Supreme Court Decision 2011Da112247, 112254 Decided December 12, 2013 about Stock Transfer Proceedings, etc

Main Issue and Holding

In a case where share certificates were re-issued upon a judgment of nullification nullifying previous certificates, but then a suit of objection was filed against the judgment, and the trial cancelling the judgment was announced and finalized, whether the owner of the re-issued certificates may bona fide acquire the certificates afterwards (negative)

Summary of Decision

Article 360(1) of the Commercial Act provides that “a share certificate may be invalidated through process of public summons,” and Article 360(2) of the same Act provides that “no person who has lost his/her share certificate shall request its re-issuance to the company, unless he/she has obtained a judgment of nullification with respect thereto.” This means that a share certificate is a marketable security that certifies ownership of stocks, so an additional share certificate which certifies the same stocks cannot be issued without nullifying the original share certificate. Therefore, a share certificate which is re-issued without a judgment of nullification violates the above provisions, and is thus invalid. Meanwhile, a judgment of nullification against a stock or certificate is only effective to the extent of recovering the public summons applicant’s status so that it is on the same level as the status when he/she owns the relevant stock or certificate, and does not finalize that the applicant is the actual rightsholder. Therefore, the rightful rightsholder of the stock or certificate does not lose actual rights even in the case of a judgment of nullification, but is merely unable to exercise his/her rights regarding the stock or certificate. And if a suit of objection is filed against the judgment of nullification in accordance with Articles 490 and 491 of the Civil Procedure Act, and the following decision finalizes cancelment of the judgment of nullification, the judgment becomes retroactively ineffective, and the stock or certificate owned by the rightful rightsholder retroactively recovers its effectiveness. Yet in cases such as the above, where the judgment of nullification is cancelled but the share certificates re-issued based on the judgment before its cancellation remains effective and can be bona fide acquired, the rightful rightsholder may lose his/her rights or is unable to exercise the rights. This is a harsh conclusion for the rightful rightsholder who has never actually lost the share certificate and actively cancelled an unjust judgment of nullification through a suit of objection, and also contradicts the purpose of the Civil Procedure Act which is to protect rightful rightsholders by enabling them to cancel judgments of nullification acquired by an unentitled person through falsehood or other illegitimate means through a suit of objection. Additionally, neither the Civil Procedure Act nor the Commercial Act has provisions regulating the effectiveness of cancellation trials against a judgment of nullification. Therefore, even where certain share certificates were re-issued upon a judgment of nullification nullifying previous share certificates, if a suit of objection was filed against the judgment, and subsequently a judgment of cancellation is announced and finalized, the re-issued certificates can be retroactively nullified and their owners cannot bona fide acquire them afterwards.

Reference Provisions Articles 359 and 360 of the Commercial Act, Article 21 of the Check Act, Articles 490, 491, 496, 497 of the Civil Procedure Act,

Article 359 of the Commercial Act (Bona Fide Acquisition of Share Certificates) The provisions of Article 21 of the Check Act shall apply mutatis mutandis to share certificates. [This Article Wholly Amended by Act No. 3724, Apr. 10, 1984]

Article 360 of the Commercial Act (Judgment of Nullification and Re-issuance of Share Certificates) (1) A share certificate may be invalidated through process of public summons. (2) No person who has lost his/her share certificate shall request its re-issuance to the company, unless he/she has obtained a judgment of nullification with respect thereto.

Article 21 of the Check Act (Check Acquired in Good Faith) Where any person has been dispossessed of a check for any reason, the holder of the check shall not be bound to relinquish the check, if the check is a bearer check or the holder of a check transferable by endorsement establishes his/her title pursuant to Article 19. However, the same shall not apply where the holder has acquired it in bad faith or by gross negligence. [This Article Wholly Amended by Act No. 10197, Mar. 31, 2010]

Article 490 of the Civil Procedure Act (Litigation of Objection against Nullification Judgment) (1) A nullification judgment shall be subject to no appeal.

(2) Against a nullification judgment, an appeal may be filed before the court of summons by a lawsuit against the requester, if it falls under any one of the following subparagraphs: 1. When it is the case where any procedure for public summons is not permitted by Acts;

2. When a public notice on the public summons has not been made, or it has not been made in the manner as prescribed by Acts and subordinate statutes;

3. When the period of public summons has not been observed;

4. When the judge who rendered the judgment has been excluded from the exercise of his duties pursuant to Acts;

5. When the provisions as to the exclusive jurisdiction have been violated;

6. When the judgment has been rendered in violation of Acts, even in spite of an existence of the report on a right or claim;

7. When the nullification judgment has been obtained by a falsity or unlawful means; and

8. When there exist any reasons for a retrial under Article 451(1)4 through 8.

Article 491 of the Civil Procedure Act (Period for Institution of Lawsuit) (1) The lawsuit under Article 490(2) shall be instituted within one month.

(2) The period under paragraph (1) shall be an invariable period.

(3) The period under paragraph (1) shall be reckoned from the date on which the plaintiff has come to know about the existence of a nullification judgment: Provided, That in case where the lawsuit is instituted by stating the grounds under Article 490(2) 4, 7 and 8, it shall be reckoned from the date on which the plaintiff has come to know about the existence of such grounds.

