신세계 대표소송의 몇 가지 쟁점 – 경업, 회사기회유용, 자기거래 (A Few Issues of the Shinsegae Derivative Suit - Competition, Appropriation of Corporate Opportunity, and Self-Dealing -)

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초록

This paper aims to summarize and analyze a few significant issues of the Shinsegae derivative suit, which was one of the most high-profile corporate law cases in Korea in the recent years. In this case, the defendant (a director of the parent company who was also a son of the largest shareholder of the parent company) acquired a large block of the new shares of its subsidiary after the board of the parent company had decided not to exercise its preemptive right to subscribe to the new shares of the subsidiary. As a result, the defendant came to own more than 80% of the shares of the subsidiary, which was operating a department store in the city of Gwangju (a de facto branch of the parent company which was operating dozens of department stores nationwide).
The plaintiffs, i.e., shareholders of the parent, filed for damages against the defendant (and a few other parent directors) based on three grounds: the defendant breached his duty (i) not to compete with the company, by operating a department store through the subsidiary, (ii) not to engaged in the self-dealing transactions, by acquiring ‘control over the subsidiary’ from the parent where he served as directors, and (iii) not to appropriate corporate opportunities, by taking the opportunity to subscribe to the new shares of the subsidiary.
The Supreme Court rejected all three arguments. It denied existence of competition between the defendant (through the subsidiary) and the parent company on the ground that the subsidiary, a de fact branch of the parent company, was an integral part of the parent’s business. It did not recognize the relevant transaction as a self-dealing subject to a board approval requirement because the transaction occurred between the subsidiary and the defendant, not between the parent and the defendant(parent’s director). Regarding the corporate opportunity claim, the Supreme Court recognized the possibility that the opportunity to subscribe to the new shares of the subsidiary (by way of the statutory preemptive right of the existing shareholders) may constitute a corporate opportunity of the parent company. The court, however, respected the decision of the parent’s board of directors not to exercise the preemptive right. Since the board led to such a decision after deliberation of the relevant facts such as the unstable financial conditions of the parent and the poor business prospect of the subsidiary, the court held that such a decision fell within the protection of the business judgment rule.
This paper analyzes the court decision in greater detail. While concurring with the decision in its conclusion, this paper provides an alternative logic to reject the “breach of duty not to compete” claim. Although the Korean Commercial Code provides several types of conflict transactions in separate provisions as if they are always distinguishable without overlap (i.e., competition with the company, self-dealing, and appropriation of the corporate opportunity), this paper argues that a single underlying transaction may constitute at the same time different types of the conflict transactions prescribed by the code. It implies that the remedies for the breach of these duties should not be cumulative and the board approval for one type of conflict transactions may be valid as an approval for another type of conflict transactions so long as the relevant information was duly disclosed.

영어초록

This paper aims to summarize and analyze a few significant issues of the Shinsegae derivative suit, which was one of the most high-profile corporate law cases in Korea in the recent years. In this case, the defendant (a director of the parent company who was also a son of the largest shareholder of the parent company) acquired a large block of the new shares of its subsidiary after the board of the parent company had decided not to exercise its preemptive right to subscribe to the new shares of the subsidiary. As a result, the defendant came to own more than 80% of the shares of the subsidiary, which was operating a department store in the city of Gwangju (a de facto branch of the parent company which was operating dozens of department stores nationwide).
The plaintiffs, i.e., shareholders of the parent, filed for damages against the defendant (and a few other parent directors) based on three grounds: the defendant breached his duty (i) not to compete with the company, by operating a department store through the subsidiary, (ii) not to engaged in the self-dealing transactions, by acquiring ‘control over the subsidiary’ from the parent where he served as directors, and (iii) not to appropriate corporate opportunities, by taking the opportunity to subscribe to the new shares of the subsidiary.
The Supreme Court rejected all three arguments. It denied existence of competition between the defendant (through the subsidiary) and the parent company on the ground that the subsidiary, a de fact branch of the parent company, was an integral part of the parent’s business. It did not recognize the relevant transaction as a self-dealing subject to a board approval requirement because the transaction occurred between the subsidiary and the defendant, not between the parent and the defendant(parent’s director). Regarding the corporate opportunity claim, the Supreme Court recognized the possibility that the opportunity to subscribe to the new shares of the subsidiary (by way of the statutory preemptive right of the existing shareholders) may constitute a corporate opportunity of the parent company. The court, however, respected the decision of the parent’s board of directors not to exercise the preemptive right. Since the board led to such a decision after deliberation of the relevant facts such as the unstable financial conditions of the parent and the poor business prospect of the subsidiary, the court held that such a decision fell within the protection of the business judgment rule.
This paper analyzes the court decision in greater detail. While concurring with the decision in its conclusion, this paper provides an alternative logic to reject the “breach of duty not to compete” claim. Although the Korean Commercial Code provides several types of conflict transactions in separate provisions as if they are always distinguishable without overlap (i.e., competition with the company, self-dealing, and appropriation of the corporate opportunity), this paper argues that a single underlying transaction may constitute at the same time different types of the conflict transactions prescribed by the code. It implies that the remedies for the breach of these duties should not be cumulative and the board approval for one type of conflict transactions may be valid as an approval for another type of conflict transactions so long as the relevant information was duly disclosed.

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