Delisting is an important mechanism designed to maintain market integrity and protect investors.

However, questions continue to arise as to whether sufficient safeguards exist for minority shareholders, who are often the parties most directly affected by delisting decisions.

In particular, where a motion for an injunction suspending the effectiveness of a delisting decision is granted, as seen in the recent case, the delisting process may be halted for an extended period, potentially depriving shareholders of a practical opportunity to recover their investments.

 Q1. Can shareholders seek damages from a company or its officers in connection with a delisting? 

A delisting does not automatically give rise to liability for damages.
However, where unlawful conduct by company officers is established, claims for damages may be available within certain limits.

Under Article 401(1) of the Korean Commercial Act, directors may be liable for damages if they intentionally or through gross negligence fail to perform their duties and thereby cause harm to a third party.

For example, courts have held that where a director conceals a deterioration in a company's financial condition through false disclosures and investors purchase shares without knowledge of those facts, damages resulting from a subsequent decline in share price may constitute direct losses recoverable by shareholders.

By contrast, where a company suffers losses due to an officer’s embezzlement or breach of fiduciary duty and the resulting decline in share value causes losses to shareholders, such losses are generally regarded as indirect damages, making recovery under Article 401 of the Commercial Act more difficult.


 Q2. Can legal liability arise from false disclosures? 

Yes.

If material facts are falsely stated or omitted in business reports, quarterly reports, or semiannual reports, liability for damages under Article 162 of the Financial Investment Services and Capital Markets Act may arise.

However, investors must still establish a causal connection between the false disclosure and their losses.
If shares were purchased after the market effect of the false disclosure had already dissipated, liability may not be recognized.


 Q3. If a company is delisted because of a disclaimer of audit opinion, can officers still be held liable? 

Not necessarily.
A disclaimer of audit opinion constitutes a formal ground for delisting under Korea Exchange regulations.

Accordingly, shareholders seeking damages must prove not only that a delisting occurred but also that unlawful conduct by officers ultimately caused the delisting itself.
In practice, establishing that causal connection is often the most significant challenge.


 Q4. How does minority shareholder protection differ between listed and unlisted companies? 

Shareholders of listed companies benefit from protections provided by the trading market and disclosure system.

Listed-company shareholders can generally sell their shares through the exchange and have access to information regarding the company’s financial condition and business operations through mandatory disclosures.

In addition, special damages provisions under capital markets laws may apply in cases involving false disclosures.

By contrast, shareholders of unlisted companies often must rely on over-the-counter transactions, making it difficult to locate appropriate buyers, while publicly available information is generally more limited.

Claims for damages are therefore typically based on the general provisions of civil and commercial law.


 Q5. Why is the liquidation trading period important? 

Because it often represents a shareholder’s final realistic opportunity to recover value from an investment after a company has been delisted.

Courts have described liquidation trading as a system designed to provide shareholders of a delisted company with one final opportunity to recover capital.

As a result, the loss of liquidation trading opportunities may have an even greater impact on investors than the delisting itself.


 Q6. What problems arise when liquidation trading is suspended by an injunction, as in the case? 

The most significant issue is that shareholders effectively lose access to an official market in which to trade their shares.

Ordinarily, once delisting is confirmed, shareholders may dispose of their shares through the liquidation trading process.
However, if a company obtains an injunction suspending the effectiveness of the delisting, the liquidation trading process may also be suspended.

Where a company is additionally excluded from designated over-the-counter trading platforms due to a disclaimer of audit opinion, shareholders may face the following circumstances:

• Inability to sell shares through liquidation trading
• Restricted access to over-the-counter trading platforms
• Reliance on unofficial private transactions

As a result, shareholders may find themselves holding shares that are extremely difficult to dispose of in practice.


 Q7. Why does the exercise of shareholder rights become difficult even though shareholders remain shareholders? 

This highlights the problem of the “disappearance of the infrastructure necessary for the exercise of shareholder rights.”

Shareholders remain shareholders even after delisting and continue to possess various legal rights.

These may include the right to seek an injunction against unlawful conduct by directors, derivative action rights, the right to request a shareholders’ meeting, and the right to seek appointment of an inspector.

However, these rights are primarily tools for monitoring management and pursuing accountability.
They do not provide shareholders with a means of selling their shares in a functioning market.

In other words, although shareholder rights remain intact, the trading infrastructure necessary to realize the economic value of those rights may disappear first.


 Q8. What are the limitations of the current delisting system? 

The current framework governing the removal of listed companies from the market is highly sophisticated.

However, post-delisting shareholder protection remains heavily dependent upon liquidation trading as the primary means of capital recovery.
When liquidation trading is suspended due to an injunction, there are effectively no meaningful alternative mechanisms available to protect investors.

Consequently, it may be argued that shareholders, who suffer the most direct consequences of delisting, can be placed in the most vulnerable position.


 Q9. What regulatory reforms does the case suggest may be necessary? 

· Short-Term Reform Measures

Where an injunction suspending the effectiveness of a delisting is granted, consideration could be given to allowing temporary access to designated over-the-counter trading platforms or establishing an alternative temporary trading market.

It may also be appropriate to require companies seeking such injunctions to submit investor-protection measures together with their applications.
Examples could include enhanced disclosure obligations or opportunities for shareholders to sell their holdings.

· Medium- and Long-Term Reform Measures

It may be necessary to establish clear legal and regulatory provisions governing alternative trading mechanisms when liquidation trading is suspended.

In addition, policymakers may consider more nuanced approaches based on the reasons for a disclaimer of audit opinion, such as distinguishing between accounting fraud and going-concern concerns when determining eligibility for over-the-counter trading access.

 

The case demonstrates that, while the delisting system is designed to promote market integrity, institutional mechanisms for addressing the practical losses experienced by minority shareholders may be comparatively limited.

In particular, where liquidation trading is suspended through an injunction, shareholders may find themselves unable to dispose of their shares despite continuing to own them.
Although a variety of shareholder rights remain available under current law, those rights have inherent limitations when it comes to addressing liquidity concerns directly.

The impact of future legal and regulatory developments, as well as evolving judicial decisions, on the protection of minority shareholders will therefore continue to warrant close attention.

-
Attorney Jun-woo Park | jwpark@onelawpartners.com
-
Public Relations Team, One Law Partners, LLC | pr@onelawpartners.com