Supreme Court: No Claim for Stock Certificate Issuance or Delivery for Shares Listed After Enforcement of the Electronic Securities Act

Published 26 Aug.2024 14:33(KST)

The Supreme Court has ruled that since the enforcement of the "Act on Electronic Registration of Stocks and Bonds (Electronic Securities Act)," valid stock certificates cannot be issued or exist for listed stocks, and therefore, claims for issuance or delivery of stock certificates cannot be made.

[Image source=Beomryul Newspaper]

The Supreme Court Civil Division 1 (Presiding Justice No Tae-ak) overturned the lower court's ruling that favored Plaintiff A in the stock certificate delivery lawsuit (2020Da273403) filed against Company B last month on the 25th, and remanded the case to the Seoul High Court.

In March 2012, A was appointed as an auditor at venture company B, which develops and manufactures medical biomaterials. In December 2014, at an extraordinary shareholders' meeting, B resolved to grant stock options for 497,000 common shares (at 1,400 KRW per share) to 40 executives and employees including A. The exercise period was set from December 2016 to December 2021.

In March 2018, A expressed his intention to exercise stock options for his 80,000 shares, but B refused, citing that A did not meet the two-year continuous service requirement stipulated in the "Special Measures for the Promotion of Venture Businesses Act (Venture Business Act)" and the company’s articles of incorporation due to the expiration of his auditor term. Consequently, A filed a lawsuit.

The first and appellate courts ruled that B must issue and deliver stock certificates to A. They found that A met the two-year continuous service requirement for exercising stock options, and even if he did not meet the requirement due to not being reappointed, it was not due to A’s fault, so he could still exercise the stock options.

The Supreme Court also found no error in the lower courts’ legal interpretation regarding the exercise conditions of stock options. However, the Supreme Court, on its own authority, ruled that even if A exercises the stock options, he cannot claim issuance or delivery of stock certificates from B.

The Electronic Securities Act was enacted to establish the basis for an electronic registration system that replaces the issuance of stock certificates. Since its enforcement on September 16, 2019, valid stock certificates cannot be issued or exist for listed stocks. Instead, stocks are registered in the electronic registration ledger of designated institutions. Transfers of electronically registered stocks are conducted through an "account-to-account replacement electronic registration procedure" upon application to the institution where the stocks are electronically registered or the account management institution.

The court stated, "Before the conclusion of the lower court proceedings on July 17, 2020, the electronic registration system under the Electronic Securities Act was already in effect, and around that time, B’s stocks were listed on KOSDAQ. If B issues new stocks, it must apply for new electronic registration of the stocks and must not issue stock certificates. Therefore, even if A exercises the stock options, he cannot claim issuance or delivery of stock certificates from B."

Furthermore, the court explained, "The lower court’s ruling ordering B to issue and deliver stock certificates representing 482,443 common shares issued by B to A after receiving the stock option exercise payment from A reflects a misunderstanding of the legal principles regarding stock issuance, electronic registration, and transfer of electronically registered stocks after the enforcement of the Electronic Securities Act."