Supreme Court Decision 2011Da57869 Decided September 12, 2013 about Damages

Main Issues and Holdings

[1] Relevant point in time to satisfy the share-holding requirement under the Commercial Act (“CA”) or the former Securities and Exchange Act when filing a representative lawsuit pursuant to Article 403 of the CA and the legality of that portion of a representative lawsuit which was instituted by those shareholders who subsequently lose their shareholder status due to stock disposal (negative in principle)

[2] Whether transactions between a director of a parent company and its subsidiary are of the kind that must obtain approval of the parent company’s board of directors subject to Article 398 of the former CA (negative)

[3] Whether a company’s director who becomes a majority shareholder of a competitor company and participates at its decision-making and business execution must obtain approval by the board of directors of the company where s/he belongs under Article 397(1) of the CA (affirmative), and whether a director who becomes a majority shareholder of another company which substantively operates as his/her company’s branch or operation division pursuing common interests must obtain approval by the board of directors of the company where s/he belongs under the same provision (negative)

[4] If the board of directors, through a legitimate procedure and in the interest of the company, gives up on a business opportunity that could be profitable to the company or approves one of the directors to use such opportunities, whether that director or the directors who participate in the board’s decision to approve thereby breach(es) a good manager’s duty of care or duty of loyalty (negative in principle)

Summary of Decision

[1] In light of both Article 403(1) through (5) of the Commercial Act (“CA”) and Article 191-13(1) of the former Securities and Exchange Act (repealed by Addendum Article 2 of Act No. 8635 of the Financial Investment Services and Capital Markets Act of Aug. 3, 2007, “the former SEA”) considered together, in order for several shareholders to file a representative suit, either when requesting the company to file a suit to seek director’s liability or when filing that suit for the company, they must satisfy the stock holding reqirement under the CA and the former SEA. After the suit is filed, the shareholders need not keep the required number of stocks. However, if some of the shareholders who file a representative suit subsequently lose their shareholder status due to having no stock as a result of stock disposal , then, barring special circumstances, they lose standing as Plaintiff and that portion of the suit initiated by him/herwould become unlawful regardless of whether other Plaintiffs who initiated the suit maintain their shareholder status.

[2] Article 398 of the former Commercial Act (amended by Act No. 10600 of April 14, 2011, “the former CA”), which requires a company’s director to obtain approval from the board of directors in regards to transactions with the company, is intended to prevent the director from promoting his/her own interest and causing loss to the company or its shareholders by means of direct transactions with the company using his/her status or transactions between the company and a third party for his/her own benefit. For this provision to apply, the company with whom the director or a third party transacts should be the company to which the director in question owes a good manager’s duty of care or duty of loyalty. In case of a transaction between a parent company’s director and its subsidiary, even if the subsidiary’s entire stocks are owned by the parent company, since a parent company and its subsidiary have separate legal personalities under the CA and any possible loss resulting from the transaction is only to the subsidiary company with the parent company merely affected indirectly, such a transaction with the subsidiary company cannot be treated identically as one with the parent company. Thus, the transaction between the parent company’s director and its subsidiary does not constitute a transaction falling under Article 398 of the former CA in terms of the relationship with the parent company, and parent company’s director need not obtain approval from the parent company’s board of directors with regards to that transaction.

[3] The purpose of Article 397(1) of the Commercial Act which provides that “no director shall, without the approval of the board of directors, engage in for his/her own account or for the account of a third party any transaction in the same line of business of the company or become an unlimited liability member or a director of any other company with the same business purpose.” is to prohibit a director from engaging in competitive business likely to injure the company’s interest through pursuing his/her own interest while using his/her status, thereby ensuring effective and proper running of the company with a good manager’s duty of care and faithfully fulfilling his/her duties. Thus it is the case that a director should obtain approval of the board of directors where s/he belongs not only when s/he becomes a director or representative director of a competitor company but also when s/he becomes a controlling shareholder and participates in its decision-making and business execution. Whereas a company, if it operates in the same business category as the director’s company, does not fail to be a competitor company merely because they operate in different business locations at the time in question, it cannot be seen that there is room for conflict of interests between the two companies if the company that is considered being in potential competition operates substantively as a branch or business division of the director’s company and is in a common interest-seeking relationship, which is to be determined in light of the whole transaction conditions such as the two companies’ shareholding situation and corporate governance, business operation pattern, use of same or similar trade name or trademark, market’s perceived competition between the two and the like. For a director who wants to acquire stocks and become a controlling shareholder of another company like the above, it is hard to see that approval of the board of directors as prescribed in Article 397 of the CA is necessary.

