Taekwang Group EB Controversy: Court Hearing Begins on 18th... All Eyes on New Business Expansion [Invest&Law]

Truston Alleges "Directors' Illegal Acts" as Injunction Hearing Begins
Legal Resolution Still Pending Despite Suspension of EB Issuance

The court proceedings over the injunction regarding the legitimacy of Taekwang Industrial's board decision to issue exchangeable bonds (EB) using treasury shares are set to begin in earnest. Although the EB issuance has been temporarily suspended, the court's future ruling is expected to have a significant impact on Taekwang Group's new business initiatives.

According to the legal community on July 16, the Seoul Central District Court Civil Division 50 (Presiding Judge Kim Sanghun) will hold a hearing at 10:30 a.m. on July 18 on the injunction application filed by activist fund Truston Asset Management, the second-largest shareholder of Taekwang Industrial, seeking to maintain the alleged unlawful board resolution. The court's decision could be issued as early as later this month.

Previously, on June 27, Taekwang Industrial announced through a board resolution that it would issue EB worth 320 billion KRW, backed by all of its treasury shares (approximately 24% of total issued shares). The company pursued this issuance to secure funding for new growth engines, as its main businesses such as petrochemicals continued to face unfavorable market conditions.

Earlier this month, Taekwang Group announced plans to invest a total of 1.5 trillion KRW, including acquisitions and establishment of companies in the cosmetics, energy, and real estate development sectors. In particular, the group planned to enter the cosmetics industry in earnest through the acquisition of Aekyung Industrial. The 63.38% stake in Aekyung Industrial that was put up for sale was reportedly valued at over 600 billion KRW.

In contrast, Truston filed for an injunction against the directors who approved the agenda, arguing that it constituted an illegal act in violation of their fiduciary duties. Truston claimed that the disclosure was unclear regarding the recipients and purpose of the issuance, and that large-scale use of treasury shares could lead to dilution of shareholder value. If the exchange rights are exercised, treasury shares without voting or dividend rights would be transferred to outside investors, resulting in losses for existing shareholders due to share dilution.

On July 1, the Taekwang Industrial Minority Shareholders' Alliance also joined the activist movement, filing a criminal complaint against the directors who approved the EB issuance and disposal of treasury shares, alleging breach of duty. The Alliance argued that "this is clearly a decision that harms the company's financial interests, and constitutes intentional breach of duty, as the directors disregarded both the actual value of the treasury shares and the potential for future share price appreciation, thereby causing damage to the company."

On the same day, the Financial Supervisory Service issued a supplementary disclosure order regarding the announcements of 'decision to dispose of treasury shares' and 'decision to issue exchangeable bonds,' citing the omission of key information such as the counterparty to the treasury share disposal. As a result, Taekwang Industrial officially announced that it would suspend follow-up procedures, stating that it would "communicate closely with minority shareholders and other stakeholders, and listen to their opinions sufficiently."

The key issue in this injunction case is whether raising funds using treasury shares could infringe on the rights and interests of existing shareholders. If the court grants the injunction in favor of Truston, it would effectively make it difficult for Taekwang Industrial to issue similar EBs in the future. Conversely, if the court broadly recognizes the board's autonomy and dismisses the injunction, Taekwang Group is expected to gain momentum in securing resources for its new business ventures.