[1] The meaning of "material facts" under Article 429 (1) 1 of the former Financial Investment Services and Capital Markets Act

[2] Where a person holding shares on his/her own account and a nominal shareholder are different, but a nominal shareholder is indicated as the largest shareholder in a registration statement and a business report, etc., whether the case constitutes “when a false statement is made concerning material facts in a securities registration statement, a business report, etc.” under Article 429(1)1 and (3)1 of the former Financial Investment Services and Capital Markets Act (affirmative), and whether such a legal doctrine equally applies to the case where an issuer or a corporation obligated to submit a registration statement for the purpose of public offering and sale of securities is a foreign corporation established under the foreign law (affirmative in principle)

[1] Article 429(1)1 of the former Financial Investment Services and Capital Markets Act (Amended by Act No. 11845, May 28, 2013) / [2] Article 119(6) (see current Article 119(7)), Article 159(2) and (4), Articles 160 and 429(1)1 of the former Financial Investment Services and Capital Markets Act; Article 125(1)3(f) and (3) (see current Article 125(4) and (4), Article 168(1)1 of the former Enforcement Decree of the Financial Investment Services and Capital Markets Act (Amended by Presidential Decree No. 22197, Jun. 11, 2010); Article 125(1)3(f) (i) and (3) (see current Article 125(4) and (1)68(1)6(1)7) of the former Financial Investment Services and Capital Markets Act

[1] Supreme Court Decision 2014Du36259 Decided February 18, 2016 / [2] Supreme Court Decision 2015Du2994 Decided August 1, 2018 (Gong2018Ha, 1876)

Plaintiff 1 and one other (Law Firm Grandmark, Attorneys Kim Jae-hun et al., Counsel for the plaintiff-appellant)

Securities and Futures Commission and one other (Law Firm Yang Hun-Ga, Attorneys Noh Jeong-ho et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2013Nu27090 decided May 29, 2014

All appeals are dismissed. The costs of appeal are assessed against the plaintiffs.

The grounds of appeal are examined.

1. As to the ground of appeal on Article 429 of the Capital Markets Act

A. Article 429(1)1 and (3)1 of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013; hereinafter “Capital Markets Act”) provides a false description or representation of a material fact in a registration statement (including a corrective registration statement and accompanying documents), or a corporation obligated to submit a business report makes a false statement or representation of a material fact in the business report, etc., and the Financial Services Commission may impose penalty surcharges on such an act committed intentionally or by gross negligence [Article 429(1)1 and (3)1, and Article 430(1) of the same Act (amended by Act No. 11845, May 28, 2013; hereinafter “material fact”). Here, the term “material fact” refers to “matters that may significantly affect investors’ reasonable judgment on investment or the value of the pertinent financial investment instrument” (see, e.g., Supreme Court Decision 2014Du36259, Feb.

Articles 119(6), 159(2) and (4), the latter part of Article 160 of the Capital Markets Act, and Article 125(1)3(f), (i) and (3), 168(2)9, and 170(1) of the Enforcement Decree of the said Act (amended by Presidential Decree No. 22197, Jun. 11, 2010); Article 2-6(9) and 43(7) of the Regulations on Issuance and Public Disclosure of Securities (amended by Notice of the Financial Services Commission No. 209-41, Jul. 6, 2009); and Article 8-1-1-1 of the Enforcement Decree of the said Act must state the name, etc. of the largest shareholder on his/her own account, including the largest shareholder, on his/her own account, his/her own shares under the name of the largest shareholder, regardless of the standards for the preparation of public disclosure form; Article 125(1)3(f) of the said Act.

Matters related to the largest shareholder constitute an important matter that is highly probable for reasonable investors to consider in making decisions on investment. Accordingly, where a person who owns shares on his/her own account and a nominal shareholder are different, but a nominal shareholder is indicated as the largest shareholder in a registration statement, business report, etc., it constitutes “when a false statement is made in relation to a material fact in a registration statement, business report, etc.” as prescribed by Article 429(1)1 and (3)1 of the Capital Markets Act

This legal doctrine equally applies to a foreign corporation which is an issuer or a corporation obligated to submit a registration statement for the purpose of public offering and sale of securities, as long as it does not submit a registration statement in compliance with the disclosure standards set by the International Securities Supervisory Organization (IOSCO).

B. The reasoning of the lower judgment and the evidence admitted by the lower court reveal the following facts.

(1) On July 30, 2008, the Plaintiff, a foreign company established pursuant to the Hong Kong Act, filed an application for a preliminary review with the Korea Exchange (hereinafter “Korea Exchange”) to list stocks on the securities market operated by the Korea Exchange (hereinafter “Korea Exchange”), and notified the Korea Exchange of the results of the qualified preliminary review, and on May 22, 2009, listed stocks on the Korea Exchange’s securities market.

