[edit] Supreme Court Decision 99Da48979 delivered on May 14, 2002 [Damages]
【Main Issues】
[1] Whether those who have acquired securities in an open market for securities trading can be regarded as `those who acquired the securities' within the meaning of Article 14 of the old Securities and Exchange Act (negative)
[2] Who can claim the protection afforded by the 'market promotion' in accordance with the old Securities and Exchange Act, Article 188-4, Paragraph 3 and the Rules of the said Act, Article 83-8
【Summary of Decision】
[1] Considering that the Securities and Exchange Act maintains a sharp distinction between the requirements of notice in the market for securities offering and the requirements of notice in the market for securities trading; that there are separate provisions for liabilities arising from a breach of these distinct requirements; and that Article 14 of the Securities and Exchange Act specifically provides for the types of breach and the extent of damages recoverable under that provision while shifting the burden of proof in order to protect investors participating in the market for securities offering, it must be construed that those who have acquired securities in an open market for securities trading, such as the plaintiffs, may not rely on Article 14 of the Act to claim damages against those who were involved in the preparation of the registration statement containing misrepresentations or inaccurate information although it is, of course, another matter whether the plaintiffs would have been successful had they pursued a claim for damages against them under the Civil Code in general.
[2] Market promotion is a special duty which the manager of an underwriting syndicate is required to undertake because of the extreme fragility of our market for public offering and trading of securities. It is an exceptional duty which can hardly be reconciled with the principles of market economy and autonomy of individuals. From the standpoint of the lead manager who has entered into an underwriting agreement with an issuer, the aim of market promotion is not to protect those who hold shares already issued before the effective date of the public offering, but those investors who hold shares which are issued according to the underwriting agreement between the lead manager and the issuer. It is one of the basic premises of a stock market that prospective investors are expected to exercise their own good judgment to evaluate the worth of a company and to analyze fluctuations of its stock price after the public offering. If they do decide to invest in a particular company, they should do so at their own risk. Market promotion must be understood together with these basic premises of a stock market. Although market promotion may have to target the entirety of a particular company's shares traded in the stock market because of the nature of the trading mechanism at the Korea Stock Exchange and Korea Securities Dealers Automated Quotation (Kosdaq), the investors who could rightly claim the protection afforded by the market promotion - and they alone can claim damages caused by the abandonment of market promotion - are those who participated in the public offering and acquired the shares issued in accordance with the underwriting agreement or the investors who purchased such shares from these initial buyers. Those who purchased undesignated or unspecified shares of the same company in an open market for stock trading cannot claim the protection of market promotion.
【Reference Provisions】 [1] the old Securities and Exchange Act (amended by Act No. 5423 of December 13, 1997) Article 14 / [2] the old Securities and Exchange Act (amended by the Act No. 5423 of December 13, 1997) Article 188-4, Paragraph 3, the old Rules of the said Act (amended by Rules No. 15687 of February 24, 1998) Article 83-8, the Civil Code, Article 750
Article 14 of the old Securities and Exchange Act (amended by Act No. 5423 of December 13, 1997) (Liabilities for False Statements) If a registration statement or a prospectus (including a preliminary prospectus) as prescribed in Article 12 includes false statements or misrepresentations or fails to state or represent material facts and, as a result, causes loss to an acquirer of securities, the following persons shall be liable to compensate the damages provided that the same shall not apply where a person who is to be held liable for compensation proves that the inaccuracy was not knowable in spite of his exercise of due diligence, or where the acquirer of the securities knew the true fact at the time of offering to acquire them:
1. The person who appears as the applicant of the registration statement and directors of the corporation (or its promoters if the registration statement was filed before the incorporation) at the time of registration
2. Certified public accountants or appraisers who certified or signed a statement that matters stated in the registration statement or documents attached thereto are true or accurate
3. A person who has entered into a contract with the issuer to underwrite the securities
4. A person who prepared or distributed the prospectus
5. A holder of outstanding securities offered for sale at the time of registration for public offering of outstanding securities.
Article 188-4 of the old Securities and Exchange Act (amended by Act No. 5423 of December 13, 1997) (Prohibition of Unfair Transaction such as Market Manipulation) (1), (2) <omitted>
(3) No person shall effect, entrust or to be entrusted with, independently or jointly, the sale and purchase of securities in a securities market or Association brokerage market with a view to pegging or stabilizing securities price in violation of the provisions of the Rules of this Act.
