Court Rules "Forcible Acquisition of Minority Fractional Shares Without Court Approval Is Illegal"; First Recognition of Majority Shareholder's Liability for Damages

Controlling Shareholder Reduced Value of Unlisted Fractional Shares Without Court Approval
Seoul High Court: "Contrary to the Principle of Shareholder Equality and the Ideals of Minority Shareholder Protection"

For the first time, a court has put a halt to the so-called "squeeze-out" practice, in which a majority shareholder pushes out minority shareholders through stock consolidation and the handling of fractional shares (danju, shares less than one unit). The High Court ruled that it is illegal for the majority shareholder to acquire minority shareholders' shares at an unfairly low price, drawing attention to the upcoming Supreme Court decision on the matter.

Controlling Shareholder Reduced Share Value of Unlisted Fractional Shares Without Court Approval

The Seoul High Court Civil Division 18-1 (Presiding Judges: Wang Jeongok, Park Seonjun, and Jin Hyeonmin) recently overturned the first-instance ruling that had dismissed the claims of 15 minority shareholders of Saint-Gobain Korea Holdings (formerly Hankook Glass Industries) in their damages lawsuit against the company, and partially ruled in favor of the plaintiffs (2023Na2049630). The court ordered Saint-Gobain to pay a total of 215.9 million won, with individual awards ranging from 1.2 million to 86.1 million won to the plaintiffs.

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Saint-Gobain Korea Holdings, the first glass manufacturer in Korea, applied for voluntary delisting in 2018 and was delisted at the end of that year. Subsequently, Saint-Gobain continued to buy back its own shares, and by the end of 2019, the proportion of shares held by minority shareholders had shrunk to 1.37%. In 2020, Saint-Gobain carried out a forced paid cancellation and stock consolidation at a ratio of 100 to 1, turning 10,000 company shares into just one share. During this process, minority shareholders with fewer than 100 shares had their holdings forcibly sold as fractional shares, which Saint-Gobain then acquired. As a result, all minority shareholders, including the plaintiffs, lost their shares entirely, and Saint-Gobain became a company almost entirely owned by the majority shareholder and related parties.

The compensation paid by Saint-Gobain to the plaintiffs for their fractional shares was 4.57 million won per share. This was calculated by dividing the company's net asset value of approximately 472.1 billion won (as of the end of December 2020, as assessed by an accounting firm) by the total number of issued shares, 100,000. The plaintiffs argued that the fair compensation for their fractional shares should have been 5.82 million won per share, 1.2 million won more than what was paid by Saint-Gobain.

In court, the plaintiffs argued that Saint-Gobain had acquired its own shares through means other than auction when handling fractional shares, and therefore should have obtained court approval in accordance with the Commercial Act. Article 443(1) of the Commercial Act stipulates that listed shares must be sold through the exchange, and unlisted shares must, in principle, be sold by auction. If sold by other means, court approval is required.

The plaintiffs also argued that Saint-Gobain undervalued the shares in the process of calculating the net asset value per share, resulting in the company's value being transferred entirely to the majority shareholder and causing losses to the minority shareholders. Specifically, they claimed that Saint-Gobain distorted the calculation by excluding treasury shares (22,000 shares) from the numerator, while including them in the denominator as part of the total number of issued shares, thereby skewing the results.

In response, Saint-Gobain argued that, according to Article 341-2 of the Commercial Act, which states, "A company may acquire its own shares if necessary for the handling of fractional shares," it was not obligated to obtain court approval when acquiring the plaintiffs' fractional shares as treasury shares.

Seoul High Court: "Contrary to the Principle of Shareholder Equality and the Ideals of Minority Shareholder Protection"

The first-instance court found that "although the procedure of acquiring the plaintiffs' fractional shares as treasury shares without court approval was illegal, it cannot be said that the plaintiffs suffered actual damages as a result," and dismissed the plaintiffs' claims.

However, the appellate court determined that not only was Saint-Gobain's procedure for acquiring its own shares illegal, but the plaintiffs did, in fact, suffer substantial losses as a result.

The appellate court stated, "Article 443(1) of the Commercial Act requires court approval for the sale of fractional shares to prevent the risk of unfair pricing when a company sells such shares at its own discretion, thereby upholding the principle of shareholder equality and the ideals of minority shareholder protection. Since Saint-Gobain is an unlisted company, it was required to obtain court approval to acquire the plaintiffs' fractional shares as treasury shares, and its failure to do so was illegal."

The court further noted, "If the net asset value per share is calculated based on the accounting firm's valuation and divided by the total number of issued shares, including treasury shares, it is difficult to achieve substantive fairness between shareholders who hold fractional shares and those who do not, and this runs counter to the ideals of minority shareholder protection. When minority shareholders lose their status as shareholders, there arises the possibility that the net asset value attributed to the company will be transferred to the remaining shareholders."

The court continued, "To prevent the unfair transfer of wealth, when handling fractional shares, the value of treasury shares should be added to the company's net asset value before dividing by the total number of issued shares, or the net asset value should be divided by the number of issued shares excluding treasury shares. This ensures that the existence of treasury shares is consistently reflected in both the numerator (net asset value) and the denominator (number of shares) when calculating the value per share."

This is the first time a court has recognized the liability of a majority shareholder for damages in a lawsuit brought by ousted minority shareholders.

Kim Kwangjoong, an attorney at Class Hangyeol Law Firm who represented the plaintiffs, stated, "The court has clearly confirmed the illegality of the practice of handling fractional shares through treasury share acquisition without court approval, and of the majority shareholder's conduct in unfairly transferring minority shareholders' wealth through the use of treasury shares."

Kim Hongki, a professor at Yonsei University Law School and former president of the Korean Economic Law Association, commented, "Although this case was corrected through litigation, institutional problems remain, so similar incidents are bound to occur in the future. In Japan, shareholders who oppose stock consolidation can apply to the court to determine the purchase price, but we have no such system. Court approval for the handling of fractional shares is a non-contentious matter, so shareholders who are deprived of their shares have no means of recourse," emphasizing the need for amendments to the Commercial Act.

Meanwhile, as Saint-Gobain filed an appeal against the appellate court's ruling at the end of last month, the case will now be reviewed by the Supreme Court.

※This article is based on content supplied by Law Times.

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