[4] Directors, as they have a good manager’s duty of care for their company, are deemed to have fulfilled their duty as directors only when the duty of care was faithfully exercised pursuant to law and the articles of incorporation. When there is a potentially profitable business opportunity, a director must offer this information to the company so that it may use the opportunity, and must not use it for their or a third party’s gain without the corporation’s approval. However, if the board of directors decided to abandon the opportunity or approved a certain director to use the opportunity after collecting and analyzing sufficient information and making decisions in the interest of the company through legitimate procedure, the directors’ business judgment to so decide should be respected, unless the decision making process was markedly irrational, and in such a case, even if a director came to use the business opportunity, it cannot be said that the director or the directors who participated in the decision breached the duty of care of a good manager or the duty of loyalty.

Reference Provisions

[1] Articles 403(1) through (5) of the Commercial Act, Article 191-13(1) of the former Securities and Exchange Act (repealed by Addendum Article 2 of Act No. 8635 of the Financial Investment Services and Capital Markets Act of Aug. 3, 2007) /

[2] Article 398 of the former Commercial Act (amended by Act No. 10600 of April 14, 2011) /

[3] Article 397 of the Commercial Act /

[4] Articles 382(2) and 382-3 of the Commercial Act, Article 681 of the Civil Act Article 403 of the Commercial Act (Representative Suits by Shareholders)

(1) Any shareholder who holds no less than one percent of the total issued and outstanding shares may request that the company file an action against directors to compel them to perform their obligations.

(2) A request under paragraph (1) shall be made in writing, stating the grounds therefor.

(3) If a company fails to file an action within 30 days from the date of receiving the request under paragraph (2), the shareholder mentioned in paragraph (1) may immediately file such action on behalf of the company.

(5) The effect of filing an action shall not be prejudiced even where the number of shares held by a shareholder who files an action under paragraphs (3) and (4) falls below one percent of the total issued and outstanding shares after the institution of the action (excluding where the shareholder no longer holds the issued and outstanding shares). Article 398 of the former Commercial Act (Transactions between Directors, etc. and Company) When a person falling under any of the following subparagraphs intends to engage in a transaction with the company for his/her own account or for the account of a third party, he/she shall in advance disclose material facts of the relevant transaction at the board of directors and shall obtain approval therefrom. In such cases, the approval of the board of directors shall be granted with two thirds or more of the total number of the directors, and the relevant transaction shall be fair in terms of its particulars and procedures:

1. A director or a major shareholder under Article 542-8 (2) 6;

2. The spouse and lineal ascendents or descendents of a person falling under subparagraph 1;

3. Lineal ascendents or descendents of the spouse of a person falling under subparagraph 1;

4. A company in which a half or more of the total number of issued and outstanding shares with voting rights is held by a person falling under any of subparagraphs 1 through 3, solely or jointly with others, or its subsidiary company;

5. A company in which a half or more of the total number of issued and outstanding shares with voting rights is held by a person falling under any of subparagraphs 1 through 3, together with a company falling under subparagraph 4.

Article 397 of the Commercial Act (Prohibition against Competition)

(1) No director shall, without the approval of the board of directors, engage in for his/her own account or for the account of a third party any transaction in the same line of business of the company or become an unlimited liability member or a director of any other company, the business purposes of which are the same as those of the company.

(2) If any director has engaged in a transaction for his/her own account in contravention of paragraph (1), the company may, by a resolution of the board of directors, deem such transaction as made for the account of the company and if he/she has made a transaction for the account of a third party, the company may request the pertinent director to transfer any interest accrued therefrom.

