Extract taken from 'The Securities Ligation Review – edition 5'
Private enforcementi Forms of actionGeneral action
Any victim who incurs damages because of securities-related wrongdoings (false statement, insider trading, market manipulation and unfair trading) may file an action seeking damages in the form of individual actions or joint actions under the Civil Procedure Act (CPA). If the securities-related wrongdoings constitute torts under the Civil Act, the victim may elect to claim either damages under Article 750 of the Civil Act or damages under the FSCMA.Class action
When at least 50 victims, who have common interests (who have legal or de facto material issues in common) and hold, in the aggregate, at least 1/10,000th of the total number of the outstanding securities of the defendant company, incur damages in the course of the trade or other transactions of securities because of false statements, insider trading, market manipulation, unfair trading or defective audits as set forth in the FSCMA, they may, after obtaining permission from a court, file a securities-related class action against the issuer of the securities to seek damages under Articles 125, 162, 170, 175, 177 and 179 of the FSCMA under the Securities-related Class Action Act (SCA).Derivative suits
A shareholder of a corporation listed on a stock exchange (regardless of the number of shares held by the shareholder) may demand that the corporation file a claim against a person who derives a short-swing profit as set forth in Article 172(1) of the FSCMA for the return of such profit, and the shareholder may make the claim on behalf of the corporation, if the corporation does not file the claim within two months of receiving the demand.
If any director or auditor, or a person involved in the execution of duties of a company, engages in securities-related wrongdoings (false statement, insider trading, market manipulation or unfair trading) and, therefore, is liable for damages sustained by the company, any shareholder who holds no less than 1/100th (1/10,000th, in the case of a corporation listed in a stock exchange) of the total issued and outstanding shares may file an action on behalf of the company under the Commercial Act.ii ProcedureGeneral action
If an action seeking damages is filed in relation to securities-related wrongdoings (false statement, insider trading, market manipulation or unfair trading), the procedures shall be in accordance with civil procedures under the CPA. Under the CPA, there is no discovery system as provided in Anglo-American law. However, it is possible to secure relevant documents from a defendant by obtaining a court's order for submission of documents during the course of a trial.Class action
Securities-related class actions are under the exclusive jurisdiction of the collegiate panel of a district court that has jurisdiction over the location of a defendant's general forum, and unlike a general civil action, both plaintiff and defendant of a securities-related class action are required to appoint attorney-at-law as their counsel. Further, the CPA applies mutatis mutandis to other matters related to a trial. Thus, as in the case of a general civil action, even though there is no discovery system, it is possible to secure relevant documents from a defendant by obtaining a court's order for submission of documents during the course of a trial.Derivative suits
If a shareholder of a corporation files an action seeking the return of a short-swing profit under the FSCMA on behalf of the corporation, there is no special restriction on jurisdiction or pleading methods. However, the shareholder, as a plaintiff, should remain as a shareholder of the corporation until the close of the action. With respect to other matters, general civil procedures apply.iii SettlementsGeneral action
In a general civil action, there is no restriction on settlement between parties or requirement for court approval of a settlement agreement.Class action
In the case of securities-related class actions, the settlement of a lawsuit or waiver of claims shall be invalid without approval of a court, and where a court intends to determine whether to grant the settlement of a lawsuit or waiver of claims, the court shall give prior notice thereof to the class members and provide an opportunity to present opinions.Derivative suits
If a shareholder of a corporation files an action seeking the return of a short-swing profit under the FSCMA on behalf of the corporation, there is no restriction on settlement or requirement for court approval of a settlement agreement. However, if a shareholder of a corporation files an action on behalf of the corporation under the Commercial Act, no relevant party may waive claims or come to a settlement without permission from the court.iv Damages and remediesFalse statement
The amount of damages for a false description or representation of any material fact in a registration statement or an investment prospectus or a business report is the amount estimated by subtracting any of the following amounts from the amount actually paid by the claimant for acquiring the securities at issue the market price of the securities at the time of the last hearing of the lawsuit filed for the claim of damages (referring to an estimate disposal price if there is no market price available) or the disposal price if the securities are disposed of before the closing of the proceedings. However, the Supreme Court, in many instances, reduces the actual amount of damages by applying the legal principle of limitation on liability based on comparative negligence or the principle of fairness in determining the amount of damages.
If the claimant claims damages under Article 750 of the Civil Act on grounds that a false description or representation of a material fact in a registration statement, investment prospectus or a business report constitutes a tort, the amount of damages will be equal to the difference between the price the securities would have been without the false description or representation; and the price the securities were reduced to because of this false description or representation. The claimant will bear the burden of proof for the amount of damages.Insider trading
The amount of a short-swing profit earned by an insider that is required to be returned shall be calculated based on the following formulas:
- where specific securities have been sold or purchased only once within six months of the purchase or sale in question being made, the profit is calculated by multiplying the difference between the unit selling price and the unit buying price by the smaller of the volume purchased and the volume sold (matching volume) and subtracting trading commission, securities transaction tax and special tax for rural areas applicable to the matching volume; and
- where specific securities have been sold or purchased twice or more within six months of the purchase or sale in question, the profit is calculated by applying the formula in (a) above to the portion purchased at the earliest point of time and the portion sold at the earliest point in time and applying the same formula to portions purchased and sold thereafter consecutively until the portions purchased or sold (to which the formula is applied) are completely exhausted.
There is no special provision within the FSCMA regarding the calculation method of damages caused by the use of material non-public information. Accordingly, under general Korean legal principles, the amount of damages will be equal to the difference between the stock price after the lapse of a certain period of time from the disclosure of the non-public information and the stock price at which an insider actually conducted the transaction. However, it has been pointed out that it is not easy for the claimant to prove the actual damage under such formula. Thus, a new provision has been recently added to the CPA stipulating that 'if the fact that damages incurred is acknowledged but it is very difficult to prove the specific amount of damages owing to the nature of the case concerned, a court may determine a reasonable amount of damages by taking into account the overall purpose of the pleadings and all relevant circumstances based on its examination of evidence', and accordingly, the court may determine such amount of damages on an ex officio basis.Market manipulation
There is no special provision within the FSCMA regarding the amount of damages for market price manipulation. However, in the Hyundai Electronics case, the Korean Supreme Court recognised 'the difference between the price that would have been set if there had been no market price manipulation (normal stock price) and the price set as a result of the market price manipulation at which the victim actually conducted the transaction (manipulated stock price)' as the amount of damages for the market price manipulation under general Korean legal principles concerning the calculation of the amount of damages (the 'difference theory'). However, the Korean Supreme Court, in many instances, reduces the actual amount of damages by applying the legal principle regarding limitation on liability based on comparative negligence or the principle of fairness in determining the amount of such damages.Unfair trading
There is no special provision within the FSCMA regarding the amount of damages for unfair trading. As such, general Korean legal principles concerning the calculation of the amount of damages also apply to unfair trading cases, and the amount of damages will be equal to 'the difference between the price that would have been set if there had been no unfair trading and the price set as a result of unfair trading at which the victim actually conducted the transaction'. Likewise, the actual amount of damages may be reduced based on comparative negligence or fairness principles.