Disclosures state conclusions; books ask for the grounds.
A disclosure tells us a transaction occurred, but the accounting books ask why that transaction was recorded the way it was.
When a listed company discloses the acquisition of shares in another corporation, the filing reveals the counterparty, acquisition price, purpose, and method of payment. A disclosure on the issuance or disposal of convertible bonds shows the issuance terms, underwriters, conversion price, and maturity. Loans, collateral provisions, debt guarantees, set-off transactions, and investments in unlisted companies are likewise communicated to the market through disclosures in a fixed format and as conclusions.
Yet disclosures do not answer every question. Why was that unlisted company's stake valued at that price? Through what contracts and journal entries was the offset between proceeds from the sale of convertible bonds and the investment payment processed? With what materials was the recoverability of a loan reviewed? Is the counterparty in a special relationship with the company? On what assumptions and data was the fair value assessment based? Disclosures present the conclusion of a transaction, but they do not fully explain the accounting grounds that support that conclusion.
In Korea's capital markets recently, reports have repeatedly emerged in which audit opinion refusals, grounds for delisting, trading suspensions, improvement periods, and substantive listing eligibility reviews are discussed alongside convertible bonds, set-off transactions, investments in unlisted companies, related-party transactions, fair value assessments, and recoverability issues. What matters here is not concluding whether a particular company has violated the law. The point is that the market continues to ask, even after disclosure: "Why was that transaction accounted for in that way?" This question is the starting point of a lawsuit seeking inspection and copying of accounting books.
An audit opinion refusal is a question of evidence, not numbers
In the market, an audit opinion refusal is often received as a signal that a company's financial condition has deteriorated. There are indeed cases in which uncertainty regarding the going-concern assumption is at issue. But an audit opinion refusal does not always mean losses or a liquidity shortage. It can also occur when the external auditor has been unable to obtain sufficient and appropriate audit evidence. In other words, the problem may not lie in the numbers themselves, but in the lack of materials capable of substantiating and explaining those numbers.
If accounting is the language of numbers, auditing is the language of evidence. Even when an asset is recorded on the financial statements, the auditor cannot easily issue an opinion unless its existence, rights and obligations, valuation, and recoverability are sufficiently supported. Even when a loan remains on the books, its recoverability comes into question if the debtor's ability to pay, collateral, repayment flows, and subsequent payment records are insufficient. Even when shares in an unlisted company are recorded at acquisition cost, fair value becomes an issue if the assumptions underlying the valuation and the economic substance of the transaction cannot be confirmed. Even when convertible bonds or bonds with warrants have been traded, the basis for the accounting treatment falters when the counterparty, payment flows, the legal relationship of the set-off, and whether related parties are involved remain unclear.
In delisting proceedings, this issue grows even sharper. When trading is suspended due to an audit opinion refusal and an improvement period is granted, the company must prepare materials to receive an unqualified opinion in a re-audit or the next audit. Conversely, shareholders need to verify what materials the company actually holds and on what grounds the accounts and transactions in question were recorded. Here, shareholders' interest is not mere curiosity. It is directly tied to the company's prospects of maintaining its listing, the pursuit of management accountability, and the future direction of shareholder rights.
For this reason, the right to inspect and copy accounting books does not remain a classical minority shareholder right under company law. In a capital market where the risk of audit opinion refusals and delisting has materialized, it functions as a procedure for verifying the accounting grounds that disclosures fail to explain. Shareholders' questions do not stop at "what happened." They extend to "how was it recorded in the books, and what materials support that record?"
The right to inspect accounting books is not an unlimited right to search internal materials
Article 466 of the Commercial Act provides that a shareholder holding at least 3 percent of the total issued shares may demand, by a written request stating the reasons, inspection or copying of the accounting books and documents. The company may not refuse the demand unless it proves that the request is improper. For listed companies, separate special provisions may impose different requirements regarding shareholding ratios and holding periods, so at the actual exercise stage, a shareholder's standing and holding requirements must be verified first.
