What counts as information that may significantly affect an investor's investment judgment, and is a trade made before the ministerial decree was enacted still a breach? Supreme Court Decision 93Do695 on 'information that may have a significant impact on investors' investment judgment'

Question

Article 188-2 of the Securities Exchange Act, headed 'Prohibition of insider trading', provides in paragraph (1) that a person within the listed categories, including one who ceased to fall within items (i) to (v)-1 less than a year before, who has learned in connection with his duties of important information not disclosed to the public concerning the business of a listed or registered company, and a person who received the information from him, must not use it, or let another use it, in trading the securities issued by that company. Paragraph (2) provides that 'important information not disclosed to the public' means information about a fact under Article 186(1) that may have a significant impact on investors' investment judgment and that the company has not disclosed, as the Ministry of Finance decree provides, so that a large number of persons can know it. The questions are what information falls within the words 'may have a significant impact on investors' investment judgment', and whether a trade using such information is caught by Article 188-2(1) when it was made before the decree under that delegation was enacted.

Decision 93Do695 answers both questions on an indictment for selling shares in February 1992. Defendant 1, the representative director of Co-defendant 2, a company that was the largest shareholder of a non-party company, and the executive partner of the advanced industry investment association that Co-defendant 2 managed, sold all 482,000 shares owned by Co-defendant 2 and the association in February 1992, before the Ministry of Finance decree was enacted on 28 April 1992. The defence argued that the trade could not breach Article 188-2(1) in the absence of the decree, and that holding otherwise offended the principle of legality.

Material to check

The statute is Article 188-2 of the Securities Exchange Act as the decision quotes it: paragraph (1) prohibits an insider who learned undisclosed important information in connection with his duties, and a person who received it from him, from using it in trading the company's securities, and paragraph (2) defines the information by reference to Article 186(1) and to disclosure under a Ministry of Finance decree. Former Article 186(1) of the Securities Exchange Act, the version before its amendment by Act No. 4701 of 5 January 1994, is the article the decision reads together with Article 188-2(2); the texts read for this brief do not give its content. The decision also refers to Article 36 of the Enforcement Rule of the Securities Exchange Act, whose items 1 to 4 set the time at which information is taken to have been disclosed according to the method of disclosure, and to the penalty provisions Article 208(6) and Article 215(2) that the court below applied.

The decisions are the decision itself and the judgment it reviewed. The court below was the Seoul Criminal District Court, whose judgment of 16 February 1993 (92No8089) the decision affirms on the appeals of the defendants. The Supreme Court gave judgment on 26 April 1994, with Justice Kim Yong-jun reporting, and dismissed all the appeals.

Possible readings

Read with the decision, the phrase 'information that may have a significant impact on investors' investment judgment' in Article 188-2(2) covers information, among the facts 'which may have a significant impact on corporate management' that former Article 186(1) is concerned with, that a reasonable investor would think carries important value in deciding whether to trade the securities, judging by comparing the significance of the information with the probability of the fact occurring. The decision adds that the information need not be objectively clear and certain. The core of the prohibited insider trade is, in the decision's words, 'the use by an insider before disclosure of corporate information that may have a significant impact on investors' investment judgment'.

On the delegation in Article 188-2(2), the decision reads it as covering only the method by which a company discloses information so that a large number of persons can know it, and the time at which information is taken to have been disclosed under that method. Where information that may significantly affect investment judgment was not disclosed to the public in any way at all, a trade using it before disclosure breaches Article 188-2(1) whatever the decree says, and so a trade made before the decree was enacted on 28 April 1992 is also an act breaching Article 188-2(1) and punishable under Article 208(6). On this reading the decision found no conflict with the principle of legality.

A third reading follows the decision's treatment of the reporting duty in Article 186(1). That provision and Article 188-2 have different subjects, so information about a fact that already arose before the shares were listed, and so could not have been reported under Article 186(1), or information about a crime or corruption inside the company, where compliance with that duty cannot be expected, is still within the prohibition if it may significantly affect the ordinary investor's investment judgment and has not been disclosed.

What the decisions held

The decision dismissed all the appeals and affirmed the judgment of the Seoul Criminal District Court of 16 February 1993 (92No8089). That court had applied Article 208(6) and Article 188-2(1) to Defendant 1, and Article 215(2), Article 208(6) and Article 188-2(1) to Defendant 2, a company. The Supreme Court held that this application was correct, and that the judgment below showed no error in the rules of evidence, no misunderstanding of the law of Article 188-2(1), and no breach of the principle of legality.

On the facts found below and reviewed against the record, Defendant 1 knew, in connection with his ordinary duties, that the non-party company was in extreme financial difficulty, with notes and cheques going unpaid because of accumulated deficits and the funding demand of building a large factory, although its books showed a surplus, and that just after the shares were listed on the stock exchange the opening price had been manipulated to an absurdly high figure. Intending to take an unfair profit or avoid a loss while other investors did not know these facts, he sold all 482,000 shares owned by Co-defendant 2 and the association in February 1992, when the shares were trading at that manipulated opening price. The decision held that the company's funding position was a fact that could seriously affect its management and that any reasonable investor would treat as of considerable value in deciding on trades in its shares, and that selling the shares on the basis of that information, learned as an insider through his duties and never disclosed to the public, breached Article 188-2(1).

The decision also explained the purpose of the provision: the securities market must allocate funds efficiently, and general investors must be able to trust that trades are fair; an insider who trades on undisclosed important information gains an unfair advantage, harms the equality of the parties to trades and damages that trust, so strict regulation of insider trading is indispensable. Against that background the decision rejected the argument that the absence of the Ministry of Finance decree left the trade outside the prohibition.

Points left open

The decision states its rule for information that 'was not disclosed to the public in any way at all'. It does not decide what counts as disclosure where information has been given out partly, indirectly or in an unclear form, nor how the times set by Article 36 of the Enforcement Rule of the Securities Exchange Act apply to such cases. On the reading in the texts, the boundary of disclosure in those intermediate cases is left open.

The decision says the information need not be objectively clear and certain, and asks what a reasonable investor would think after comparing significance with the probability of the fact occurring. It does not say how that comparison is made where the fact is still a rumour or a distant prospect, nor does it deal separately with the limb of Article 188-2(1) covering a person who received the information from an insider, or with the one-year tail in that paragraph.

When to reconsider

We revisit this brief if Article 188-2 of the Securities Exchange Act, or former Article 186(1) or Article 36 of its Enforcement Rule, is amended or replaced so that the texts read give the current provisions, if the text of former Article 186(1) becomes available in the texts read, or if a later decision fixes the test for partial or indirect disclosure or for the reasonable investor's comparison of significance and probability.

Statutes referred to

• 증권거래법 제188조의2
• 구 증권거래법 제186조

Decisions referred to

• 대법원 1994. 4. 26. 선고 93도695 판결 · Decision ledger

Verification status

The texts read for this brief are the decision in its published items, summary and reasons, and the articles it cites, all read at the National Law Information Center on 24 October 2026. The only cited article given separately, former Article 186(1) of the Securities Exchange Act, is a former version and its current text was not among the texts read for this brief.