Plaintiff (Law Firm Barun, Attorneys Park Ho-ho et al., Counsel for the plaintiff-appellant)

Defendant Co., Ltd. (Attorney Kim Young-hoon, Counsel for defendant-appellant)

September 23, 2005

Seoul Central District Court Decision 2004Gahap25531 Delivered on October 7, 2004

1. The plaintiff's appeal is dismissed.

2. The costs of appeal shall be borne by the plaintiff.

The judgment of the first instance shall be revoked. The defendant shall pay to the plaintiff the amount of KRW 500,000,000 and the amount calculated by the ratio of 20% per annum from the day following the delivery of a copy of the complaint of this case to the full payment day.

1. Basic facts

[Grounds for recognition: Facts without any dispute, Gap 1 through 15, Gap 16-1, 2, and Eul 1 through 4]

A. A. Around February 1999, the non-party 2 Co., Ltd. (hereinafter "non-party 2 Co., Ltd.") changed to the defendant on September 8, 2003; hereinafter "non-party 2 Co., Ltd. (hereinafter "the non-party 3"), which was the substantial controlling shareholder and representative director of the non-party 2 Co., Ltd. at the time of the deterioration of management crisis, sold the shares of the non-party 2 Co., Ltd. and contributed 3.3 billion won (the plaintiff's share is equivalent to 60 million won), such as the sales fund, to the non-party 2 Co., Ltd. (the non-party 4 Co., Ltd.) to the non-party 2, one of the non-party 2 Co., Ltd.'s subsidiaries (the "non-party 4 Co. 2") to whom the non-party 4 Co., Ltd. was in charge of lending the shares to the non-party 1, etc. 300 million won.

In accordance with this method, on March 23, 1999, the Plaintiff lent 100 million won per annum to Nonparty 1 on April 30, 201, and agreed between Nonparty 1 and Nonparty 1 to the effect that “if the Plaintiff wishes to be converted to Nonparty 1’s shares, in whole or in part, the amount of the loan by the due date is due, Nonparty 1 shall issue shares at par value (5,000 won per share) at all times, and deliver it to the Plaintiff. In addition, Nonparty 1 did not perform capital increase without the Plaintiff’s consent (hereinafter “instant agreement”).

B. At the time of the instant agreement, Nonparty 2 owned 9,800 shares of Nonparty 1’s total number of outstanding shares of Nonparty 1 (the par value of KRW 5,000 per share) [the remaining shares of Nonparty 1 were held by Nonparty 5, who was the representative director of Nonparty 1, holding 100 shares (the share ratio of KRW 1%), Nonparty 6, and Nonparty 7 held 20 shares (the share ratio of KRW 0.2%).

C. At the time of the agreement of this case, the articles of incorporation (No. 2) of the non-party 1 company did not have a provision on the grounds and details in the case of issuing convertible bonds to persons other than shareholders (the total amount of convertible bonds, conditions of conversion, contents of shares to be issued due to conversion, and the period during which a claim for conversion was filed). The amended articles of incorporation (No. 17 evidence) takes effect from the date of the amendment. Although Article 19 of the amended articles of incorporation asserts that the provision on the issuance of convertible bonds was newly established, the non-party 1 company was able to recognize the fact that the minutes of the general meeting of shareholders were prepared without giving written notice or convocation notice to each shareholder for the convocation of the general meeting of shareholders, and according to the above facts of recognition, it is reasonable to view that the above procedure defects in the general meeting of shareholders are too serious and thus, it cannot be viewed that the non-party 1 company cannot be seen as arbitrarily owned by the non-party 1 company's representative director or non-existent company's resolution at the general meeting of this case (the non-party 1 company).

D. On March 26, 199 and January 5, 2001, the Plaintiff sought to convert all of the loans to the non-party 1’s stocks in accordance with the instant agreement (i.e., the purport to request the issuance of 20,000 shares of the non-party 1), but the non-party 1 rejected the claim on the ground that “the non-party 1 may not issue convertible bonds because it is in capital erosion as a result of the settlement of accounts in 1998.”

E. Meanwhile, on February 23, 2004, the defendant merged the non-party 1 with the company and completed the registration on March 3, 2004. At the time of the merger, the defendant, as the defendant held the entire shares issued by the non-party 1 (the total number of issued shares 10,000 shares) and thus, did not issue new shares, and calculated the standard amount of merger by evaluating the shares issued by the non-party 1 to 234,788 won.

F. The Plaintiff requested that Nonparty 1 pay the pecuniary gain (20,000 shares of Nonparty 1 x 234,788 won per share at the time of the merger) that the Plaintiff would have accrued in the course of the merger when the Plaintiff issued shares under the instant agreement or issued shares in accordance with the instant agreement, even after the merger took place, as seen above, and even after the merger took place, Nonparty 1 deposited KRW 159,669,172, an amount calculated by adding the interest calculated at an annual interest rate of 10% from the date of loan to February 17, 2004 from the date of loan to February 17, 2004.