(4) <omitted>
Article 83-3 of the old Rules of the Securities and Exchange Act (amended by Rules No. 15687 on February 24, 1998) (Special Treatment for Foreign Corporation, etc.)
(1) Articles 186-2, 186-3 and 186-5 of the Act shall not apply to a foreign corporation, etc. enumerated in the following subparagraphs:
1. Foreign government
2. Foreign local government
3.Foreign public institutions and international financial organizations to be designated by the Financial Supervisory Commission.
(2) Where a foreign corporation, etc. (excluding those enumerated in Paragraph (1) above; throughout this Article, foreign corporation, etc. shall not include those enumerated in Paragraph (1) above) submits an annual report, a semi-annual report or equivalent documents prescribed in Article 186-4 of the Act to the relevant foreign country, it may, within 10 days from the date of such submission, file an annual report, a semi-annual report or the equivalent documents submitted to the foreign country concerned along with a summarized Korean translation.
(3) The contents, method and format of the Korean translation as provided in Paragraph (2) above shall be determined by the Financial Supervisory Commission.
【Plaintiff, Appellant & Appellee】 Moon Yong-hoon and 1 other(Attorney Kang Jong-pyo, Counsel for plaintiff-appellant & appellee)
【Defendant, Appellee & Appellant】 Good Morning Securities Co., Ltd. (formerly Ssang Yong Securities Investment Co., Ltd.)(Attorney Lee Seh-jak, Counsel for defendant-appellee & appellant)
【Court of First Instance】 Seoul District Court Judgment 98Gahap8944 delivered on August 21, 1998
【Court of Second Instance】 Seoul High Court Judgment 99Na50355 delivered on July 23, 1999
【Disposition】 The judgment of the court below regarding an alternative claim shall be reversed. The corresponding part of this case shall be remanded to Seoul High Court. The remaining grounds for appeal regarding the principal claim shall be dismissed.
【Reasoning】 The grounds for appeal are examined as follows (supplementary grounds submitted after the legal due date are examined only to the extent that they concern grounds for appeal submitted within the due date):
1. The court below, having duly assessed the evidence before it, found the following facts:
A. On June 30, 1997, Pentec Corporation ("Pentec") submitted the registration statement to the Securities Management Committee reporting its proposed issuance of 440,000 shares of registered securities (par value was set at 5,000 won per share) by way of a public offering where the defendant was to act as the underwriting manager forming a syndicate with Samsung Securities and Ileun Securities. It was set out in the registration statement that the offering price was to be at 60,000 won, the total amount of capital to be raised was 26,400 million won and the effective date was to start on July 23, 1997 ending on July 24, 1997(Pentec subsequently submitted an amended registration statement on July 13, 1997 setting the offering price at 65,000 won thus increasing the total capital to be raised at 28,600 million won). At about that time, the defendant entered into the underwriting agreement with Pentec and submitted to the Securities Management Committee a preliminary prospectus which contained substantially the same information as set out in the registration statement.
B.The registration statement and the preliminary prospectus were deposited with the Securities Management Committee, Korea Stock Exchange, Pentec, the defendant and 35 other Securities firms' head offices and branches and they remained available for consultation by the public. Both documents contain a statement that the underwriters assume a joint responsibility to do the market promotion for three months following the effective date of the public offering; that the guide price for the market promotion would be the offering price; and that the underwriters would refrain from doing anything which may adversely affect the market promotion. On September 24, 1997, it was also publicly announced in accordance with Securities and Exchange Act, Article 188-4, Paragraph 3, Enforcement Decree of the Securities and Exchange Act, Article 83-11, Paragraph 2, Securities and Exchange By-laws, Article 36-4 that the defendant was to start the market promotion for the newly issued shares of Pentec starting from September 24, 1997 until November 26, 1997 at the price of 65,000 won.
C. However, because of the sudden onslaught of the foreign exchange crisis, stock prices rapidly fell at about that time. The defendant started market promotion from October 28, 1997 and has, until November 24, bought 280,400 shares at the price of 65,000 won. But as the stock prices continued to fall and substantial quantity of shares were on the market for sale, the defendant could not continue with the purchase for lack of fund. The defendant abandoned the market promotion for the shares of Pentec on November 24, 1997. These events were reported in the Economic Daily and other newspapers on the following morning.
