[Governance] Dreamtech Increases Stake by Exercising ‘Namuga BW Call Option’ Before Financial Authorities’ Regulation

[Asia Economy Reporter Jang Hyowon] Dreamtech, a KOSPI-listed company, acquired bonds with warrants (BW) of its subsidiary Namuga through a call option (put option). This allowed Dreamtech to secure new shares at a price lower than the market price and increase its control over Namuga.

However, financial authorities are expected to regulate such methods in the future to prevent damage to existing shareholders and investors.

According to the Financial Supervisory Service's electronic disclosure on the 24th, Dreamtech acquired 6 billion KRW worth of the 4th series BW of its subsidiary Namuga. Out of the total 20 billion KRW of the 4th series BW, Dreamtech exercised the call option on 6 billion KRW to acquire it. This BW included a call option exercisable for 30% of the total amount.

This BW was issued last September to Withwin Investment Association No. 60. One year after issuance, the warrant can now be exercised. The exercise price per share dropped from 21,630 KRW to 8,378 KRW due to Namuga's bonus issue and stock price decline. Based on the current stock price in the 10,000 KRW range, this means acquiring Namuga shares at about 18% below market price.

As the exercise price of the BW decreased, the number of shares that can be secured also increased. At the initial BW issuance, the number of shares to be issued upon exercising the warrant was 924,641 shares, about 13.46% of the total shares. However, due to the bonus issue and stock price decline, the exercise price changed, increasing the exercisable shares to 2,387,204 shares, equivalent to 17.37% of the total shares.

If Dreamtech exercises all the warrants of the 6 billion KRW BW acquired through this call option exercise, it will newly obtain 716,161 shares, which is about 5.21% of the current total shares. Dreamtech is the largest shareholder of Namuga, holding 27.97% of the shares.

If Withwin Investment Association does not exercise the warrants on the remaining 14 billion KRW BW it holds, Dreamtech's stake in Namuga could increase from the current 27.97% to 32.92%. Even if all BW are converted into shares, the stake would rise to 28.27%.

It is currently uncertain whether Withwin Investment Association will exercise the warrants or demand redemption of the BW. Since the current stock price and exercise price differ by about 18%, exercising a large number of warrants could cause an overhang issue, potentially pushing the stock price below the exercise price. Therefore, the possibility of selling to a third party or Dreamtech's affiliates cannot be ruled out.

Meanwhile, actions like Dreamtech's exercise of Namuga BW call options will be subject to financial authorities' regulations starting December 1. This is to reduce abuses such as unfair transactions or manipulative shareholding expansions by major shareholders of listed companies through call options on convertible bonds (CB) or BW.

A Dreamtech official said, "This exercise of Namuga BW call options is unrelated to future regulatory measures," adding, "We do not know how the remaining 14 billion KRW BW held by Withwin Investment Association will be disposed of."