[1] Whether a lawsuit to nullify the issuance of a convertible bonds under the Commercial Act is permitted (affirmative), and the method of determining the grounds for invalidation

[2] In a case where convertible bonds are issued to a person other than a shareholder, the specific extent to the effect that the conditions of conversion, etc. are already stipulated in the articles of incorporation, and there is no need to go through

[3] The case holding that where the articles of incorporation provides for issuance of convertible bonds that "the board of directors shall determine the conversion price at the time of issuance of the bonds at the face value or above the face value of the stocks", this cannot be deemed null and void since it satisfies the minimum requirements under Article 513 (3) of the former

[4] Whether it is permissible to add a new ground for invalidation after the period of release of a lawsuit seeking nullification of the issuance of new stocks has expired (negative), and whether the same legal principle can be applied to a lawsuit seeking nullification of the issuance of new stocks (affirmative)

[5] Grounds for invalidation in a lawsuit seeking nullification of the issuance of convertible bonds

[6] The case holding that the reason that an underwriter of convertible bonds has a special relationship with a controlling shareholder of the company, or that the conversion price is a somewhat low price in light of the stock price at the time of issuance, etc. does not constitute a ground for nullifying the issued convertible bonds or shares issued by exercising convertible rights

[1] Article 516(1) of the Commercial Act provides that Article 424 of the Act and Article 424-2 of the Act on the Right to Demand the issuance of new shares shall apply mutatis mutandis to the issuance of convertible bonds with respect to the liability of the underwriter of the shares at unfair prices. Even though Article 516(1) of the Commercial Act provides that Article 429 of the Act on the Right to Demand the issuance of new shares shall apply mutatis mutandis to the issuance of convertible bonds, there is no provision as to whether or not the application of Article 429 of the Act on the Action for the Nullity of the issuance of new shares is applied mutatis mutandis, but the issuance of convertible bonds is substantially similar to the issuance of new shares in that it affects the physical foundation of the company and the interests of the existing shareholders. Therefore, even in the case of the issuance of convertible bonds, Article 429 of the Commercial Act on the action for the nullification of the issuance of new shares shall apply mutatis mutandis to the issuance of the convertible bonds. However, considering the fact that the grounds for invalidation of the issuance of the convertible bonds are all causes for a claim.

[2] Article 513(3) of the former Commercial Act (amended by Act No. 6488 of Jul. 24, 2001) provides that where convertible bonds are issued to persons other than shareholders, the amount of convertible bonds that can be issued, conditions of conversion, and the period during which the conversion may be requested shall be determined by a resolution under Article 434 of the Commercial Act, unless the articles of incorporation provide for the amount of convertible bonds to be issued, the conditions of conversion, etc. shall be stipulated in the articles of incorporation, so that the conditions of conversion, etc. shall not be subject to a special resolution of the general meeting of shareholders. However, in order for a company to ensure that the conditions of conversion are already stipulated in the articles of incorporation, the conditions of conversion, etc. shall be specified in the articles of incorporation as much as possible in order to raise funds by selecting the method of issuing convertible bonds to persons other than shareholders from among various methods of financing corresponding to the necessary demand for funds, it is desirable that the company may make a new determination in response to the specific economic situation, such as the amount of funds, interest rate, market situation, etc.

[3] The case holding that where the articles of incorporation provide that "the conversion price shall be determined by the board of directors at the time of issuance of the bonds" with respect to the issuance of convertible bonds, it shall be determined by the board of directors at the time of issuance of the bonds, the specific conversion price shall be determined at the time of issuance of the bonds, and the specific conversion price shall be determined at the time of issuance of the convertible bonds, and the standard or delegation method shall be set at the time of issuance of the bonds, which shall be one of the conditions of conversion under Article 513 (3) of the former Commercial Act (amended by Act No. 6488 of July 24, 2001), and shall be delegated to the board of directors at the time of issuance of the convertible bonds, and it shall not be deemed invalid because the standard or delegation method shall be too abstract or comprehensive.