D. On November 18, 1997, the plaintiff Moon Yong-hoon bought 1,500 shares of Pentec at the price of 65,100 won, the plaintiff Lee Mi-sun bought 1,500 shares of Pentec at the price of 65,300 won through credit transactions. On November 24, as the price of Pentec's shares continued to fall, they attempted to sell all their Pentec shares at the price of 59,800 won. Not a single share was sold. On the following day, they made another attempt to sell all their Pentec shares at the price of 55,100 won. The plaintiff Moon Yong-hoon managed to sell 100 shares and the plaintiff Lee Mi-sun sold 200 shares only. On November 26, as the price of Pentec shares plummeted to 50,700 won, they concluded that there was no prospect of having their Pentec shares sold in the normal course of stock trade and got in touch with the defendant on the telephone asking that the defendant should buy the remainder of their Pentec shares at the price of 65,000 won, which had been announced as the market promotion price. They subsequently made the request in writing(Purchase request, Exhibits A4-1 and A4-2) where they stated that if the defendant should fail to buy their shares at the said price by December 3, 1997, they would sell their shares on December 4, 1997 at the market price and claim the difference from the defendant as damages. The defendant did not respond to their request and the plaintiffs sold their Pentec shares in the normal course of stock trade as described in the Schedule (Sale of shares) attached to the judgment of the court below.
E. The number of Pentec shares which were on offer, the number of purchase applications for Pentec shares, daily calling prices, the size of Pentec share trade, lowest prices and closing prices of Pentec shares and various other stock market indices during the period of November 24 and November 28, 1997 are set out in the Schedule (Market conditions) attached to the judgment of the court below.
2. On the first ground for appeal by plaintiffs
A. The plaintiffs asserted that under the old Securities and Exchange Act (revised by the Law No. 5423 of December 13, 1997), Article 14, the defendant is liable to compensate for the loss sustained by the plaintiffs who purchased the shares in question because the defendant was the party who entered into an underwriting agreement with the issuer of the securities; prepared and distributed the registration statement and preliminary prospectus which either contain misrepresentations or fail to represent material facts. The court below held that the omission to state the possibility of abandoning the market promotion in the registration statement or the preliminary prospectus did not amount to a `misrepresentation or failure to represent material facts' within meaning of Article 12 of the old Act. The court below accordingly dismissed the plaintiffs' claim.
B. Considering that the Securities and Exchange Act maintains a sharp distinction between the requirements of notice in the market for securities offering and the requirements of notice in the market for securities trading; that there are separate provisions for liabilities arising from a breach of these distinct requirements; and that Article 14 of the Securities and Exchange Act specifically provides for the types of breach and the extent of damages recoverable under that provision while shifting the burden of proof in order to protect investors participating in the market for securities offering, it must be construed that those who have acquired securities in an open market for securities trading, such as the plaintiffs, may not rely on Article 14 of the Act to claim damages against those who were involved in the preparation of the registration statement containing misrepresentations or inaccurate information although it is, of course, another matter whether the plaintiffs would have been successful had they pursued a claim for damages against them under the Civil Code in general.
The plaintiffs have purchased the shares in question in the stock exchange, which is a market for securities trading. They therefore cannot be regarded as `those who acquired the securities' within the meaning of Article 14 of the old Securities and Exchange Act which leads to the conclusion that, even if they did sustain losses as alleged, they cannot claim damages under the said Act.
Though the court below's conclusion was based on different reasons, as long as it is identical with the conclusion of this Court, the plaintiffs' argument that the court below made an error in its understanding of Article 14 of the old Securities and Exchange Act cannot be accepted.
3. On the first ground for appeal by defendant (the part of alternative claim)
A. In the court below, the plaintiffs pursued an alternative claim for damages under the Civil Law alleging a tort. The court below found that the defendant invited the general public to apply to purchase Pentec shares stating in its preliminary prospectus that securities companies participating in the underwriting syndicate managed by the defendant jointly assumed the responsibility to do the market promotion for three months starting from the effective date of the public offering; that the defendant had the duty to perform in good faith the task which was thus announced to the investors; and that if the defendant's failure to perform the duty should cause loss to a party, the defendant would be liable to compensate for the loss. The court below also found that the plaintiffs relied on the defendant's representation announced to the public and proceeded to purchase Pentec shares; that, during the period of market promotion, the plaintiffs attempted to sell the shares at a price lower than the offering price; and that the plaintiffs specifically requested the defendant to purchase the shares in question. The court below then held that the defendant ought to have purchased the shares in question from the plaintiffs at the market promotion price which it announced to the public.
As the defendant failed to do so, the court below concluded, the defendant is liable to compensate the plaintiffs for the loss caused by the defendant's failure to purchase the shares in question.
