in proportion to the number of shares he/she holds," and Paragraph (2) of the same Article provides that "a company may, notwithstanding the provisions of paragraph (1), assign new shares to persons other than shareholders in accordance with its articles of incorporation: Provided, That in this case, it is necessary to achieve the managerial purpose of the company, such as the introduction of new shares and the improvement of financial structure, etc., if a stock company issues new shares and allocates new shares to a third party who is not a shareholder, in principle, it is possible to allocate new shares to the existing shareholders in accordance with the articles of incorporation, and allotment of new shares to a third party is limited to exceptional cases such as the introduction of new shares and the improvement of financial structure of the company, and thus, it is intended to strengthen the purpose of the company's new shares to achieve the purpose of the company's management purpose by protecting the existing shareholders in violation of the articles of incorporation, and thus, it is necessary to achieve the purpose of the company's new financial structure or defense.

Meanwhile, in cases where the issuance of new shares is invalidated after the fact that there is a great risk of undermining the safety of transaction and legal stability, the grounds for invalidation should be strictly interpreted as much as possible in a lawsuit seeking nullification of the issuance of new shares. However, in cases where there is a violation of the Acts and subordinate statutes and the articles of incorporation, which are contrary to the essence of the corporation or the basic principles of the corporation law, or where it has a significant influence on the interests of the existing shareholders and the interests of shareholders and other interested parties, the issuance of new shares cannot be deemed null and void even if considering the safety of transaction related to the shares, and

In full view of the above circumstances in light of the aforementioned legal principles, the issuance of new shares in this case was made by the third party allocation method to defend the management rights of the current management rather than the grounds stipulated in Article 418(2) of the Commercial Act and the articles of incorporation of the defendant company. Thus, the issuance of new shares in this case infringed upon the rights of existing shareholders, including the plaintiff, etc. in violation of the provisions of the Commercial Act and the articles of incorporation of the defendant company. Accordingly, as seen earlier in the corporate governance of the defendant company, serious changes have occurred in mind as seen earlier, thereby significantly undermining the management rights of the defendant company, and thus, such issuance of new shares may not

Therefore, the judgment of the court below to the same purport is just, and there is no error in the misapprehension of legal principles as to the grounds for invalidation of issuance of new stocks.

3. Conclusion

Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices.

Justices Park Ill-sook (Presiding Justice)