Interpretative Exception to the Short-Swing Profit Return Rule: Focus on Equity Acquisition via the Corporate Restructuring Promotion Act

The short-swing profit return system in Korean capital markets aims to prevent unfair trading by requiring corporate insiders, such as directors and major shareholders, to return profits gained from the sale and purchase of the same securities within a six-month period, irrespective of actual use of insider information. While this mechanism offers a powerful means to deter insider trading without the need to prove actual misuse of material non-public information (MNPI), its rigid application has raised concerns regarding possible infringements of property rights and equality. In a 2024 ruling, the Korean Supreme Court, for the first time, recognized an interpretative exception to this return obligation. The case involved the acquisition of shares through a debt-equity conversion based on the former Corporate Restructuring Promotion Act (CRPA), followed by a sale of those shares within six months. Contrary to earlier precedents which narrowly interpreted exceptions, the Court acknowledged both the involuntary nature of the transaction and the lack of objective possibility to use insider information. However, this decision raises critical questions. The defendant, a major shareholder with over 30% ownership and the lead creditor bank presiding over the restructuring committee, was in a position that made access to MNPI highly likely. The Court’s finding that both exemption criteria were met appears insufficiently substantiated and inconsistent with prior strict interpretations. This paper suggests that where a policy-based institution such as Korea Development Bank is involved, its unique role should be addressed explicitly by legislation rather than through judicial interpretation. Moreover, criteria for exemptions—such as whether both acquisition and disposal must independently satisfy the exception—should be clearly codified to enhance predictability. In conclusion, while the Court's recognition of exceptional circumstances under the CRPA is understandable, interpretative exceptions must remain narrowly defined. Legislative refinement is required to clearly outline the scope and conditions of exemptions in order to maintain the integrity and deterrent power of the short-swing profit return system.