B. However, market promotion is a special duty which the manager of an underwriting syndicate is required to undertake because of the extreme fragility of our market for public offering and trading of securities. It is an exceptional duty which can hardly be reconciled with the principles of market economy and autonomy of individuals. From the standpoint of the lead manager who has entered into an underwriting agreement with an issuer, market promotion is not designed to protect those who hold shares already issued before the effective date of the public offering, but those investors who hold shares which are issued according to the underwriting agreement between the lead manager and the issuer. It is one of the basic premises of a stock market that prospective investors are expected to exercise their own good judgment to evaluate the worth of the company and to analyze the fluctuation of its stock price after the public offering. If they do decide to invest in a particular company, they should do so at their own risk. Market promotion must be understood together with these basic premises of a stock market. Although market promotion may have to target the entirety of a particular company's shares traded in the stock market because of the nature of the trading mechanism at the Korea Stock Exchange and Korea Securities Dealers Automated Quotation (Kosdaq), the investors who could rightly claim the protection afforded by the market promotion - and they alone can claim damages caused by the abandonment of market promotion - are those who participated in the public offering and acquired the shares issued in accordance with the underwriting agreement or the investors who purchased such shares from these initial buyers. Those who purchased undesignated or unspecified shares of the same company in an open market for stock trading cannot claim the protection of market promotion.
C. In this case, Pentec had already issued 1 million shares before the public offering on July 23, 1997, where further 440,000 shares were issued. Among those 440,000 shares, 264,000 shares were put on the stock market for the general public and the remaining 176,000 shares were allocated to the employee stockholders association and financial institutions. Once the public offering was completed and the Pentec's shares went on trading, however, the entirety of Pentec's 1,440,000 shares were being traded on the stock market. If market promotion is understood without any restriction on its scope of operation, any and all holders of the entire 1,440,000 shares of Pentec would have to be protected. Such a conclusion is evidently unfair because the lead manager would have to bear the brunt of having to protect the interests of holders of 1 million shares which it had no involvement in issuing. This point appears to be conceded by the plaintiffs themselves who stated in their written submission dated June 9, 1998, `the duty of market promotion extends to the entirety of 440,000 shares issued on the occasion of the public offering'(page 68 of the record). The plaintiffs again asserted in their reply to the defendant's brief of October 1, 1999, `as the plaintiffs purchased the shares during the period of market promotion from the initial buyers who participated in the public offering, the plaintiffs are in the same position as those who participated in the public offering' thus reconfirming that the duty of market promotion does not extend to the entirety of 1,440,000 shares but only to 440,000 shares which the defendant underwrote. The plaintiffs purchased the shares in question on November 18, 1997, which was somewhat removed from the announced date for the commencement of market promotion, September 24, 1997, or from the date when the defendant actually started the market promotion, which was October 28, 1997. Moreover, the plaintiffs purchased the shares from Korea Stock Exchange, which is an open market for stock trading. It is therefore impossible to ascertain whether the shares purchased by the plaintiffs were from the 440,000 shares underwritten by the defendant or from the 1 million shares already issued before the public offering. Also, it is doubtful whether the fall of Pentec's shares which continued well beyond the period of market promotion was indeed caused by the defendant's abandonment of market promotion. It is rather more than likely that the fall was due to the general collapse of the stock prices caused by the foreign exchange crisis of the time. (In March 1998, when the stock market index recovered from the collapse of the market caused by the foreign exchange crisis, Pentec shares have for some time been traded at a price higher than the price at which the plaintiffs sold their Pentec shares or even higher than the market promotion price announced by the defendant.) In the light of the foregoing, the plaintiffs cannot be regarded as among the investors who can claim the protection of market promotion. Nor is there any showing of the causal relation between the plaintiffs' loss and the defendant's abandonment of market promotion.
D. It follows that the decision of the court below regarding the plaintiffs' alternative claim cannot be allowed to stand as it was flawed by a mistaken understanding of the scope of protection afforded by market promotion. The defendant's first ground for appeal can be accepted.
4. For these reasons, the judgment of the court below regarding the plaintiffs' alternative claim shall be reversed and the corresponding part is remanded to Seoul High Court without considering the remaining grounds for appeal by plaintiffs and defendants. The plaintiffs' appeal as to the main claim shall be dismissed. This decision is delivered with the assent of all Justices who reviewed the appeal.
Justices Suh Sung (Presiding Justice)
Lee Yong-woo
Bae Ki-won (Justice in charge)
Park Jae Yoon
- This is a legal document in the public domain according to Korean Copyright Law.