(2) On April 14, 2009, the Plaintiff Company submitted a registration statement (hereinafter “instant registration statement”) to the Financial Services Commission in accordance with Article 119(1) of the Capital Markets Act. The Governor of the Financial Supervisory Service did not use the form of the registration statement set by the International Securities Supervisory Commission in compliance with the disclosure standards set by the International Securities Supervisory Commission. The instant registration statement is written by the largest shareholder of the Plaintiff Company in the form of “non-party”. In addition, the Plaintiff Company written the largest shareholder in the business report submitted six times from May 29 to August 30, 2010 to the Korea Exchange (hereinafter “instant business report”).

(3) Pursuant to Article 438(2) of the Capital Markets Act and Article 387(1)2 of the Enforcement Decree of the said Act, the Defendant Securities and Futures Commission delegated the authority to take measures against the Defendant’s violation of the Capital Markets Act by the Financial Services Commission on the ground that “the Nonparty was the largest shareholder of the Plaintiff Company,” imposed a penalty surcharge of KRW 30 million on April 13, 2012, pursuant to Article 429(1) of the said Act. The Defendant Financial Services Commission imposed a penalty surcharge of KRW 2 billion on the Plaintiff Company on the ground that “the Nonparty was falsely stated in the securities registration statement and the six annual business report as the largest shareholder.” The Defendant imposed a penalty surcharge of KRW 2 billion on the Plaintiff Company on April 20, 2012 pursuant to Article 429(1) and (3) of the said Act.”

(4) The relationship between the plaintiffs and the non-party is as follows.

(A) Plaintiff 1, a Chinese national, was the actual one shareholder and the representative director of the Dogdong-Song River Limited Fisheries Corporation (hereinafter “Dogsan Fishery”).

(B) In order to avoid the regulation of Chinese law, Plaintiff 1 planned to list the annual fisheries in the form of offshore holding company to the Korea Exchange, and established the Plaintiff Company in Hong Kong on August 27, 2007. At the time, Plaintiff 1 paid the Plaintiff Company’s capital in full, and thereafter paid the purchase price of new stocks at the time of issuing new stocks, but the Nonparty, a Singapore’s nationality, was registered as a shareholder in the Hong Kong corporate register. At that time, Plaintiff 1 transferred the entire annual fishery stocks to the Plaintiff Company, thereby becoming a single shareholder in the annual fishery.

(C) On August 20, 2007, the Plaintiff 1 and the Nonparty concluded an option contract with the effect that “the Nonparty shall transfer all the Plaintiff’s rights to USD 1 at the time of Plaintiff 1’s choice to Plaintiff 1, but the contract was cancelled on July 24, 2008, the day immediately before the preliminary listing request was made. On August 18, 2009, the Plaintiff Company entered into a trust name with the Plaintiff Company on August 18, 2009, after listing the stocks on the Korea Exchange’s securities market. The key contents are ① Plaintiff 1 entrusted the Plaintiff’s stocks to the Nonparty, thereby holding the Nonparty on behalf of the Nonparty 1, and ② the Nonparty is obliged to transfer, pay, and process the dividends and profits derived therefrom at Plaintiff 1’s request, and ③ the Nonparty cannot exercise its voting right without the direction of Plaintiff 1.

C. We examine these facts in light of the legal principles as seen earlier.

The Plaintiff Company is a foreign company established in accordance with the Hong Kong Act, but in order to offer securities on the securities market operated by the Korea Exchange, the Plaintiff Company must submit a registration statement to the Financial Services Commission. However, the Plaintiff Company did not use the form of the registration statement set forth by the Governor of the Financial Supervisory Service in accordance with the disclosure standards set by the International Securities Supervisory Commission while submitting the registration statement. Therefore, the largest shareholder under Article 9(1)1 of the

At the time of the incorporation of the Plaintiff Company and capital increase for new shares, Plaintiff 1 acquired the Plaintiff Company’s shares in the name of the Nonparty, but the funds for acquiring the shares were made by Plaintiff 1’s contribution and the profits and losses accrued therefrom also belong to Plaintiff 1. Therefore, the largest shareholder of the Plaintiff Company pursuant to Article 9(1)1 of the Capital Markets Act, which is stated in the registration statement, is Plaintiff 1. Nevertheless, the Plaintiffs stated the Nonparty, who is merely a shareholder in the name of the instant registration statement and the business report, as the largest shareholder, and this constitutes “when a false statement is made in relation to the material facts in the registration statement, business report, etc.” as provided by Article 429(1)1 and (3)1

In so doing, the lower court did not err by misapprehending the legal doctrine regarding the criteria for determining the largest shareholder of a foreign company established under foreign statutes or the entry of the largest shareholder in the registration statement and business report, or by exceeding the bounds of the principle of free evaluation of evidence.

2. As to the ground of appeal on Article 430 of the Capital Markets Act

Based on its stated reasoning, the lower court determined that the Plaintiffs knew or did not know the largest shareholder of the instant registration statement or business report due to gross negligence.

Examining this in light of the relevant legal principles and records, the lower judgment did not err by failing to exhaust all necessary deliberations and exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules.

3. Conclusion

Therefore, all appeals are 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 on the bench.

Justices Park Jung-hwa (Presiding Justice)