1.

Case Overview

Defendant Company A is a manufacturer of shoes and shoe components. Around the end of 2010, Company A transferred the shares it held in certain overseas subsidiaries engaged in the manufacturing of cycling shoes and thereby discontinued its cycling shoe manufacturing business. The plaintiffs are shareholders of Company A, who collectively hold approximately 5.42% of Company A’s issued and outstanding shares. The plaintiffs filed a claim for damages against Company A, alleging that Company A’s transfer of the subsidiary shares constituted a “transfer of all or a material part of business” under Article 374 of the KCC. On that basis, the plaintiffs asserted that (i) the transaction required approval by a special resolution at the general meeting of shareholders and (ii) Company A was required to comply with the procedures enabling dissenting shareholders to exercise their appraisal rights. The plaintiffs further asserted that Company’ A’s failure to comply with these requirements deprived them of the opportunity to exercise these rights and sought compensation for the resulting loss. The Seoul High Court held that Company A’s sale of the subsidiary shares violated Article 374 of the KCC, a mandatory provision, and was therefore void. On that basis, the court dismissed the plaintiffs’ claim for damages, reasoning that no appraisal rights could arise where the underlying transfer itself was void and, according, the plaintiffs had not suffered legally cognizable damages. (Seoul High Court Decision No. 2014Na49076 rendered on January 29, 2016).

Despite the High Court’s decision, Company A did not recover the subsidiary shares or otherwise unwind the transactions that the High Court deemed void. The plaintiffs, hoping to exercise their appraisal rights as dissenting shareholders, therefore submitted a shareholder proposal to Company A’s representative director to include, as an item on the agenda of the general meeting of shareholders, a resolution to ratify the share transfer agreement effectuating the sale of the subsidiary shares. Company A rejected the proposal, determining that the proposed agenda item concerned “grievances of individual shareholders” or “a matter that cannot be realized by the company.” In response, the plaintiffs filed a claim for damages against Company A, its representative director and its directors, alleging Company A’s unlawful refusal to accept the shareholder proposal caused the plaintiffs to suffer loss in an amount equal to the share purchase price they would have received had they been able to exercise their appraisal rights.
 

2.

Lower Court’s Decision

The lower court held as follows:
 

(1)

because Company A discontinued its cycling shoe manufacturing business as a result of the transfer of the subsidiary shares, the share transfer agreement with respect to such subsidiary shares constitutes a transfer of business (or business assets) requiring an approval by special resolution at the general meeting of shareholders;
 

(2)

Company A’s refusal to accept the plaintiffs’ shareholder proposal was unlawful, as the proposal cannot be characterized as either (a) a matter that cannot be realized by the company or (b) a mere grievance of individual shareholders;
 

(3)

if such special resolution ratifying the share transfer agreement were to be approved, the plaintiffs would have had specific and legally protected expectations to receive compensation through the appraisal rights prescribed by Article 374-2 of the KCC, and Company A’s failure to carry out the requisite resolution procedure infringed those expectations; and
 

(4)

Company A, its representative director and its directors, by intentionally or negligently breaching their duty to carry out the requisite resolution procedures or their fiduciary duties, caused damage to the plaintiffs.
 

3.

Supreme Court’s Decision

The Supreme Court clarified that a “transfer of all or a material part of business” under Article 374(1)1 of the KCC requires that the transferee succeed to all or a material part of the transferor’s business activities. Although a mere transfer of business assets does not, by itself, constitute such a transfer, a disposition of business assets that has the same practical effect as transferring or discontinuing all or part of a company’s business falls within the scope of Article 374(1)1 of the KCC and thus requires approval by a special resolution at the general meeting of shareholders (Supreme Court Decision No. 2004Da13717 rendered on July 8, 2004, etc.). Applying this standard, the Supreme Court held that because Company A discontinued its cycling shoe manufacturing business by transferring, at around the end of 2010, its shares in certain overseas subsidiaries that conducted that business, the transfer constituted a transfer of business assets requiring the approval by a special resolution at the general meeting of shareholders, in such circumstances, the appraisal rights of dissenting shareholders are recognized.

In connection with the foregoing ruling, the Supreme Court rendered the following specific determinations:
 

(1)

Shareholders cannot directly participate in the day-to-day management of company and may influence the company’s affairs only through indirect means, such as through resolutions at a general meeting of shareholders (Supreme Court Decision No. 2000Ma7839 rendered on February 28, 2001; Supreme Court Decision Nos. 2018Da228462 and 2018Da228479 rendered on June 9, 2022; etc.). As a result, shareholders are not permitted to intervene directly in transactions between Company A and its subsidiaries to seek judicial declaration of the invalidity of the transfer of subsidiary shares or demand that the subsidiaries perform their obligation restitution and return such transferred subsidiary shares to Company A. Accordingly, the plaintiffs had no other choice but to submit a shareholder proposal requesting that the ratification of the share transfer agreement be included as an agenda item at the general meeting of shareholders.
 

(2)

Even if the actual purpose of the shareholder proposal was for the plaintiffs to oppose the proposed agenda item and thereby exercise appraisal rights, the shareholder proposal cannot be regarded as (i) “a grievance of an individual shareholder” under Article 12, Item 2 of the Enforcement Decree of the KCC, (ii) “a matter that cannot be realized by the company” under Item 5 of the same Article, or (iii) “a violation of laws, regulations, or the articles of incorporation” under Article 363-2(3) of the KCC. Nevertheless, the representative director and directors of Company A took no steps to rectify the previously void transfer of subsidiary shares (such as adopting a board resolution to include the ratification of the void share purchase agreement as an agenda item of the general meeting of shareholders), thereby rejecting the plaintiffs’ shareholder proposal without justifiable grounds.
 

(3)

The representative director and directors of Company A, by intentionally or negligently breaching their duties as directors, unlawfully rejected the plaintiffs’ shareholder proposal and failed to take the steps necessary to bring the proposal to ratify the share transfer agreement before the general meeting of shareholders. As a result, the plaintiffs were deprived of the opportunity to exercise their appraisal rights as dissenting shareholders (which they would have been able to exercise had such shareholder proposal been approved), and they suffered losses equal to the amount they would have received as the share purchase price. Accordingly, the representative director and the directors of Company are jointly liable to compensate the plaintiffs for such losses, and Company A is also liable (jointly with its representative director) for the plaintiffs’ losses resulting from its representative director’s unlawful performance of its duties, pursuant to Articles 389 and 210 of the KCC.
 

(4)

The damages suffered by the plaintiffs are the amount equal to the share purchase price plaintiffs would have received as of the date of Company A’s ordinary general meeting of shareholders, and statutory default interest accrued on that amount at the annual rate of 5%, as provided under the Civil Act, from the day following the general meeting of shareholders.