(3) Rights under paragraph (2) shall be extinct upon the lapse of one year after the date such transaction has been made.

Article 382 of the Commercial Act (Appointment of Directors, Relationship with Company and Outside Directors) (2) The provisions of the Civil Act regarding delegation shall apply mutatis mutandis to the relationship between the company and the directors.

Article 382-3 of the Commercial Act (Duty of Loyalty by Directors) Directors shall perform their duties in good faith for the interest of the company in accordance with Acts, subordinate statutes, and the articles of incorporation.

Article 681 of the Civil Act (Mandatary’s Duty of Care and Due Diligence) A mandatary shall manage the affairs entrusted to him with the care of a good manager in accordance with the tenor of the mandate.

Reference Cases [2] Supreme Court Decision 2007Da71271 decided March 11, 2010 (Gong2010Sang, 709) / [3] Supreme Court Decision 92Da53583 decided April 9, 1993 (Gong1993Sang, 1365)

Plaintiff-Appellant Solidarity for Economic Reform, et al. (Attorney Kim Seok-yeon, Counsel for plaintiff-appellant)

Defendant-Appellee Defendant 1, et al. (Yulchon LLC, Attorneys Shin Seong-taek, et al., Counsel for defendant-appellee)

Judgment of the court below Seoul High Court Decision 2010Na70751 decided June 16, 2011

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

Reasoning The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

Under Article 403(1) of the Commercial Act (“the CA”), any shareholder who holds no less than one percent of the total issued and outstanding shares (“issued shares”) may request that the company file an action against directors to compel them to perform their obligations. Under Article 403(2), a request under parag. (1) shall be made in writing, stating the grounds. Under Article 403(3), if a company fails to file an action within 30 days from the date of receiving the request under parag. (2), the shareholder mentioned in parag. (1) may immediately file such action on behalf of the company. Under Article 403(5), the effect of filing an action shall not be prejudiced even where the number of shares held by a shareholder who files an action under parag. (3) and (4) falls below one percent of the total issued shares after the institution of the action, excluding where the shareholder no longer holds the issued shares. And Article 191-13(1) of the former Securities and Exchange Act (repealed by Addendum Article 2 of Act No. 8635 of the Financial Investment Services and Capital Markets Act of Aug. 3, 2007, “the former SEA”) provides that “a person who has held no less than 1/10.000 of entire issued shares of the listed corporations or Kosdaq-listed corporations under the Presidential Decree since 6 months ago may exercise shareholders’ rights under Article 403 of the Commercial Act.”

In light of these provisions considered together, in order for several shareholders to file a representative suit, either when requesting the company to file a suit to seek director’s liability or when filing that suit for the company, they must satisfy the stock holding reqirement under the CA and the former SEA. After the suit is filed, the shareholders need not keep the required number of stocks. However, if some of the shareholders who file a representative suit subsequently lose their shareholder status due to having no stock as a result of stock disposal, then, barring special circumstances, they lose standing as Plaintiff and that portion of the suit initiated by him/her would become unlawful regardless of whether other Plaintiffs who initiated the suit maintain their shareholder status. According to the judgment below, Plaintiffs 2, 7, Tiger Asia Ltd., and Tiger Asia Fund LLC. owned stocks issued by Shinsegae Corporation (“Shinsegae”) at the time of filing of this case’s litigation. However, they disposed the stocks before the closing of oral argument, and did not own any Shinsegae stocks at the time of closing of the oral argument. Review of the above facts in light of the above principle revealed that the above Plaintiffs lost standing as this case’s Plaintiff since they came to own none of Shinsegae’s issued shares after the filing of a representative lawsuit.

The court below was correct in holding that the portions of this suit raised by the above Plaintiffs were all unlawful, and it did not err in misapprehension of legal principle as to elements of shareholder’s representative lawsuit as asserted in the ground of appeal.

