Hello, this is Attorney Kim Kwang-sik from Chungchul Law Firm.

With the enforcement of the Act on Electronic Registration of Stocks and Bonds (hereinafter referred to as the “Electronic Securities Act”), which was introduced to enhance the efficiency and transparency of capital markets, the issuance and delivery of stock certificates for listed stocks are generally not possible. In this regard, the Supreme Court recently judged whether it is possible to exercise stock options on listed stocks and claim the issuance and delivery of stock certificates from the company after the enforcement of the Electronic Securities Act. In this article, we will analyze the main contents of the Electronic Securities Act and the significance of the relevant Supreme Court ruling.

[Question]

Can one claim the issuance and delivery of stock certificates based on the exercise of stock options for listed stocks?

[Answer]

1.     Introduction and Significance of the Electronic Securities Act

The Electronic Securities Act was enacted on March 22, 2016, and has been in effect since September 16, 2019, introduced to enhance the efficiency and transparency of capital market transactions. Previously, physical certificates were issued, which transferred the ownership of stocks. However, since the enforcement of the Electronic Securities Act, physical certificates cannot be issued for listed stocks, and all transactions can only be conducted through electronic registration accounts.

The main purpose of the Electronic Securities Act is to enhance the efficiency of the securities issuance and distribution process and to prevent the risks of loss or forgery of physical certificates. It also reduces the cost of securities issuance for companies and increases the convenience of transactions for investors. The introduction of the electronic securities system clarifies the ownership of stocks and strengthens the safety of the securities market.

According to the Electronic Securities Act, when issuing listed stocks, the issuer must apply for new electronic registration with the electronic registration institution. Stocks that have been previously issued will automatically be converted to electronic registered stocks from the date of the laws enforcement. In particular, no physical securities can be issued for electronically registered stocks, and if they are issued, they will have no legal effect.

Furthermore, the transfer of electronically registered stocks is conducted through an account substitution method via the electronic registration institution or account management institution. This electronic registration system is an important institutional change that enhances the transparency of transactions and simplifies the procedures for transferring rights, thereby promoting the stability of the financial market.

2.     Supreme Court Ruling of 2024. 7. 25. No. 2020Da273403

In this case, the plaintiff claimed the right to receive 482,443 common shares from the defendant (the issuing company) by exercising stock options and demanded the issuance and delivery of stock certificates for the relevant shares. However, the defendant argued that since the issuance of stock certificates for listed stocks has been prohibited after the enforcement of the Electronic Securities Act, the plaintiff's claim could not be established.

The lower court ruled that the defendant must issue a stock certificate corresponding to the amount paid by the plaintiff for exercising the stock options. However, the Supreme Court strictly applied the legal principles of the Electronic Securities Act and overturned the lower court's ruling, stating that the claim for the issuance of stock certificates for listed stocks cannot be recognized.

In its ruling, the Supreme Court stated, “The issuance and delivery of physical stock certificates for listed stocks after the enforcement of the Electronic Securities Act are not legally permitted, and all transactions must be conducted through electronic registration accounts.” It also stated, “Investors holding listed stocks acquire ownership by being registered in the electronic registration account according to the Electronic Securities Act, and no separate physical stock certificate is necessary for this.”

This ruling can be seen as an important case that emphasizes the effectiveness of the Electronic Securities Act, confirming once again that legal claims based on the issuance of physical stock certificates are not recognized, and that individuals exercising stock options cannot demand the issuance of physical stock certificates. Therefore, in the future, when exercising stock options for listed stocks from the company, one must seek the delivery of stocks according to the Electronic Securities Act rather than demanding the issuance and delivery of physical stock certificates.

3.     Conclusion

After the enforcement of the Electronic Securities Act, the issuance and delivery of stock certificates for listed stocks are legally impossible, and such claims cannot be upheld. The Supreme Court ruling reviewed here serves as an important case reaffirming this legal principle, showing that the electronic registration system must continue to be established as the fundamental method for stock transactions.

Companies and investors must clearly understand the legal requirements of the Electronic Securities Act and adapt from the existing mindset focused on physical stock certificates to the electronic registration method. We will continue to provide readers with helpful information through practical issues and case analyses related to the Electronic Securities Act.

Attorney Kim Kwang-sik provides corporate-customized corporate law advice based on his expertise and experience accumulated at Kim & Jang Law Office. From corporate establishment to M&A, contract review, corporate governance improvement, and compliance monitoring, we strategically resolve legal issues across all aspects of corporate operations. We minimize complex legal risks and present practical solutions to help businesses grow stably.