Corporate Investment Attraction | Supreme Court Judgment Holding That a Person Involved in Investment Negotiations May Qualify as an "Agent of the Listed Company" and Bear Liability for Conveying Undisclosed Information

The lower court (Seoul High Court) entered an acquittal on the charges against the defendant. The gist is as follows.

The Supreme Court emphasized the legislative purpose of Article 174 of the Financial Investment Services and Capital Markets Act (Prohibition of Use of Material Undisclosed Information), namely the protection of investors and the fairness of the market, and held that construing the scope of an agent narrowly would create a regulatory gap.

The core of the Supreme Court's determination is as follows.

• In determining whether a person is an agent, what matters is the substance rather than the form, position, or title.
• A person may qualify as an agent if he performed company affairs on the company's behalf, in accordance with the company's intent, upon delegation or entrustment of those affairs.
• If a person in fact performed company affairs, such as advising on contract terms, participating in negotiations, sharing the course of the negotiations and exchanging opinions, and coordinating meeting schedules, he may be regarded as an "agent."

In short, the purport is that the lower court's premise that "there is no agency because there is no legal power of agency" is difficult to accept.

The Supreme Court held that it cannot be concluded that "information prior to the finalization of the final terms is not material information."

It reaffirmed the legal principle that, even if the internal decision-making process has not been completed, information may be recognized as material undisclosed information once it has become sufficiently concrete that a reasonable investor would assess its likelihood of realization and its significance and reflect this in an investment judgment.

It emphasized that the information in this case, structured as a capital increase for consideration and a change of the largest shareholder, ordinarily constitutes information that may have a material effect on the stock price.

The Supreme Court specifically pointed out that the trading conduct of the acquaintances who heard the relevant information from the defendant is difficult to view as "coincidental investment."

• Intensive purchases over approximately 20 days immediately before disclosure
• Use of leverage, such as loans and borrowings, rather than surplus funds
• Sale of the entire holding within a short period after disclosure and realization of substantial gains
• A sharp purchasing pattern differing from their prior investment tendencies, and the lack of clarity as to the reasons for purchase

Taking these circumstances together, the Supreme Court reversed and remanded the case on the basis that the possibility that the information was used following the defendant's provision of it is difficult to exclude, and that the lower court's acquittal was premature.

An act of using material undisclosed information is not limited to "directly purchasing shares."

Article 174 of the Financial Investment Services and Capital Markets Act prohibits the following acts.

The types that frequently arise in practice are as follows.

• A participant in investment attraction negotiations hinting to an acquaintance that "a big contract is coming soon"
• A company officer purchasing through an account in a family member's name before disclosure
• An outside advisor sharing negotiation information while recommending a purchase
• A recipient of material information re-conveying it through social media, group chats, and the like
• Indirect purchases using borrowed-name accounts or corporate accounts

The conduct at issue in this case likewise involved a structure in which a person who participated in corporate investment attraction negotiations conveyed information to acquaintances in a hobby club, and those acquaintances purchased intensively immediately before disclosure and sold immediately after disclosure.

The Supreme Court held that, even without a direct instruction to "buy" or "sell," the possibility of the use of information may be determined by considering, as a whole, the time the information was created, the circumstances of its conveyance, the trading pattern, and the method of financing.

When you seek advance advice on corporate investment attraction from our firm, attorneys experienced in corporate matters and in financial matters work together to design a system for managing undisclosed information (access rights, recordkeeping, and communication rules), thereby preventing insider trading risks in advance.

In addition, where outside collaborators such as investors, brokers, and advisors are involved, we put in place training, pledges, and trading-restriction measures on the premise that they may be assessed as "agents," thereby preventing disputes and investigations.

Where a problem has already arisen, through collaboration with attorneys experienced in criminal matters and with the evidence examination center, we can reconstruct the facts with a focus on transaction records, lines of communication, and the time the information was created, and systematically support the response to the investigation and the defense strategy at the criminal trial.

If you need assistance with a related matter, you are welcome to make a 🔗legal consultation reservation with a corporate attorney.