Daegu Corporate Specialist Attorney | Assists a Corporate Client and Invalidates a New Share Issuance on Appeal

The Daegu corporate attorney set out to ascertain the facts of the case in order to succeed on appeal.

The clients were the in-house director and the auditor of a stock company located in Daegu, and managed the company together with the defendant, who was the representative director.

The defendant, exercising the authority of representative director, convened a board of directors meeting and, through a resolution, issued several hundred thousand new shares.

The problem is that the clients, who are shareholders of the company, had never received notice of the convening of the board meeting and had never participated in the resolution.

The clients filed a lawsuit to invalidate the new share issuance, arguing that 'the new share issuance is void because it violated the requirements for notice of convening and resolution of the board of directors.'

However, at the first instance, the court dismissed the clients' suit on the basis of the Supreme Court precedent that 'even if there is a defect in the board of directors' resolution concerning a new share issuance, the board's resolution is merely an internal decision of the company, and therefore does not affect the validity of the new share issuance.'

An issuance of new shares means the issuance of newly created shares out of the unissued portion of the total number of shares to be issued, after a stock company has been established.

In other words, new shares mean shares that have been newly issued and not yet subscribed for, and a feature of new shares is that they may be issued when there is a need for an inflow of additional capital.

The Daegu corporate attorney argued that, because the payment of funds through the issuance of new shares and the effect of the capital increase arise, a large number of interested parties (creditors, business partners, and the like) may emerge beyond those who subscribed for the new shares, including counterparties who transacted with the company on the premise of such an improved financial condition, and that its invalidation must therefore be approached with caution.

The Daeryun Daegu corporate specialist attorney emphasized that the clients had never received notice of the convening of a board of directors meeting regarding the new share issuance and had never participated in the resolution.

That is, he argued that because this new share issuance violated the requirements for notice of convening and resolution of the board of directors, it amounted to a nullity.

The Daegu corporate specialist attorney stated, "Since Article 429 of the Commercial Act, which provides for an action to invalidate a new share issuance, does not separately specify the grounds for invalidity, the requirement for a claim to enjoin a new share issuance under Article 424 of the Commercial Act, namely 'an issuance of shares in violation of statutes or the articles of incorporation, or by a markedly unfair method,' may be considered as a ground for invalidity of a new share issuance."

The Daegu corporate specialist attorney argued that the purpose of the new share issuance itself did not meet the requirements for issuance.

Under Article 418(2) of the Commercial Act, a company's allotment of new shares to a third party must be limited to cases necessary to achieve the company's management objectives, such as the introduction of new technology or the improvement of its financial structure.

This new share issuance, however, failed to prove the management necessity for the issuance.

The Daeryun attorney emphasized that the court below, despite the fact that this new share issuance could not be regarded as having satisfied the substantive requirement of management necessity, dismissed the plaintiffs' claim on the premise that the substantive requirement had been satisfied, and that this was therefore unlawful due to a misunderstanding of the legal principles or a violation of the rules of evidence.

A Daegu attorney specializing in corporate matters understands the reasoning of the judge and knows which points should be emphasized, and, based on that understanding, provides a defense suited to the client's situation.

At Daeryun LLC, veteran attorneys with an average of more than 20 years of legal experience oversee cases and derive client-tailored solutions.

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