The President, representative director, etc. of Company A, a KOSDAQ listed company, issued non-guaranteed convertible bonds with a face value of KRW 10 billion to PEF B, a private equity fund, for the purpose to use the subscription price for the Company A’s working capital. One of conditions precedent for PEF B’s subscription of the convertible bonds set by asset manager of Company B, however, was that the President of Company A should make payment of stocks for capital increase by issuing new shares to third-party in the amount of KRW 7 billion. Company A’s President, with insufficient capital in hand at the time, fulfilled the capital increase by issuing new shares by making payment for the subscription of new shares to the Company with the funds borrowed from a lending company in the amount of KRW 7 billion. Company A, then, immediately after the registration of the capital increase by issuing new shares withdrew KRW 7 billion from Company’s account and repaid the loan amount to the lending company. After a few days of a public notice, stating that Company A’s capital increase by issuing new shares was completed, PEF B paid the subscription price of the convertible bonds in the amount of KRW 10 billion to Company A.

The prosecution prosecuted Company A’s President, etc., for having conspired to make disguised payment in violation of the Commercial Act and to commit unfair practices under the Capital Markets Act by making a false public notice. The prosecution also considered the convertible bonds with a face value of KRW 10 billion as unjust enrichment, based on which the prosecution demanded a fine of KRW 20 billion against the defendant after application of mitigation of punishment pursuant to Article 443 Section 1 of the Capital Markets Act.

During the trial, intense arguments were made over the issue of the amount of unjust enrichment while it was also argued whether the payment structure was disguised payment. The amount of unjust enrichment was significant due to the relevant penalty clauses in the Capital Markets Act where, if the amount of unjust enrichment is admitted to be KRW 10 billion, the defendant will be sentenced to a life sentence or imprisonment of three (3) years or more pursuant to Article 443 Section 2(1) and will be also required subject to fines in between three (3) times and five (5) times of the amount of unjust enrichment pursuant to Article 443 Section 1 and Article 447. In addition, for those who fail to pay the fines, 1,000 or more days of detention in a workhouse can be additionally sentenced pursuant to Article 70 Section 2 of the Criminal Act.

In this circumstance, it is of importance in this case to convince the court that the unjust enrichment was difficult to calculate, which will only result in punishment of either one (1) or more years of imprisonment or payment of KRW 500 million or less in fines.

A precedent shows that if the fluctuations in stock price are caused by other factors in addition to unfair trade practices, it is considered that unjust enrichment is difficult to calculate. According to the precedent, “in a case where an individual X has recommended purchasing Company Y’s stocks since around May 2007 through his lectures based on media interviews of the defendant, CEO of Company Y, although X’s lectures had some influence on the rise in stock price in consideration of the factors including the number of members of an investment research center operated by X and the fact that the abnormal rise in stock price of Company Y was accelerated since September 2007 due to the purchase by X’s members, unjust enrichment generated until around August 31, 2007 had a causal relationship with the defendant’s misrepresentation and the use of false and misleading documents, and thus, the defendant was guilty for the said unjust enrichment. However, as X has made an influence to the rise in stock price through his lectures since around September 2007, there should not be a causal relationship between the rise in stock price after September 1, 2007 in its entirety and the defendant’s misrepresentation and use of false and misleading documents. Thus, the defendant should not be found guilty for the entire unjust enrichment generated after September 1, 2007 and there is no way to ascertain the amount of unjust enrichment caused by the defendant’s act (The Supreme Court decision, sentenced on April 15, 2010, 2009Do 13890).”

In this case, DR & AJU proved that there were factors other than the capital increase by issuing new shares to third-party which caused PEF B to subscribe the convertible bonds. In particular, it was taken into consideration that the convertible bonds in this case were a mezzanine debt with no collateral or guarantee in place with a 5-year maturity and early redemption right being exercisable after 18 months of issuance, that Company A had been in deficit for years, and that around the time of the issuance of the convertible bonds Company A was B-rated (payment of principal and interest uncertain) by a credit rating agency to successfully prove that the asset manager determined to subscribe the non-guaranteed convertible bonds as they highly valued the prospects of Company A’s new overseas business, despite Company A’s poor financial situation. As a result, the court found that the unjust enrichment was difficult to calculate in this case for even though a causal relationship can be recognized between the unfair trade practices and the unjust enrichment, the PEF B’s subscription of the convertible bonds was also caused by prospects of the new business of Company A, thereby a fine of KRW 500 million was sentenced.

As in this case, KRW billions or tens of billions is normally recognized as unjust enrichment in the unfair trade practice cases involving convertible bonds, bond with warrants, and capital increase by issuing new stocks. Therefore, it is critical to consider whether there are factors other than the unfair trade practices involved in the cases such as the subject company’s financial situation, terms of bonds or capital increase by issuing new stocks, cause of the victim’s participation.