For the first time, the Supreme Court has set forth specific standards governing the method of dividing unlisted shares in divorce proceedings. The decision addresses the tension between monetary compensation and in-kind division when the marital property includes a significant stake in a privately held company. This article examines the background, key holdings and practical implications of this landmark ruling.
|
1. |
Background of Property Division Involving Unlisted Shares |
|
2. |
Key Holdings of Supreme Court Decision |
|
A. |
Summary of Facts and Lower Court’s Ruling |
|
B. |
Supreme Court’s Ruling |
|
(i) |
The closed nature of unlisted shares makes it difficult to convert them into cash at a fair price or to participate in management; and |
|
(ii) |
The value of such shares is subject to the risk of being affected by the other spouse’s managerial decisions. |
Accordingly, the Supreme Court ruled that, absent special circumstances—such as where the parties have agreed on the method of dividing the unlisted shares or where it is difficult to determine their objective value—it is desirable to give priority to dividing unlisted shares by way of monetary compensation.
However, the Supreme Court also held that, because the purpose of the property division system is to liquidate and distribute marital property in a manner consistent with substantive fairness, in cases where applying monetary compensation alone would significantly undermine equity between the parties, a combined approach incorporating methods such as in-kind division should also be considered.
In this case, the defendant’s net assets, excluding the Shares, amounted to only approximately KRW 10.3 billion—far short of the KRW 14.3 billion monetary compensation owed to the plaintiff. Without selling or pledging the Shares, the defendant would have difficulty paying this amount, and in the process, the risk of losing management control, along with tax and transaction-cost burdens, would inevitably have been concentrated on the defendant. By contrast, given the plaintiff’s overall financial position, it was difficult to conclude that receiving a portion of the Shares in kind would cause the plaintiff economic hardship.
Considering these circumstances, the Supreme Court held that the lower court erred by awarding all of the Shares to the defendant and ordering only a large monetary compensation payment. Accordingly, the Supreme Court reversed and remanded the property division portion of the lower court’s decision.
|
3. |
Practical Implications and Points to Consider |
-
Liquidity and convertibility of the shares;
-
Feasibility of actually paying the monetary compensation amount;
-
Impact of in-kind division on the company’s ownership structure and management control; and
-
Tax and transaction costs associated with selling or pledging the shares.
Parties should therefore develop litigation strategies that comprehensively consider not only the valuation of unlisted shares but also these factors.
If in-kind division of unlisted shares actually occurs, it may also give rise to corporate law disputes. Specifically, issues may arise regarding the relationship between in-kind division and share transfer restrictions under the articles of incorporation or rights of first refusal under shareholders’ agreements. In addition, as a former spouse becomes a minority shareholder, disputes may arise over the exercise of various minority shareholder rights, such as the right to demand the convocation of an extraordinary general shareholders’ meeting or the right to inspect and copy accounting books and records.
Accordingly, owners and managers of privately held companies should proactively review their articles of incorporation, shareholders’ agreements and other corporate governance mechanisms to prepare for the possibility that their shareholdings may become subject to property division in unforeseen circumstances such as divorce.