[4] Article 429 of the Commercial Code provides that the invalidity of issuance of new shares may be asserted only by a lawsuit within six months from the date of issuance of new shares only by shareholders, directors, or auditors. This is intended to determine complicated legal relations that may arise from the issuance of new shares early. Thus, in light of the fact that the legal relationship becomes unstable if a new ground for invalidation is allowed to be asserted after the lapse of the period of release, and the purport of the above provision becomes worse, it is reasonable to interpret that the above provision limits the timing of assertion of the grounds for nullification. Meanwhile, even in a lawsuit for nullification of issuance of new shares by analogical application of Article 429 of the Commercial Code, it shall not be asserted in addition to the new ground for nullification after the lapse of six months from the date

[5] Article 429 of the Commercial Act does not stipulate the grounds for invalidation in a lawsuit seeking nullification of the issuance of new shares. However, since "the issuance of convertible bonds by violating the statutes or the articles of incorporation or by remarkably unfair means" under Article 424 of the Commercial Act, which is applicable mutatis mutandis to the issuance of convertible bonds, is stipulated as the requirements for the request to maintain the issuance of new shares, such requirements may be considered as the grounds for invalidation of the issuance of convertible bonds. On the other hand, once convertible bonds are issued, the interests of underwriters need to be considered, and since shares issued by the exercise of convertible bonds or convertible rights are distributed as securities, the right to maintain the issuance of convertible bonds need to be protected. In light of the remedy for illegal issuance, the lawsuit seeking nullification of the issuance of convertible bonds is against the law and the articles of incorporation, and thus, the grounds for invalidation is strictly interpreted as far as possible, and thus, it would not be objectively limited to cases where there is a significant violation of the nature of the company or the basic principles of the company law or where there is a significant influence on existing shareholders' interests in the issuance of convertible bonds or other interests.

[6] The case holding that an underwriter of convertible bonds does not have a special relationship with the controlling shareholder of the company, or that the conversion price is a somewhat low price in light of the stock price at the time of issuance, etc., and there is no ground for nullifying the already issued convertible bonds or shares issued by the exercise of convertible rights, regardless of the fact that the conversion price can generally be the cause of the claim for maintaining the issuance of convertible bonds

[1] Articles 424, 424-2, 429, and 516 of the Commercial Act / [2] Article 513 (3) of the former Commercial Act (amended by Act No. 6488 of July 24, 2001), Article 434 of the Commercial Act / [3] Article 513 (3) of the former Commercial Act (amended by Act No. 6488 of July 24, 2001), Article 434 of the Commercial Act / [4] Articles 429 and 516 of the Commercial Act / [5] Articles 424 and 429 of the Commercial Act / [6] Articles 424 and 429 of the Commercial Act

Plaintiff (Attorney Kim J-jin et al., Counsel for plaintiff-appellant)

Samsung Electronic Co., Ltd. (Attorney Lee Jae-soo et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 98Na4608 delivered on June 23, 2000

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

1. As to the assertion of misapprehension of legal principles as to the method of determining the grounds for invalidation of issuance of convertible bonds

Article 516(1) of the Commercial Act provides that Article 424 of the Act and Article 424-2 of the Act on the Liability of a person who has acquired shares at an unfair price shall apply mutatis mutandis to the issuance of convertible bonds. However, there is no provision as to whether Article 429 of the Act on the Litigation over Nullity of Issuance of New Shares shall apply mutatis mutandis to the issuance of convertible bonds. However, the issuance of convertible bonds is similar to the issuance of new bonds in fact in that the issuance of convertible bonds affects the physical foundation of a corporation and the interests of the existing shareholders. As such, it is reasonable to view that Article 429 of the Commercial Act shall apply to the issuance of convertible bonds. In this case, the specific cause of invalidation as an individual attacking method as alleged by the parties has an individual nature to a certain extent. However, considering that the existence of a cause of invalidation in the issuance of convertible bonds is a whole cause of a claim, in determining whether the issuance of convertible bonds is null and void, it shall be considered as a whole as a ground for final appeal.

