Hyun Jeong-eun Confirmed to Compensate 170 Billion Won to Hyundai Elevator for 'Derivative Loss'

Hyun Jung-eun, chairwoman of Hyundai Group, has been finally defeated in a lawsuit with Schindler Group, a multinational elevator company and the second-largest shareholder of Hyundai Elevator. As a result, Chairwoman Hyun will have to pay damages amounting to around 100 billion KRW to Hyundai Elevator.

Hyun Jung-eun, Chairwoman of Hyundai Group, is entering the Korea Chamber of Commerce and Industry in Jung-gu, Seoul, where the bus heading to Cheong Wa Dae to attend the '2019 Dialogue with Entrepreneurs' hosted by President Moon Jae-in on the 15th is waiting. / Asia Economy DB

The Supreme Court's 3rd Division (Presiding Justice Noh Jeong-hee) on the 30th upheld the lower court's ruling ordering Chairwoman Hyun to pay 170 billion KRW to Hyundai Elevator in a damages lawsuit filed by Schindler against Chairwoman Hyun and former Hyundai Elevator CEO Han Sang-ho. Former CEO Han is jointly liable with Chairwoman Hyun for 19 billion KRW of the compensation amount.

The court stated, "Chairwoman Hyun and others did not sufficiently review the necessity of the contract or the risk of loss, or even if they were aware, they failed to take necessary measures," and ruled that "they cannot be considered to have fulfilled their duties to Hyundai Elevator as directors or CEOs."

Schindler, the second-largest shareholder of Hyundai Elevator, claimed that Chairwoman Hyun and others caused nearly 700 billion KRW in damages to Hyundai Elevator through derivative financial contracts, starting in 2014.

Schindler argued that Hyundai forced Hyundai Elevator, the major shareholder of Hyundai Merchant Marine, to enter into derivative financial contracts to defend Hyundai Merchant Marine's management rights, causing huge losses. The contracts between Hyundai Elevator and the derivative contract funds stipulated that if Hyundai Merchant Marine's stock price rose, profits would be shared, but if the stock price fell, Hyundai Elevator would incur losses.

Since Hyundai Elevator held shares of Hyundai Merchant Marine, which was potentially subject to hostile mergers and acquisitions (M&A) at the time, the contract also included provisions for exercising voting rights in a friendly manner. Hyundai Elevator also entered into derivative contracts related to Hyundai Securities shares, which had launched a paid-in capital increase to strengthen its capital.

Supreme Court

In 2014, Schindler sent an official letter to Hyundai Elevator's Audit Committee requesting a claim for damages, but when the committee did not respond, Schindler filed a shareholder derivative lawsuit. A shareholder derivative lawsuit is a suit in which shareholders sue on behalf of the company to hold directors accountable when they violate the articles of incorporation or their duties, causing losses to the company.

The first trial court rejected Schindler's claims, but the appellate court ruled that some derivative contracts caused damages to Hyundai Elevator and ordered Chairwoman Hyun to pay 170 billion KRW in compensation. The Supreme Court upheld the appellate court's ruling recognizing Chairwoman Hyun's liability for damages.

Along with this ruling, the Supreme Court also presented legal standards for judging whether a "director of a company belonging to a corporate group" has fulfilled the duty of care as a good manager when entering into specific contracts.

It emphasized that when a director participates in a paid-in capital increase of an affiliated company and acquires newly issued shares, they must specifically review the affiliated company's contribution to their own company's business, the financial burden, and benefits resulting from the participation.

In situations where additional shares are acquired to resolve the risk of hostile M&A of affiliated companies belonging to a corporate group with a circular shareholding structure like Hyundai Elevator, Hyundai Merchant Marine, and Hyundai Securities, directors must also consider the degree of benefits or disadvantages to their own company due to the maintenance or loss of management rights of the affiliated company, as well as business sustainability.

Schindler welcomed the decision, stating, "We respect the court's ruling and believe that this judgment will ultimately strengthen the protection of the interests of Hyundai Elevator and all shareholders."