법무법인(유한) 율촌 | Yulchon LLC

Yulchon achieved all decisions in favor of the client in a lawsuit filed seeking an injunction to prohibit executives’ from authorizing a paid-in capital increase amounting to KRW 12 Billion for the majority shareholder by representing the second largest shareholder of a KOSDAQ-listed Corporation (hereafter the “Corporation”) during a pending dispute for management control.

The current majority shareholder of the Corporation acquired management control from the Corporation’s former majority shareholder in July 2018 based on an agreement with the second largest shareholder that management control would be with the current majority shareholder. However, a dispute over management control arose, and when the second largest shareholder requested the board of directors to convene an extraordinary general meeting of the shareholders in August 2018, the board of directors decided that new shares amounting to KRW 5.2 billion and convertible bonds amounting to KRW 7 billion would be issued to the majority shareholder and others on September 6, 2018 with a payment date of September 17, 2018 through a third-party issuance, which was announced on September 7, 2018.

In this regards, Yulchon urgently filed for an injunction to prohibit the issuance of the aforementioned new shares and convertible bonds by representing the second largest shareholder on September 11, 2018, and the Corporation claimed that issuance of the aforementioned new shares and convertible bonds was legal by arguing thefollowing: ① the Corporation is in need of capital as the Corporation’s capital is impaired by 50%, ② a capital increase by allocation to the shareholders or a public offering would fail as the Corporation’s financial position has been worsen due to a fault of the second largest shareholder and it is designated as a high-risk investment item. However, Yulchon sufficiently refuted such arguments by emphasizing that ① the allotment method to a third party for the benefit of the majority shareholder where there is a dispute over management control among the shareholders would be unlawful, ② simply having impaired capital cannot fully satisfy the requirements of Article 418(2) of the Commercial Act, and ③ certain facts were contested, which finally led to the decision of the court to prohibit the issuance of the aforementioned new shares and convertible bonds.

This case has significant meaning as it dealt with the argument of (i) whether a paid-in capital increase through a third party issuance during a dispute over management control can be justified by the need to repair a company’s capital impairment, (ii) whether restrictions on the choice of financing methods such as designation of high-risk investment items can justify a third party issuance of shares, and (iii) whether a shareholder who is partially responsible for the designation of the high-risk investment item or deterioration of the financial condition of the company can claim for a prohibition against the issuance of new shares.

This case was handled by Il Bong Moon, Jae June Yang, Mi Ra Baek, and Yoon Young Choi(M) of the Litigation Group and Ki Young Kim and Jin Wook Lee of the Corporate and Finance Group.