However, the court below held that the plaintiff's specific grounds for nullification of the issuance of the convertible bonds of this case are divided into ① defect in the resolution of the general meeting of shareholders, ② infringement of the preemptive right and shareholder equality right, ③ defect in the procedure of the resolution of the board of directors, ④ issuance of convertible bonds to secure control over the company, ⑤ issuance of convertible bonds by extremely unfair means, and ⑤ issuance of convertible bonds. However, it is clear that the court below comprehensively takes into account illegal factors related to the issuance of the convertible bonds of this case according to the above legal principles. Thus, the court below did not err in the misapprehension of legal principles as to the method of determining the grounds for nullification of the issuance of the convertible bonds of this case

2. As to the assertion of misapprehension of legal principles as to the validity of Defendant Company’s articles of incorporation

Article 513(3) of the former Commercial Act (amended by Act No. 6488, Jul. 24, 2001; hereinafter referred to as the "former Commercial Act") provides that where convertible bonds are issued to persons other than shareholders, it shall be determined by a resolution under Article 434 of the Commercial Act, unless the articles of incorporation provide for the amount of convertible bonds to be issued, the conditions of conversion, and the period during which a request for conversion and conversion may be made. Since the conditions of conversion, etc. are already stipulated in the articles of incorporation, in order to ensure that a special resolution of the general meeting of shareholders is not necessary, the conditions of conversion, etc. should be specified in the articles of incorporation as much as possible in the articles of incorporation. However, when a corporation selects a method of issuing convertible bonds to persons other than shareholders from among various methods of financing necessary funds, it is desirable that the conditions of conversion, such as the amount and urgency of funds from time to time, interest rate of issuing company, market situation, etc., should be newly determined in response to the specific economic situation. Accordingly, it is not permissible to request the general meeting to make a change to issue.

According to the records, Article 16 of the articles of incorporation of the defendant company at the time of issuance of convertible bonds of this case provides for matters necessary for the issuance of convertible bonds, and the latter part of paragraph (3) provides that "the conversion price shall be determined by the board of directors at the time of the issuance of the bonds" (the above provision is based on the standard articles of incorporation of the listed company). This provision provides for various matters under Article 513 (3) of the former Commercial Act, and provides for the standard articles of incorporation of the listed company, and determines the standard of response that is above the face value of the stocks with respect to the conversion price, which is one of the conditions of conversion, and delegates the specific conversion price to the board of directors at each time of issuance of convertible bonds. In light of the special nature as seen earlier, it is reasonable to deem that the above provision of the defendant company's articles of incorporation satisfies the minimum requirement under Article 513 (3) of the former Commercial Act, and its standard or delegation method is too abstract or comprehensive.

The decision of the court below to the same purport is just, and there is no error in the misapprehension of legal principles as to the effect of the defendant company's articles of incorporation or Article 513 (3) of

3. As to the assertion of misapprehension of legal principles as to the validity of the issuance of convertible bonds defective in resolution of board

Article 429 of the Commercial Act provides that the invalidity of issuance of new shares may be asserted only by a lawsuit within six months from the date of the issuance of new shares only by shareholders, directors, or auditors. This is intended to determine the complicated legal relationship that may arise from the issuance of new shares early. Thus, in light of the fact that if a new invalidation ground is asserted after the lapse of the time of release, the legal relationship becomes unstable and the purport of the above provision becomes extinct, it is reasonable to interpret that the above provision limits the time of claim for the nullification of the issuance of new shares. On the other hand, as seen above, Article 429 of the Commercial Act recognizes a lawsuit seeking nullification of the issuance of new shares by analogical application of Article 429 of the Commercial Act. Thus, even in a lawsuit seeking nullification of the issuance of new shares, it shall be deemed that the new

According to the records, it is clear that the plaintiff newly added to the resolution of the board of directors for the issuance of the convertible bonds of this case only after filing the lawsuit of this case on June 24, 1997 with respect to the convertible bonds of this case, which were issued on March 24, 1997, and after April 16, 1998, the statement of grounds for appeal as of April 16, 1998. Thus, it is not allowed to additionally claim a new ground for nullification after the expiration of

