Court: "Unlisted Stock Transactions... Market Price Changes When 'Management Control Premium' Applies"

[Asia Economy Reporter Kim Daehyun] A court ruling has determined that when a 'control premium' is recognized in the trading of unlisted stocks, the market price of the same stock can be set differently.

According to the legal community on the 13th, the Seoul Administrative Court, Administrative Division 8 (Chief Judge Lee Jonghwan) recently ruled in favor of plaintiff A, the CEO of an entertainment agency, in a lawsuit seeking cancellation of a gift tax imposition filed against the Banpo Tax Office chief.

Previously, as of October 31, 2015, A was the largest shareholder holding 5,500 shares (55%) out of 10,000 issued shares of the unlisted entertainment agency B, and a month later acquired 4,500 shares (45%) at 1.38 million KRW per share, thereby owning 100% of the shares. Five days later, he sold 7,000 shares (70%) at 1.8 million KRW per share to another entertainment agency.

The Seoul Regional Tax Office judged that A acquired the shares at 1.38 million KRW per share, which was below the market price, and notified the Banpo Tax Office, the responsible tax office, of the taxation data. The Banpo Tax Office imposed and notified A of gift tax amounting to 471 million KRW and additional tax of approximately 221 million KRW in 2018.

A filed an administrative lawsuit, arguing that "the nature of the two transactions is significantly different." A's side claimed in court, "As the company’s CEO and largest shareholder, he contributed to the company’s rapid growth and there was a control premium due to his influence over the company," and "after serious negotiations, the market price was determined at 1.38 million KRW per share." They also emphasized that "the 45% stake is a minority shareholding with limited influence over the company, whereas the 70% stake includes non-financial values such as control over the company."

The court ruled in favor of A. The court stated, "The transaction price of 1.8 million KRW per share cannot be said to reflect only the value of 7,000 shares of the company’s stock, but also reflects the value of control or management rights over the company obtained along with the acquisition of those shares," and "therefore, the National Tax Service’s disposition based on the premise that the market price of the disputed shares in this case is 1.8 million KRW per share is illegal."

This content was produced with the assistance of AI translation services.