2. The assertion and judgment

A. The plaintiff's assertion

(1) In accordance with the instant agreement, Nonparty 1 was obligated to issue 20,000 shares to the Plaintiff requesting for share conversion, and if Nonparty 1 fulfilled such obligation, the Plaintiff could have obtained pecuniary benefits equivalent to the share value at the time of the said merger. However, Nonparty 1 was liable to compensate for the Plaintiff’s damages due to Nonparty 1’s failure to perform the obligation to issue shares under the instant agreement, which resulted in loss of such pecuniary benefits (20,00 shares of Nonparty 1 x KRW 234,788 won at the time of the merger x KRW 234,788 won at the time of the merger x KRW 4,536,090,828). Accordingly, Nonparty 1, who succeeded to the rights and obligations of Nonparty 1, due to the merger, was liable to compensate for the Plaintiff’s damages due to Nonparty 1’s failure to perform the said agreement. The Plaintiff sought against the Defendant for the damages of KRW 500,000 and damages for delay.

(2) Even if the agreement of this case is null and void because it may cause a change in the management and right of management of the non-party 1, the Plaintiff’s exercise of rights pursuant to the agreement of this case is valid to the extent that it does not result in a change in the management and right of management of the non-party 1. Since the Defendant, which was the controlling shareholder of the non-party 1, owned 9,800 shares equivalent to the total issued shares 10,000 shares, it is sufficient to hold shares equivalent to 51% of the total issued shares to exercise the management and right of management of the non-party 1. In order to maintain the above share ratio, the shares that the non-party 1 is entitled to issue to the Plaintiff for the purpose of maintaining the above share ratio of 9,215 shares are equivalent to 9,215 shares, and thus, the non-party 1 issued new shares or convertible bonds equivalent to the above 9,215 shares to the Plaintiff (i.e., the amount that the Plaintiff was entitled to receive from the Defendant 2,50750.75 shares

B. Defendant’s assertion

The instant agreement was concluded for the purpose of illegally depriving Nonparty 1’s management right on the ground of Nonparty 1’s dominant shareholder and representative director, the parent company of Nonparty 1, and Nonparty 3, the parent company of Nonparty 2, on the ground of his wife. ① The resolution of the board of directors and the special resolution of the general meeting of shareholders was not made in violation of the provisions of the Commercial Act regarding the issuance of converted bonds. ② In addition, according to the Plaintiff’s assertion, the issuance price of convertible bonds can be deemed to be determined by calculating the shares of Nonparty 1, which are worth KRW 234,788 per share at the

C. Determination

(1) As the Plaintiff claims in this case on the premise that the agreement in this case is valid, it first examines whether the agreement in this case is valid or not.

(2) Although the instant agreement is in the form of a loan for consumption, it is deemed that the Plaintiff granted the right to convert the said loan to stocks, and thus, constitutes an agreement to issue converted bonds. However, in principle, the Commercial Act requires the issuance of bonds according to a resolution of the board of directors (Article 513(2) of the Commercial Act). However, exceptionally, in order to issue convertible bonds to persons other than shareholders, the articles of incorporation stipulate that the basis and details of the issuance (the total amount of convertible bonds, terms and conditions of conversion, the contents of the stocks to be issued due to conversion, and the period during which the conversion may be demanded) must be stipulated in the articles of incorporation, and if not, the said agreement shall undergo a special resolution of the general meeting of shareholders (Article 513(3) of the Commercial Act). However, the representative director of Nonparty 1’s company arbitrarily concluded the instant agreement without a special resolution of the general meeting of shareholders without having any provision on the issuance of convertible bonds to persons other than shareholders.

(3) Comprehensively taking account of the Plaintiff’s aforementioned facts and the overall purport of each of the instant convertible bonds, namely, ① bonds entitled to be converted to stocks by exercising the right to conversion, which, in fact, has the same meaning as the issuance of new stocks. ② It is reasonable to view that the Commercial Act permits the issuance of new stocks to the same effect as the preemptive rights of shareholders are preferentially guaranteed, inasmuch as the Commercial Act provides for a special resolution of the shareholders at the general meeting of shareholders to the effect that the issuance of new stocks is more effective than that of the instant bonds, and that there is no substantial possibility that the company will be converted to non-party 1’s new stocks, even if the issuance of new stocks by exercising the right to convert to non-party 6’s new stocks, and that there is no substantial possibility that the company will be converted to non-party 1’s new stocks, and thus, it would be more likely that the company will be converted to non-party 2’s existing interests and interests than that of the non-party 1’s new stocks.

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and the judgment of the court of first instance is just in conclusion, and the plaintiff's appeal is dismissed. It is so decided as per Disposition.

Judges Ansan-do (Presiding Judge)