Punishment for Capital Increase with Company Profits?…All Eyes on Choi Seon-won's Trial

SKC, SK Telesys Invest 70 Billion Won
Record High Operating Profit for the Year
Prosecutors: "Board Resolution Induced Breach of Fiduciary Duty"
Choi: "Inevitable Choice to Save the Company"
Trial Merged with Cho Dae-sik Case... Outcome Anticipated

[Image source=Yonhap News]

[Asia Economy Reporter Kim Hyung-min] Is a paid-in capital increase that benefits the company also subject to punishment?

The answer to this question, which is of interest to the business and legal communities, will come from the courtroom through the trial of Choi Seon-won, Chairman of SK Networks, and Cho Dae-sik, Chairman of the SK Supex Council. The Seoul Central District Court Criminal Division 23 (Presiding Judge Yoo Young-geun) held the first preparatory hearing for Chairman Cho and others on the morning of the 17th, and in the afternoon held the eighth trial for Chairman Choi. The court decided to consolidate the two cases for trial on August 12.

Chairmen Choi and Cho were indicted on charges of causing losses by having SKC invest 70 billion won in a paid-in capital increase of SK Telesys, which was in a state of capital erosion in 2015. The prosecution alleges that the two conspired to exaggerate reports necessary for the paid-in capital increase to induce board resolutions and systematically committed breach of trust. Chairman Choi’s side argues that although SK Telesys funds were used as paid-in capital, it was an unavoidable decision to save the company, and that all borrowed funds were repaid within three months, denying embezzlement. The business community has especially criticized the breach of trust charge as being ambiguous, saying it is like “earrings if hung on the ear, nose rings if hung on the nose.” In fact, SKC posted its highest-ever operating profit (218.1 billion won) in the year the paid-in capital increase took place. At that time, inside and outside the business community evaluated that the subsidiary SK Telesys had improved its structure well through the paid-in capital increase and restructuring. This differs from the prosecution’s allegations.

This is why the business community pays close attention to the court’s judgment on Chairmen Choi and Cho regarding paid-in capital increases, which are common practice. There is still no definitive answer as to whether a company’s losses from a paid-in capital increase can hold the corporate head responsible. Opinions are divided in the legal community. Some argue that paid-in capital increases are voluntary corporate decisions and should be recognized as part of management freedom.

Shin Dong-bin, Chairman of Lotte Group, was sentenced by the Supreme Court in October 2019 to 2 years and 6 months in prison with a 4-year probation for the state affairs manipulation and management corruption case, but was acquitted of charges related to causing losses by having affiliates participate in the paid-in capital increase of Lotte Episnet.