ToBeSoft's Free Capital Reduction Halted... Court Says "High Possibility of Illegality"

The KOSDAQ-listed company ToBeSoft's ongoing free capital reduction has been halted. The court judged that there was a problem with the capital reduction resolution made at the recent regular shareholders' meeting.

On the 12th, the Seoul Central District Court granted a provisional injunction to suspend the effect of the shareholders' meeting resolution filed by nine shareholders of ToBeSoft.

Previously, ToBeSoft resolved a free capital reduction agenda at the regular shareholders' meeting on the 28th of last month, merging all issued shares at a ratio of 5 to 1.

At that time, ToBeSoft restricted the voting rights of the 2nd largest shareholder, Bel Air Johap 2ho (3,500,583 shares), and the 3rd largest shareholder, Cavallo Blanco (2,525,000 shares), on the grounds that "the Johap has no legal capacity." If the voting rights of the 2nd and 3rd largest shareholders had not been restricted, the outcome might have been different.

In response, the court stated, "It is illegal not to allow the exercise of voting rights on the grounds that the proxy voting of shares held by members of Bel Air Johap 2ho and Cavallo Blanco is unlawful," and added, "This likely affected the capital reduction resolution."

According to the ruling, the Johaps, as the 2nd and 3rd largest shareholders, had legitimately delegated the exercise of rights to the representative Johap member through their Johap regulations. Furthermore, the Johap regulations and the list of members were submitted to ToBeSoft before the regular shareholders' meeting. Nevertheless, the court judged that restricting voting rights on the grounds that "voting rights cannot be exercised under the name of a Johap without legal capacity" is highly likely to be illegal.

The court also pointed out that the quorum for the capital reduction resolution was violated. According to the Commercial Act, a capital reduction resolution requires approval by at least two-thirds of the voting rights of shareholders present and at least one-third of the total issued shares. However, capital reduction for the purpose of covering losses requires only a majority of voting rights of shareholders present and at least one-quarter of the total issued shares, making the threshold lower.

ToBeSoft argued that since the accumulated deficit reached 131.1 billion KRW and 99.7 billion KRW of deficit would remain after the capital reduction, this capital reduction qualifies as a "capital reduction for the purpose of covering losses."

However, the court explained, "ToBeSoft has capital surplus of 126.7 billion KRW, and the total capital reflecting this is 31.4 billion KRW, so it is difficult to see that the entire amount of capital to be reduced corresponds to the deficit," adding, "Therefore, this reduction cannot be considered a capital reduction for covering losses, and according to the Commercial Act, approval by two-thirds of the shareholders present and one-third of the total issued shares is required."

The court continued, "However, the voting rights in favor of the reduction at this shareholders' meeting were 19,925,366 shares, which is 53.5% of the voting rights of shareholders present, falling short of two-thirds, and 25.4% of the shares eligible to exercise voting rights, falling short of one-third," and pointed out, "This resolution violates the quorum requirements of the Commercial Act and is highly likely to have defects that constitute grounds for cancellation of the resolution."