Complete Guide to Share Issuance Invalidation Lawsuits in South Korea: Legal Requirements to Practical Response
Table of Contents
1. Overview of Share Issuance Invalidation Lawsuits
A share issuance invalidation lawsuit in South Korea is a legal action filed to nullify the effect of new share issuance when the company’s issuance contains legal defects. Since a company’s capital increase directly affects the ownership structure of existing shareholders, the South Korean Commercial Act establishes strict regulations regarding the procedures and methods of new share issuance.
When share issuance violates legal provisions or articles of incorporation, or is conducted through grossly unfair methods, it becomes necessary to invalidate the effect of such issuance. However, since invalidating already-issued shares could cause significant disruption to the company’s capital structure and shareholder composition, the South Korean Commercial Act restricts claims for share issuance invalidation to be made only through litigation.
2. Legal Framework and Requirements
The legal basis for share issuance invalidation lawsuits is stipulated in Article 429 of the South Korean Commercial Act. According to this provision, invalidation of share issuance can only be claimed through litigation by shareholders, directors, or auditors within six months from the date of share issuance.
Article 431 of the South Korean Commercial Act regulates the scope of effect of invalidation judgments. An invalidation judgment has effect against third parties (erga omnes effect), but does not affect rights and obligations between the company and third parties that arose before the judgment became final.
The essential requirements for filing a share issuance invalidation lawsuit in South Korea are as follows:
- Standing to Sue: Limited to shareholders, directors, or auditors.
- Filing Period: Must be filed within six months from the date of share issuance.
- Jurisdiction: Exclusive jurisdiction of the district court having jurisdiction over the company’s principal place of business.
3. Major Grounds for Share Issuance Invalidation
The major grounds for recognizing share issuance invalidation are broadly categorized into statutory violations, violations of articles of incorporation, and issuance through grossly unfair methods.
3.1 Statutory Violations
Major examples of statutory violations under South Korean law include:
- Issuing new shares without board resolution required under Article 416 of the South Korean Commercial Act or with defective resolutions
- Improperly restricting or infringing shareholders’ subscription rights under Article 418 of the South Korean Commercial Act
- Failing to fulfill announcement or notification obligations under Article 419 of the South Korean Commercial Act
3.2 Articles of Incorporation Violations
When a company’s articles of incorporation contain special provisions regarding new share issuance, violations of such provisions can constitute grounds for invalidation. Specific examples include:
- Issuing shares exceeding the limit set in the articles of incorporation
- Issuing shares of a different class than specified in the articles of incorporation
- Issuing shares without going through shareholder meeting resolution when required by the articles of incorporation
3.3 Grossly Unfair Methods
Share issuance through grossly unfair methods includes the following cases:
- Preferentially allocating new shares to specific shareholders under favorable conditions only
- Issuing new shares with the improper purpose of diluting specific shareholders’ equity
- Issuing new shares at significantly low prices, damaging the interests of the company or existing shareholders
- Unreasonably discriminating against shareholders holding the same class of shares, violating the principle of shareholder equality
4. Comparative Analysis: Invalidation Lawsuit vs. Injunction
Share issuance invalidation lawsuits and share issuance effect suspension injunctions have fundamental differences in purpose and effect.
| Category | Share Issuance Invalidation Lawsuit | Share Issuance Effect Suspension Injunction |
|---|---|---|
| Legal Nature | Main lawsuit | Provisional disposition |
| Purpose | Confirmation of share issuance invalidation | Temporary suspension of share issuance effect until main lawsuit result is confirmed |
| Effective Date | Takes effect prospectively after judgment becomes final | Immediate effect suspension upon favorable ruling |
| Legal Basis | South Korean Commercial Act Article 429 | South Korean Civil Execution Act Article 300 |
| Subject of Review | Existence of grounds for share issuance invalidation | Right to be preserved and necessity of preservation |
In practice, it is common to file a share issuance invalidation lawsuit while simultaneously applying for a share issuance effect suspension injunction after share issuance is completed. However, since share issuance invalidation judgments only take effect prospectively once finalized (South Korean Commercial Act Article 431, Paragraph 1), injunctions suspending the effect of share issuance would result in consequences exceeding the content of the final main judgment, violating the supplementary principle of provisional dispositions, and are therefore generally not permitted according to the prevailing view in South Korean jurisprudence.
5. Litigation Procedures
Share issuance invalidation lawsuits proceed through the following step-by-step procedures:
- Complaint Filing: The plaintiff (shareholder, director, auditor) files a complaint with the district court having jurisdiction over the company’s principal place of business.
- Preparatory Proceedings: The court systematically organizes the parties’ arguments and evidence through preparatory proceedings.
- Trial Dates: The plaintiff and defendant (company) present their respective arguments and submit evidence in court.
- Judgment Pronouncement: The court determines whether grounds for share issuance invalidation exist and pronounces judgment.
- Judgment Finalization: The judgment becomes final after the appeal period expires or after higher court judgment is rendered.
- Registration Procedures: Once the invalidation judgment becomes final, the company must complete invalidation registration at its principal and branch office locations within one month (South Korean Commercial Act Article 432).
6. Corporate Practical Response Strategies
Systematic strategies for effective corporate response when facing share issuance invalidation lawsuits are as follows:
6.1 Preventive Measures
- Ensure complete legality of board resolution procedures (quorum, convening procedures, voting methods, etc.).
- Clearly document justifiable reasons when restriction of subscription rights is necessary.
- Prepare materials in advance that can objectively prove the fairness of new share issuance conditions.
- Thoroughly fulfill announcement and notification obligations to shareholders.
- Strictly comply with share payment procedures.
6.2 Defense Strategies
- Thoroughly verify whether the filing period has expired (6 months from share issuance date).
- Carefully examine whether the plaintiff has standing to sue.
- Systematically organize materials that can prove the legality of share issuance procedures.
- Actively argue justification based on the business judgment principle.
- For injunction applications filed simultaneously with lawsuits, argue violation of the supplementary principle of provisional dispositions.
7. Compliance Checklist
Key matters that corporate executives must verify to prevent legal disputes in advance when issuing new shares:
7.1 Legality of Decision-Making Process
- Were board convening procedures conducted legally?
- Was the board resolution quorum satisfied?
- Are the resolution contents clear and specific?
- Are all necessary matters recorded in the minutes?
7.2 Subscription Rights Matters
- Were existing shareholders’ subscription rights sufficiently guaranteed?
- When restricting subscription rights, do justifiable reasons exist?
- In case of third-party allocation, can the necessity and fairness be proven?
7.3 Disclosure Duties Compliance
- Were notification or announcement obligations to shareholders completely fulfilled?
- Were share subscription forms properly maintained according to law?
- Were share payment procedures legally complied with?
7.4 Fairness Assessment
- Was the issuance price determined fairly?
- Are there no unfavorable conditions for specific shareholders?
- Is the purpose of new share issuance legitimate and consistent with the company’s interests?
8. Summary and Implications
Legal issues related to share issuance have decisive impact on corporate governance structure and capital raising, making professional and experienced legal counsel absolutely necessary. It is most important to prevent potential future disputes through thorough legal review from the planning stage of corporate share issuance.
K&P Law Firm has experience representing an Incheon-area company and achieving victory in a share issuance effect suspension injunction case in South Korea. In this case, our firm successfully argued that share issuance invalidation judgments only take effect prospectively once finalized according to South Korean Commercial Act Article 431, Paragraph 1, and succeeded in having the injunction application that exceeded the content of the main final judgment dismissed. Through such professional response, the client company was able to maintain the effect of share issuance and continue smooth business operations.
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