On September 11, 2017, in a derivative suit filed in connection with the sale of a company’s shares in an affiliate to a related party (family member) of the same person controlling the business group (the “Transaction”), the Supreme Court ruled that the Transaction did not involve any appropriation of the company’s opportunities, self-transaction, or negligence of duties.

Details of the Ruling:

1.  Misappropriation claim

The Supreme Court concluded that even if the company’s opportunities were provided, if the company's board of directors – after collecting and analyzing sufficient information – , made a decision through a legitimate procedure to forgo the business opportunity, or if a certain director gave approval to utilize the opportunity, unless there was a reason to believe that the decision-making process was significantly unreasonable, a business decision made by the directors must be respected. Moreover, as long as there are no circumstances to believe that the decision-making process for the Transaction was significantly unreasonable, such a decision could be deemed as an appropriation of the company’s opportunities.

2.  Self-transaction claim

The Supreme Court held that it was not a self-transaction, because the counterparty to the Transaction was not the same person controlling the business group, but a specially related person. Even if the Transaction was a self-transaction, given that the same person controlling the business group disclosed key transaction terms (such as the fact that the buyer of the Transaction was a specially related party, and the sales price), the necessity of a paid-in capital increase of the affiliate, and the necessity to sell shares based on the restrictions on the total amount of shareholding, there had been a legitimate approval of a self-transaction under Article 398 of the Commercial Code (i.e., the Board of Directors’ resolution took place after learning that the sales price was evaluated by an accounting firm).

3.  Duty of care / Negligence claim

Regarding the claim that the officers breached their duty of care by making a low-price sale, the Supreme Court ruled that: (i) it was impossible to conclude that the Transaction was not an improvement of the financial structure through the sale of non-core investment assets of the company; (ii) the shares had to be sold once the grace period for the restrictions on the total amount of shareholding was over; (iii) the affiliate was in poor financial condition at the time; and (iv) the circumstances following the Transaction did not suggest that the Transaction incurred a loss to the company, and that the share valuation that the Plaintiffs claimed to be legitimate were all after-the-fact judgment or were not an objective valuation. Therefore, the Court viewed the original court ruling denying the negligence of duties by the directors of the company to be reasonable.

Significance:

This ruling is noteworthy, because the Court found no wrongdoing in a case where a company sold shares in an affiliate to a family member of the person controlling the business group on the grounds that there had been a business necessity, and that the company had undergone a careful review by the board of directors, an objective evaluation of the transaction terms, and engaged in the Transaction at a fair price.

We believe this ruling could be used as a reference to minimize the legal risks relating to low-price sales in equity transactions between companies and large shareholders/specially related persons.