FSS Points Out "Significant Omissions"
Second-Largest Shareholder Files for Injunction Against Illegal Actions
Following legal action by the second-largest shareholder regarding Taekwang Industrial's plan to issue exchangeable bonds (EB), the Financial Supervisory Service (FSS) has also intervened. The FSS pointed out that there were significant omissions concerning the counterparty to the transaction. Some in the market are criticizing the move as a loophole to circumvent the revised Commercial Act.
On July 1, the FSS announced, "As a result of reviewing Taekwang Industrial's decision to issue exchangeable bonds, we found that there were important omissions in the disclosure regarding the counterparty to the issuance. Therefore, we are imposing a correction order."
Previously, on June 27, Taekwang Industrial's board of directors approved the issuance of exchangeable bonds worth 320 billion KRW, with all of the company's treasury shares (representing a 24.41% stake) as the underlying asset. However, the recipients of the EBs were not specified, leading to controversy. Under current law, when a company issues exchangeable bonds to parties other than shareholders, the board must clearly identify the counterparty and the terms of issuance.
An FSS official explained, "Under the Capital Markets Act, listed companies must have their board of directors resolve on the counterparty when disposing of treasury shares. However, Taekwang Industrial failed to disclose the counterparty. In addition, the intended use of the funds to be raised is unclear, and the company needs to review related matters more thoroughly, which is why we imposed the correction order."
Trusston Asset Management, the second-largest shareholder of Taekwang Industrial, is also strongly opposing the move, calling it both a "loophole" and "illegal." Issuing exchangeable bonds with treasury shares as the underlying asset has the same effect as a third-party paid-in capital increase when the exchange rights are exercised. This is seen as causing serious harm to the interests of existing shareholders.
On June 30, Trusston Asset Management announced that it had filed for an injunction with the Seoul Central District Court to halt the illegal actions of Taekwang Industrial's directors. Trusston stated, "Disposing of a large block of treasury shares, amounting to 24.41% and influencing management control, at a price that is only one-fourth of the per-share net asset value, raises concerns of breach of trust. If the exchangeable bond issuance proceeds, Taekwang Industrial will suffer not only significant financial losses from selling treasury shares at a bargain price, but also irreparable damage to its corporate governance, which values transparency and accountability, as well as a deterioration of its reputation in the capital markets," the company criticized.
In the market, there is criticism that Taekwang Industrial is blatantly undermining shareholder interests in advance of the Commercial Act revision. The Korea Corporate Governance Forum commented, "It is outrageous to see such arbitrary disclosures before the revision of the Commercial Act, clearly infringing on the interests of ordinary shareholders. All such cases should be subject to a one-strike-out rule," citing Taekwang Industrial as an example.
The forum continued, "Taekwang Industrial, which has been operating in petrochemicals and textiles, suddenly claims it needs 320 billion KRW and plans to issue exchangeable bonds with treasury shares as the underlying asset, supposedly to review beauty, energy, and real estate businesses. However, these are just words, with no concrete plans or preparations in place." The forum further questioned, "How can such brazen disregard for the market be so prevalent in the capital market?" and argued, "This is why it is urgent to restore the independence of boards of directors, which has hit rock bottom, through measures such as mandatory cumulative voting and expanding the separate election of audit committee members."
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