First Trial Rules Against Former Executive Director Park Cheol-wan
"Must Overcome Legal Reasoning of 'No Standing to Sue'"
The second trial of the civil lawsuit filed by Park Cheol-wan, former executive director of Kumho Petrochemical (Kumho Seokhwa) and nephew of Park Chan-gu, chairman of the Kumho Petrochemical Group, challenging the mutual exchange of treasury shares between the group and OCI Group, will be held next month. Park, the former executive director, has argued that the purpose of the treasury share exchange is to defend the chairman's management rights and that it should be declared invalid.
According to the legal community on the 6th, the Civil Division 12-1 of the Seoul High Court will hold the first oral argument session of the appeal trial on the 11th of next month in the case where Park and three others filed a lawsuit against Kumho Petrochemical seeking confirmation of the invalidity of the disposal of treasury shares.
Previously, Kumho P&B Chemical of the Kumho Petrochemical Group and OCIMSB, a Malaysian subsidiary of OCI Group, announced in 2021 the establishment of OCI Kumho, an eco-friendly bio-epichlorohydrin (ECH) joint venture. In this process, to strengthen the strategic partnership between the two sides, they mutually exchanged treasury shares worth 31.5 billion KRW.
Accordingly, 171,847 shares of Kumho Petrochemical common stock and 298,900 shares of OCI common stock were exchanged, and Kumho Petrochemical additionally canceled 171,847 shares, the same number as the exchanged shares, to increase shareholder value.
However, the following year, Park filed a provisional injunction to prohibit the exercise of voting rights for the exchanged shares. Since the main lawsuit would take a long time to conclude, he initially applied for the injunction, but when the court did not accept it, he eventually filed this lawsuit. At that time, Park was the largest individual shareholder holding 9.10% of Kumho Petrochemical shares and had been dismissed from his executive director position after losing a shareholder meeting vote in a management rights dispute against his uncle, Chairman Park, in 2021.
Baek Jong-hoon, CEO of Kumho Petrochemical, is presiding over the 47th regular shareholders' meeting held on March 22 at Signature Towers in Jung-gu, Seoul. [Photo by Kumho Petrochemical]
During the trial, Park's side argued that "'the legal principle that third-party allotment of new shares for the purpose of defending management rights infringes on shareholders' preemptive rights and is invalid' should also apply to the disposal of treasury shares by a stock company." They also emphasized that "in a continuing management rights dispute, the management disposed of treasury shares to the OCI Group side. This was for the purpose of securing friendly shares," adding that "when a stock company disposes of treasury shares to a third party, according to Article 369, Paragraph 2 of the Commercial Act, the voting rights of treasury shares, which are normally restricted, are restored. Since the total number of shares with voting rights increases, the existing shareholders' stakes are diluted."
On the other hand, Kumho Petrochemical countered by saying, "Park does not have the standing to file this lawsuit." Kumho Petrochemical stated, "Park and others, as shareholders, only have an economic interest in the disposal of treasury shares," and argued that "even if this lawsuit results in an invalidation ruling, its effect will not extend to the third party, OCI Group. Since the effect of the disposal of treasury shares is not impacted, this lawsuit lacks 'interest for confirmation' or is 'filed by a person without standing,' and is therefore improper."
Last November, the first trial sided with Kumho Petrochemical and dismissed Park's claim. Dismissal means the case is concluded without substantive judgment because the lawsuit requirements were not met.
The first trial court cited a Supreme Court precedent stating that 'shareholders may file a lawsuit to hold directors accountable under certain conditions, but cannot directly intervene in transactions with third parties to claim the invalidity of contracts concluded by the company.'
It further stated, "The disposal of treasury shares to a third party reduces the proportional interests (such as voting rights) of existing shareholders in the company and dilutes the value of shares, which is similar to the company acquiring treasury shares and increasing the proportional interests of existing shareholders. Therefore, it is considered only a factual, economic, or general and abstract interest, and Park and others cannot be allowed to directly intervene in the transaction with the third party OCI and claim the invalidity of the disposal of treasury shares, a legal act involving Kumho Petrochemical as a party."
Park's side appealed the first trial ruling. Meanwhile, ahead of the general shareholders' meeting in March, Park allied with an activist fund to propose an agenda to amend the articles of incorporation to cancel treasury shares, but was defeated in the vote. The amendment proposed by Kumho Petrochemical received 74.6% approval, while Park's shareholder proposal garnered only 25.6% support.
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