(4) This lawsuit shall not be instituted if three years have elapsed since the date on which a nullification judgment has been pronounced.

Article 496 of the Civil Procedure Act (Declaration of Nullification Judgment) In a nullification judgment, the invalidity of securities or deeds shall be declared.

Article 497 of the Civil Procedure Act (Effect of Nullification Judgment) When a nullification judgment has been rendered, the requester therefor may allege the right based on the securities or deeds against the person to bear the obligation pursuant to the securities or deeds.

Reference Case Supreme Court Decision 67Da1731, Sept. 26, 1967 (Jip 15-3, Min 157)

Plaintiff-Appellee KRNC Co. (Seyang Law Firm, Attorneys Kim Gwang-hoon, et al., Counsel for plaintiff-appellee)

Defendant-Appellant Sambo Development Co. (HM Law Office, Attorney Jwa Sae-joon, Counsel for defendant-appellant)

Independent Party Intervenor Comtec Systems Co., Ltd.

Judgment of the court below Seoul High Court Decision 2011Na51535, 53876 decided November 20, 2011

Disposition The appeal is dismissed. The costs of appeal are assessed against Defendant.

Reasoning The grounds of appeal are examined.

1. Regarding ground of appeal Nos. 1 and 2

A. Article 360(1) of the Commercial Act provides that “a share certificate may be invalidated through process of public summons,” and Article 360(2) of the same Act provides that “no person who has lost his/her share certificate shall request its re-issuance to the company, unless he/she has obtained a judgment of nullification with respect thereto.” This means that a share certificate is a marketable security that certifies ownership of stocks, so an additional share certificate which certifies the same stocks cannot be issued without nullifying the original share certificate. Therefore, a share certificate which is re-issued without a judgment of nullification violates the above provisions, and is thus invalid.

Meanwhile, a judgment of nullification against a stock or certificate is only effective to the extent of recovering the public summons applicant’s status so that it is on the same level as the status when he/she owns the relevant stock or certificate, and does not finalize that the applicant is the actual rightsholder. Therefore, the rightful rightsholder of the stock or certificate does not lose actual rights even in the case of a judgment of nullification, but is merely unable to exercise his/her rights regarding the stock or certificate (see Supreme Court Decision 67Da1731, Sept. 26, 1967, etc.). And if a suit of objection is filed against the judgment of nullification in accordance with Articles 490 and 491 of the Civil Procedure Act, and the following decision finalizes cancelment of the judgment of nullification, the judgment becomes retroactively ineffective, and the stock or certificate owned by the rightful rightsholder retroactively recovers its effectiveness.

Yet in cases such as the above, where the judgment of nullification is cancelled but the share certificates re-issued based on the judgment before its cancellation remains effective and can be bona fide acquired, the rightful rightsholder may lose his/her rights or is unable to exercise the rights. This is a harsh conclusion for the rightful rightsholder who has never actually lost the share certificate and actively cancelled an unjust judgment of nullification through a suit of objection, and also contradicts the purpose of the Civil Procedure Act which is to protect rightful rightsholders by enabling them to cancel judgments of nullification acquired by an unentitled person through falsehood or other illegitimate means through a suit of objection. Additionally, neither the Civil Procedure Act nor the Commercial Act has provisions regulating the effectiveness of cancellation trials against a judgment of nullification.

Therefore, even where certain share certificates were re-issued upon a judgment of nullification nullifying previous share certificates, if a suit of objection was filed against the judgment, and subsequently a judgment of cancellation is announced and finalized, the re-issued certificates can be retroactively nullified and their owners cannot bona fide acquire them afterwards.

The court below determined that when a trial cancelling a judgment of nullification is finalized, the judgment is then retroactively ineffective and the state prior to the judgment is recovered, so a share certificate re-issued upon the judgment is ineffective in itself since it was doubly and illegitimately issued, and thus the independent party intervenor may not bona fide acquire re-issued certificates, even if he/she acquired them.

Upon examining the records in light of the above legal principles, the court below’s aforementioned determination is just, and contrary to the allegations in the grounds of appeal, there were no errors by misapprehending the legal principles on the effectiveness of a judgment of nullification or the bona fide acquire of re-issued share certificates.

B. Meanwhile, as the independent party intervenor’s bona fide acquire of re-issued certificates are not acknowledgeable, the ground of appeal allegation that the status of the intervenor who bona fide acquired re-issued share certificates takes priority over that of the Plaintiff who is merely the security owner is without merit.

2. Regarding ground of appeal No. 3

The court below determined that since the case of application for deciding stock purchase price finalized that the purchase price for the stock of this case is 3,116,380 won per 1 stock, Defendant may no longer argue that the price decided by the court is too high.

Upon examining the records in light of related legal principles, the court below’s aforementioned determination is just, and contrary to the allegations in the grounds of appeal, there were no errors by misapprehending the legal principles on stock purchase price in accordance with exercise of purchase claims.

3. Conclusion

Therefore the appeal is dismissed, and the costs of appeal are assessed against the defeated party. It is decided as per Disposition at the assent of all participating Justices.

Justices

Ko Young-han (Presiding Justice)

Yang Chang-soo (Justice in charge)

Park Byoung-dae

Kim Chang-suk