2. Regarding the ground of appeal No. 2

Article 398 of the former Commercial Act (amended by Act No. 10600 of April 14, 2011, “the former CA”), which requires a company’s director to obtain approval from the board of directors in regards to transactions with the company, is intended to prevent the director from promoting his/her own interest and causing loss to the company or its shareholders by means of direct transactions with the company using his/her status or transactions between the company and a third party for his/her own benefit. For this provision to apply, the company with whom the director or a third party transacts should be the company to which the director in question owes a good manager’s duty of care or duty of loyalty. In case of a transaction between a parent company’s director and its subsidiary, even if the subsidiary’s entire stocks are owned by the parent company, since a parent company and its subsidiary have separate legal personalities under the CA and any possible loss resulting from the transaction is only to the subsidiary company with the parent company merely affected indirectly, such a transaction with the subsidiary company cannot be treated identically as one with the parent company. Thus, the transaction between the parent company’s director and its subsidiary does not constitute a transaction falling under Article 398 of the former CA in terms of the relationship with the parent company, and parent company’s director need not obtain approval from the parent company’s board of directors with regards to that transaction.

The court below, after finding that Defendant 1 was a member of Shinsegae’s board of directors at the time of subscribing to new stocks at issue here, that G-Shinsegae Department Store Incorp. (“G-Shinsegae”) and Shinsegae are two independent and separate legal entities, and that the subscription of new stocks at issue here was made between Defendant 1 and G-Shinsegae after the Shinsegae board of directors’ resolution of non-subscription, ruled that it is difficult to view the subscription to new stocks at issue here as constituting the director’s self-dealing in relation to Shinsegae and that this would not differ merely because Shinsegae was G-Shinsegae’s parent company owning the latter’s entire stocks.

In light of the legal principle considered above, the foregoing judgment of the court below is acceptable as just and did not err in misapprehendinglegal principle as to what constitutes a director’s self-dealing as otherwise asserted in the ground of appeal.

3. Regarding ground of appeal No. 3

A. The purpose of Article 397(1) of the Commercial Act which provides that “no director shall, without the approval of the board of directors, engage in for his/her own account or for the account of a third party any transaction in the same line of business of the company or become an unlimited liability member or a director of any other company with the same business purpose.” is to prohibit a director from engaging in competitive business likely to injure the company’s interest through pursuing his/her own interest while using his/her status, thereby ensuring effective and proper running of the company with a good manager’s duty of care and faithfully fulfilling his/her duties. Thus it is the case that a director should obtain approval of the board of directors where s/he belongs not only when s/he becomes a director or representative director of a competitor company but also when s/he becomes a controlling shareholder and participates in its decision-making and business execution. Whereas a company, if it operates in the same business category as the director’s company, does not fail to be a competitor company merely because they operate in different business locations at the time in question, it cannot be seen that there is room for conflict of interests between the two companies if the company that is considered being in potential competition operates substantively as a branch or business division of the director’s company and is in a common interest-seeking relationship, which is to be determined in light of the whole transaction conditions such as the two companies’ shareholding situation and corporate governance, business operation pattern, use of same or similar trade name or trademark, market’s perceived competition between the two and the like. For a director who wants to acquire stocks and become a controlling shareholder of another company like the above, it is hard to see that approval of the board of directors as prescribed in Article 397 of the CA is necessary.

B. According to the reasoning of the judgment below and records, the following circumstances are confirmed.

(1) G-Shinsegae is a subsidiary company established by Shinsegae in order to operate department stores, etc. in Gwangju Metropolitan City withall of its stocks owned by Shinsegae and from around 1995 operated department stores etc. using the Shinsegae trademark. From the time of G-Shinsegae’s establishment, Shinsegae effectively operated G-Shinsegae as Shinsegae’s branch store located in Gwangju Metro. City, purchasing goods for it through contracts and controlling its overall management, and this was the perception of others as well.

(2) When following the late-1997 foreign exchange crisis G-Shinsegae suffered difficulties in financing and management due to increased financial charges, and to resolve this problem, G-Shinsegae executed the paid-in capital increase at issue here in consultation with Shinsegae. However, Shinsegae itself was not in a position to participate in recapitalization due to restructuring and other needs, so Defendant 1 came to acquire 83.3% of G-Shinsegae stocks on Feb. 23, 1998 through the new stock purchase in this case.