The structure of this provision is straightforward, but its meaning in practice is not simple. Shareholders cannot peer into a company's internal materials without reason. A "written request stating the reasons" is required. Conversely, a company cannot shut its doors merely because a shareholder asks uncomfortable questions. The burden of proving that a demand is improper rests with the company. Ultimately, this right rests on a balance: easing the information asymmetry between shareholders and the company while protecting the company's trade secrets and normal business operations.
To properly understand the right to inspect accounting books, one must break it down into four questions. Who may inspect? Why do they wish to inspect? What do they wish to inspect? And to what extent may they inspect? If any one of these four questions becomes blurred, the lawsuit immediately runs into difficulty.
First, the shareholder must meet the shareholding requirements demanded by law, and where the special provisions for listed companies apply, the holding-period requirement must also be confirmed. Second, the reasons for the demand must be specific. Third, the target documents must be accounting books and documents. Fourth, the scope of the demand must be specified to the extent necessary for the exercise of the shareholder's rights. A lawsuit for inspection and copying of accounting books is not a procedure for conducting a comprehensive investigation into a company's internal affairs. Nor is it a procedure for demanding all of the company's emails, all internal reports, and all employee communications. The central targets a shareholder may demand are the books and underlying documents that are substantively related to accounting treatment.
Miss this point, and a strong right becomes a weak claim. A shareholder's suspicions may begin broadly. But the document list submitted before the court must be narrow and precise.
The court looks not only at the magnitude of suspicion, but at the specificity and relevance of the document list
In a lawsuit for inspection and copying of accounting books, shareholders typically begin with a sense of distrust toward the company. An audit opinion refusal may have occurred, trading may have been suspended, large-scale fund transactions may have been repeated, or convertible bonds and investments in unlisted companies may be intricately intertwined. Suspicions often grow through media reports and disclosures. But the court will not order books opened based on the magnitude of suspicion alone.
The Supreme Court has held, in essence, that the reasons for a demand to inspect and copy accounting books must be stated specifically enough to allow the company to determine the existence and scope of its inspection and copying obligations. This does not mean a shareholder must prove every wrongdoing before being permitted to view the books. The right of inspection is itself a means for that very verification. But the reasons for the demand must at least rise to the level of reasonable suspicion that the alleged facts may be true, and that suspicion must be linked to the necessity of inspecting specific accounting books and documents.
The phrase "to investigate accounting fraud at the company" alone is not enough. The phrase "to protect shareholders' interests" is also insufficient on its own. The demand must be narrowed down: which transaction is at issue, which account is at issue, which period is at issue, and what materials must be examined to confirm that suspicion. The practical battleground in lawsuits for inspection and copying of accounting books lies precisely here.
For example, if the acquisition of shares in an unlisted company is at issue, the demand should be narrowed not to "all materials related to the company's investments," but to materials supporting the calculation of the acquisition price, the share purchase agreement, vouchers related to payment or set-off, the ledger of the relevant investment asset account, the underlying materials the company holds in connection with the fair value assessment, and the materials the company holds in connection with the impairment review. If the recoverability of a loan is at issue, the loan agreement, interest receipt records, collateral materials, the debtor's financial data, the materials the company holds in connection with the recoverability review, and the basis for setting the bad debt allowance may come into question. If a convertible bond transaction is at issue, the issuance contract, transfer agreement, accounting treatment related to payment and set-off, conversion terms, the relationship with the counterparty, and the journal entries and ledgers of the relevant accounts become central.
Begin suspicions broadly, but keep the document list narrow and precise. This is the heart of a lawsuit for inspection and copying of accounting books. There is no problem with a shareholder's suspicions being broad. The problem arises when those suspicions remain broad even before the court. The court considers not only the strength of the suspicion, but how precisely that suspicion is tied to specific docu
