In an appeal to the Supreme Court with respect to the validity of a delisting filed by the Korea Exchange (the “KRX”) against Kukje Corp. (“Kukje”), the Supreme Court (3rd Division) ruled in favor of Kukje on November 15, 2007, upholding the lower court’s decision that the provision of the Securities Listing Regulation of the KRX (the “SLR”), which stipulates that an application for commencement of reorganization proceeding is a Delisting Event. is invalid.
Developments in the Case
In January 1999, when the reorganization proceeding for Kukje began, the SLR provided that an application for commencement of a reorganization proceeding is a Pre-Delisting Event.
In January 2003, the SLR was amended to provide that an application for commencement of reorganization proceeding is a Delisting Event, with a supplementary provision that any company whose reorganization proceeding began prior to the amendment but did not end until December 31, 2004, should be de-listed. Such a strict supplementary provision, however, was eased on December 27, 2004, to stipulate that any company which meets the re-listing requirements based on a 2004 business report shall not be de-listed.
Kukje failed to meet its re-listing requirements, triggering a Delisting Event, and filed a complaint arguing that the SLR provision relating to delisting and the supplementary provision are illegal and invalid. Besides Kukje, Choongnam Spinning Co., Ltd. (“Choongnam Spinning”), Donghae Pulp Co., Ltd. and Trigem Computer, etc. brought similar lawsuits, and Kukje won the case at the court of first instance (Seoul Southern District Court). Then, the appellate court (Seoul High Court) reversed the lower court’s decision for Choongnam Spinning and affirmed the lower court’s decision for Kukje.
The KRX appealed both cases to the Supreme Court. However, the Supreme Court dismissed the appeals on November 15, 2007, which was the first decision by the Supreme Court as to the validity of the SLR provision stipulating that an application for commencement of a reorganization proceeding is a Delisting Event.
The court victory by Kukje is expected to put an end to similar cases and cause the SLR to be amended. The decision of the Supreme Court is summarized as follows: (i) The KRX is a private corporation and the listing of securities is subject to private law as “listing contracts.” Thus, listing regulations have the nature of the terms and conditions of contracts. However, given that the KRX performs a public interest, any listing regulation in material non-compliance with the principles of equity and of exercising public power for appropriate purposes is invalid; and (ii) the delisting of shares of a company that applies for commencement of a reorganization proceeding causes significant loss for existing shareholders in violation of the principle to exercise public power for appropriate purposes, discriminates against such a company in breach of the principle of equity given that other companies that elect to be under co-management as set out in the Corporate Restructuring Promotion Act are not delisted, and runs counter to the intent of the Corporate Reorganization Act by materially limiting the right that a listed company has to undergo reorganization.