(3) Defendant 1 as the son of Nonparty, the controlling shareholder of Shinsegae, was a person in special relation to Shinsegae, so he had no reason to manage G-Shinsegae separately from Shinsegae or to compete with Shinsegae. And indeed G-Shinsegae remained in the same corporate group as Shinsegae despite the fact that Shinsegae lost its controlling shareholder status and became a second largest shareholder following the purchase of new stocks in this case.

(4) Even after Defendant 1’s purchase of new stocks, G-Shinsegae continued to use trademarks identical to Shinsegae’s, commissioned Shinsegae with purchase of goods for sale, followed Shinsegae’s management advice and continued to cooperate with Shinsegae as before. Shinsegae also annually received fixed management fees from G-Shinsegae as payment for trademark use and management advice as it did before the purchase of new stocks in this case.

C. Upon examining these circumstances in light of the legal principles considered earlier, it was the case that G-Shinsegae continued to be operated as a Shinsegae branch even after Defendant 1’s purchase of the new stocks here, and the records did not show that Defendant 1 made transactions through G-Shinsegae which conflicted with Shinsegae’s interest, so it is difficult to view that Defendant 1 should have obtained under Article 397 of the CA the approval of the Shinsegae board of directors in relation to his becoming the controlling shareholder following the purchase of new stocks.

While some of the judgment of the court below in its statement of reasoning was improper, the courts rejection of the relevant portion of Plaintiffs’ assertion was just in the end, as there were no errors to affect the judgment either by misapprehending the legal principles on the existence of a competing business relationship or by misconceiving facts, as otherwise alleged in the grounds of appeal.

4. Regarding ground of appeal No. 4

Directors, as they have a good manager’s duty of care for their company, are deemed to have fulfilled their duty as directors only when the duty of care was faithfully exercised pursuant to law and the articles of incorporation. When there is a potentially profitable business opportunity, a director must offer this information to the company so that it may use the opportunity, and must not use it for their or a third party’s gain without the corporation’s approval. However, if the board of directors decided to abandon the opportunity or approved a certain director to use the opportunity after collecting and analyzing sufficient information and making decisions in the interest of the company through legitimate procedure, the directors’business judgment to so decide should be respected, unless the decision making process was markedly irrational, and in such a case, even if a director came to use the business opportunity, it cannot be said that the director or the directors who participated in the decision breached the duty of care of a good manager or the duty of loyalty. As we review the reasoning of the court below in light of the above legal principles, while its determination that it is not likely Defendant 1 used Shinsegae’s business opportunity is improper in its statement of reasoning, it is ultimately just and acceptable, and there were no errors to affect the judgment either by misapprehending the legal principles on elements or procedure where a director may acquire the corporation’s business opportunity or by misperceiving facts, as otherwise asserted in the grounds of appeal.

5. Regarding ground of appeal No. 5

Based on the circumstances stated in its ruling, the court below determined that there is insufficient reason to conclude that this case’s new stocks were issued at a noticeably low price and that even if this case’s new stocks were issued at a relatively low price, it is not sufficient to acknowledge that Defendants’ decision not to take over the new stocks was considerably irrational and negligent of their duties as directors.

Upon examining the reasoning of the judgment below in light of the records, the above determination of the court below is just and acceptable. Additionally, the determination can also be seen as including in effect rejection of Plaintiffs’ allegation that since the new stocks of this case were issued at a noticeably low price without considering the fact that the quantity of new stocks was huge enough to result in a transfer of the right to control, Defendants are obliged as Shinsegae directors to prevent G-Shinsegae from assigning the new stocks to third parties at the same price, even if Shinsegae lost right to subscription. Thus, the judgment below did not err by omitting judgment as otherwise asserted in the grounds of appeal.

6. Conclusion

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

Justices  Kim So-young (Presiding Justice)

Shin Young-chul

Lee Sang-hoon (Justice in charge)

Kim Yong-deok