Deleted from Shareholder Register? Complete Guide to Shareholder Status Protection and Damages Claims in South Korea

During internal corporate disputes in South Korea, situations may arise where shareholders are unilaterally deleted from the shareholder register or denied notice of shareholder meetings. How can shareholders protect their rights in such cases? Through a successful case handled by Atlas Legal at the Incheon District Court, we examine the key issues of shareholder status confirmation claims and damages claims.

1. Case Overview

This case involves plaintiffs who were shareholders of Company A filing claims for shareholder status confirmation and damages against the company and its CEO in South Korea.

The plaintiffs had been registered as shareholders of the company since 2018, each holding 6,000 shares. However, despite the company and CEO promising in a shareholders’ agreement concluded around January 2020 to pay 12% monthly returns, they failed to fulfill this obligation. Subsequently, when convening multiple shareholder meetings, they excluded the plaintiffs from the shareholder register and failed to send meeting notices.

Particularly, in the shareholder register dated April 16, 2024, the plaintiffs’ names were completely deleted.

2. What is Shareholder Status Confirmation Claim?

Meaning of Shareholder Status Confirmation Claim

A shareholder status confirmation claim is a lawsuit to obtain the qualification-granting effect of being able to exercise shareholder rights without proving one’s substantial rights in relation to the company. However, it does not receive creative effect through the shareholder register entry.

Therefore, a person who is not presumed to be a shareholder cannot exercise shareholder rights simply by receiving a name transfer (Supreme Court Decision 2005Da45537, September 14, 2006).

Criteria for Determining Substantial Shareholders

Even if a third party who is not a shareholder on the shareholder register actually made the payment for new share subscription, various legal relationships can be assumed as the underlying causal relationship, including nominee trust relationships, partnership relationships where capital payment is one party’s investment obligation, or simple borrowing relationships for new share subscription funds.

Therefore, without clarifying the causal relationship or substantial relationship of the share subscription procedure by the third party, one cannot conclude that the third party is the substantial shareholder based on a nominee trust relationship simply because the third party made the payment for new share subscription (Supreme Court Decision 2007Da27755, September 6, 2007).

To recognize a third party who is not a shareholder on the shareholder register as a substantial shareholder, it is insufficient that the third party merely paid the share subscription amount. The determination must be made comprehensively considering the internal relationship between the third party and the shareholder on the register, the circumstances and purpose of share subscription and shareholder register entry, and the exercise of shareholder rights after registration (Supreme Court Decision 2016Da240338, May 16, 2019).

3. Legal Effect and Presumption of Shareholder Register Entry

Effect of Shareholder Register Entry

A nominal shareholder registered on the shareholder register receives only the qualification-granting effect of being able to exercise shareholder rights without proving their substantial rights in relation to the company, but does not receive creative effect through the shareholder register entry. Therefore, a person who has not acquired substantial shareholder status cannot exercise shareholder rights simply by receiving a name transfer.

Share Subscription Process in This Case

In this case, when the plaintiffs subscribed to new shares around January 2020 at the request of the defendant CEO, they agreed with the defendant CEO to subscribe as follows: nominee B for 19,500 shares and each plaintiff for 6,000 shares, with the plaintiffs and B as the respective new share subscription parties, and paid a total of 150,000,000 won to the defendant company as the new share subscription payment.

About one month later, B made a declaration of intent to the defendant company and CEO that 18,000 shares out of the 37,500 shares were transferred to the plaintiffs, 6,000 shares to each plaintiff.

Presumptive Power of Shareholder Register Entry

Although the defendant company registered the plaintiffs as shareholders in the shareholder register dated April 16, 2020, it deleted the plaintiffs from the shareholder register dated May 24, 2022, and claimed that B was the substantial shareholder.

However, while the plaintiffs were registered as shareholders on the defendant company’s shareholder register as described above, the defendant company sent notices of shareholder meetings dated February 16, 2021, March 8, 2021, and March 4, 2022 to the plaintiffs, and the plaintiffs attended all these meetings and exercised voting rights with B as their representative.