The court below rejected the plaintiff's assertion on this part on the premise that it is allowed to additionally claim a new ground for nullification even after the expiration of the period of release from the board of directors for the issuance of the convertible bonds of this case, on the ground that the resolution of the board of directors for the issuance of the convertible bonds of this case was defective below the quorum as stated in its holding, but such a ground alone is not sufficient to deem the issuance of the convertible bonds of this case as null and void. This decision of the court below is just in the misapprehension of legal principles as to the addition of a new ground for nullification, but the rejection of the plaintiff's assertion on this part is not erroneous, and there is no error of law

In addition, the argument in the grounds of appeal disputing that the court below did not examine the non-party 2 who subscribed to convertible bonds as a witness is not only related to the court below's assumptive judgment, but also to the extent that it is evident that the additional assertion in the grounds of invalidation based on the defects in the resolution of the board of directors cannot be allowed, this part of the grounds of appeal

4. As to the assertion of mistake regarding the issuance of convertible bonds by the representative director

The assertion that the issuance of the convertible bonds of this case is not made by the representative director of the defendant company, and thus is null and void cannot be a legitimate ground for appeal as it was made only in the final appeal, and it cannot be a legitimate ground for appeal, and it cannot be accepted without further review in that it additionally claims a new ground for nullification after the lapse of the period of release from the lawsuit.

5. As to the assertion of misapprehension of legal principles as to the violation of shareholder equality

According to the provisions of the former Commercial Act and the articles of incorporation of the defendant company, the court below interpreted that the shareholder's right to subscribe to convertible bonds shall be excluded within the scope of the amount that can be issued with convertible bonds to persons other than shareholders, and there is no evidence to deem that the issuance of the convertible bonds of this case exceeds the above authorized limit as stipulated in the articles of incorporation of the defendant company. Thus, the board of directors of the defendant company can allocate the convertible bonds of this case regardless of whether the purchaser is a shareholder, and therefore, it cannot be deemed that the shareholder equality right has been infringed on by allocating the convertible

In light of the provisions and records of the former Commercial Act and the articles of incorporation of the defendant company, the above judgment of the court below is just, and further, it is clear that the underwriter of the convertible bonds of this case has a special relationship with the non-party 1 who is the major shareholder of the defendant company. However, if there is no difference in the conversion conditions, the rights of the existing shareholders are not particularly infringed compared with the case where the other third party is an underwriter. Thus, the judgment of the court below is just in this respect, and there is no error of law in the misapprehension of legal principles as to the infringement of shareholder equality

6. As to the assertion of misapprehension of legal principles or misconception of facts as to the validity of the issuance of convertible bonds due to the deviation or abuse of the representative director's authority to issue convertible bonds, the purpose of acquiring control

A. The court below held that, in order to deem the issuance of the convertible bonds as null and void by the legal principles of the lawsuit seeking nullification of the issuance of new shares, even if there was no objective objective purpose of strengthening control over the issuance of the convertible bonds in this case, such as continuing or imminent conflict of management rights at present, or there was no dispute over management rights or any such dispute over the issuance of the convertible bonds for the purpose of preventing it, the defendant company at the time of the issuance of the convertible bonds in this case did not have management rights, and in light of the size of the defendant company and the ratio of the non-party 1, who is the controlling shareholder, the management rights of the defendant company were stable, and the defendant company issued the corporate bonds from time to time in addition to the convertible bonds in this case and raised funds, and the size of the issuance of the convertible bonds in this case seems to be small compared to the size of the defendant company's capital, the above cannot be deemed as

Then, the lower court determined that the instant convertible bonds were issued at a relatively low price in light of the share price of the Defendant Company at the time of the issuance of the instant convertible bonds, the condition of the instant convertible bonds, and the conversion price of the Defendant Company’s other convertible bonds issued at a similar time, etc. However, the lower court held that once the instant convertible bonds were issued, the grounds for nullifying the issuance could not be the grounds for nullifying the issuance, on the contrary that a shareholder may either request the company prior to the issuance of the instant convertible bonds to maintain the issuance or claim compensation for damages or additional payment for difference with the director or underwriter after the issuance of the convertible