Additionally, the defendant company sent a notice of an extraordinary shareholder meeting dated September 6, 2024, held after the first instance judgment date, to the plaintiffs, and the plaintiffs attended the shareholder meeting and exercised voting rights with the defendant CEO designated as their representative.

Court’s Determination

The court noted that the defendant company deleted the plaintiffs from the shareholder register on May 24, 2022, about two years after April 16, 2020, when the plaintiffs were first registered on the defendant company’s shareholder register.

Although the defendant company argued that it sent the meeting notice to respect the first instance judgment and because there might be defects in the shareholder meeting convocation procedure depending on future trial results, the first instance judgment was pronounced on June 14, 2024, while the defendant company re-registered the plaintiffs as shareholders in the shareholder register dated April 16, 2024, about two months before the judgment date.

4. Omission of Shareholder Meeting Notice and Damages

Importance of Shareholder Meeting Notice

A shareholder who did not receive notice of a shareholder meeting can claim damages from the company. In this case, although the defendant company deleted the plaintiffs from the shareholder register dated May 24, 2022, and restored the plaintiffs’ names in the shareholder register dated April 16, 2024, as long as the defendant company argues that this restoration was merely to respect the first instance judgment and disputes that the substantial shareholder is B, the plaintiffs have an interest in seeking confirmation through this lawsuit.

Scope of Damages

The plaintiffs are shareholders owning 6,000 shares each out of the 200,000 shares issued by the defendant company. Nevertheless, the defendant company deleted the plaintiffs from the shareholder register dated May 24, 2022, preventing the plaintiffs from attending shareholder meetings and exercising voting rights.

The court determined that the company and directors bear liability for damages for such infringement of shareholder rights.

5. Requirements for Consolation Money Claims

Liability of CEO and Auditor

The defendant CEO arbitrarily deprived the plaintiffs of their shareholder status, and the defendant auditor, as the company’s auditor with duties to audit the overall business execution of directors and to request injunctions against directors when they engage in acts violating laws or articles of incorporation, failed to prevent the defendant CEO’s illegal acts.

Recognition of Consolation Money

Therefore, the defendant CEO and auditor have an obligation to pay 20,000,000 won each as compensation for the plaintiffs’ mental damages.

6. Key Points of the Judgment

The Incheon District Court ruled as follows:

• All appeals by the defendants are dismissed
• Appeal costs shall be borne by the defendants

The court recognized that the plaintiffs agreed to subscribe to all 37,500 shares of the new shares with the defendant company around January 2020, and accordingly, the entire amount of 150,000,000 won was paid as the new share subscription payment in B’s name. About one month later, B made a declaration of intent to the defendant company and CEO that 18,000 shares out of the 37,500 shares were transferred to the plaintiffs, 6,000 shares to each plaintiff.

7. Practical Implications and Response Strategies

This judgment provides important implications for protecting shareholder status in internal corporate disputes in South Korea.

Importance of Shareholder Register Entry

When registered as a shareholder on the shareholder register, the company must send shareholder meeting notices to that shareholder, and failure to do so may affect the validity of shareholder meeting resolutions.

Necessity of Shareholder Status Confirmation

When a company arbitrarily deletes a shareholder from the shareholder register or fails to send shareholder meeting notices, the shareholder must protect their rights through a shareholder status confirmation lawsuit.

Damages Claims

A shareholder who could not attend a shareholder meeting due to not receiving meeting notice can claim damages from the company and directors. Particularly, consolation money for mental damages is also claimable.

Securing Evidence

To prove shareholder status, it is important to secure objective evidence such as proof of new share subscription payment, copies of shareholder registers, shareholder meeting notices, and dividend receipt records.

Conclusion

When shareholder rights are infringed in internal corporate disputes, rights can be protected through shareholder status confirmation claims and damages claims. Particularly when arbitrarily deleted from the shareholder register or denied shareholder meeting notices, prompt legal response is necessary.

Atlas Legal recently successfully protected shareholders’ rights by winning both the first instance judgment at the Incheon District Court and the appeal in such shareholder rights infringement cases in South Korea. If you need professional legal advice on internal corporate disputes, shareholder disputes, or management control disputes in South Korea, please feel free to consult with us.