B. As seen earlier, Article 429 of the Commercial Act regarding the action for nullifying the issuance of convertible bonds may apply mutatis mutandis to the issuance of convertible bonds. Furthermore, Article 429 of the Commercial Act regarding the ground for invalidation of the issuance of convertible bonds does not provide for the ground for invalidation in the lawsuit for nullifying the issuance of new convertible bonds. However, in the case of the issuance of convertible bonds, "in violation of the Acts and subordinate statutes or the articles of incorporation or the issuance of stocks by remarkably unfair means" is stipulated as the requirement for the request for maintenance of the issuance of new convertible bonds. Thus, the above requirement may be considered as the ground for invalidation of the issuance of convertible bonds. On the other hand, it is necessary to consider the interests of the underwriter when the convertible bonds are issued as securities, and the dispute over the issuance of convertible bonds or convertible bonds is highly necessary to protect the safety of transaction because the claim for maintenance of the issuance of the convertible bonds is against the remedy for unlawful issuance. Considering that the lawsuit for nullification of the issuance of the convertible bonds after the issuance becomes null and void, it is highly likely to undermine the safety and stability of trading by the company or other interests.

In addition, as long as a strict interpretation should be made on the ground of invalidity in a lawsuit seeking nullification of the issuance of the convertible bonds, the ground that the underwriter of the convertible bonds is in a special relationship with the controlling shareholder of the company, or the conversion price is somewhat low in light of the stock price at the time of issuance, etc. shall not be a ground for nullifying the existing convertible bonds or the shares issued in the exercise of convertible rights.

C. Furthermore, according to the facts duly established by the court below and records on the ground of invalidity of the issuance of the convertible bonds of this case, it seems that there was no dispute over the management rights of the defendant company at the time of the issuance of the convertible bonds of this case, or that the management rights of the defendant company were stable in light of the size of the defendant company and the ratio of the non-party 1, which is the controlling shareholder. The defendant company had issued the convertible bonds of this case from time to time in comparison with the size of the defendant company's capital, and there was no provision on the issue of the convertible bonds of this case as to the conversion price at the time of the issuance of the convertible bonds of this case, but there was no provision on the legal basis on the conversion price at the time of the issuance of the convertible bonds of this case, the issue price of the convertible bonds of this case was set at 0% higher than that of the defendant company's 9% lower than that of the above 9% lower than that of the company's new convertible bonds of this case.

In addition, the Plaintiff asserts that the allocation of the instant convertible bonds to Nonparty 2, the head of the Defendant Company, etc., even though there was no urgent need to raise funds, is dilution with the existing shareholders’ value of the shares, while it is evident that it was for the purpose of transferring management rights or control rights by inheritance or donation. It is difficult to conclude that there was no need to raise funds at the time of the record. Furthermore, even if there is room for doubt as to this point, the issuance of the instant convertible bonds can not be deemed null and void, and the existing shareholders’ value may be dilution with the issuance of the instant convertible bonds. Furthermore, the Plaintiff’s assertion that the issuance of the instant convertible bonds was made under the purpose of transferring management rights or control rights by inheritance or donation under the Act on the Establishment of the Commercial Code and the Articles of incorporation of the Defendant Company cannot be viewed as null and void unless there is a clear ground to suspect that there was no special reason to invalidate the issuance of the instant convertible bonds with respect to non-party 2’s issuance of the instant convertible bonds.

Furthermore, in accordance with the legal principles as seen earlier as to the grounds for invalidation of the issuance of convertible bonds, even if the Plaintiff comprehensively takes account of various circumstances related to the specific grounds for invalidation as alleged by the Plaintiff, it cannot be deemed that there exists grounds for invalidation of the issuance of the instant convertible bonds.

D. Thus, although the court below's fact-finding and decision are not sufficient in its reasoning as to the ground for invalidation of the issuance of convertible bonds of this case, the court below's fact-finding and decision are just, and there are no errors in the misapprehension of legal principles as to the deviation and abuse of the representative director's authority to issue convertible bonds, mistake of facts as to the purpose of acquiring control rights, or the effect of the issuance of convertible bonds due to improper conversion price, etc., as otherwise alleged in the ground for appeal.

7. 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 Yoon Jae-chul (Presiding Justice)