Dispute Over Daily Indirect Compulsory Payment of $200,000
Chairman Shin’s Stalling Strategy at the Center... Holding Company Conversion a Key Variable
"If International Arbitration Is Undermined, the Entire Market Could Suffer"
According to the investment banking and legal industries on September 10, the 33rd Civil Division of the Seoul High Court will hold the second appellate hearing on September 18 for the case filed by IMM Private Equity against Chairman Shin. The first hearing was primarily to confirm the case’s progress and set the schedule for future proceedings, so the next session is expected to see more substantive arguments.
IMM Private Equity did not accept part of the first-instance ruling by the Seoul Central District Court. The first-instance court accepted the ICC arbitration’s order that "Chairman Shin must appoint an appraiser and determine the put option value according to the shareholders’ agreement," but ruled that the imposition of a daily indirect compulsory payment of 200,000 dollars must be directly ordered by the domestic court. IMM Private Equity appealed this decision to the Seoul High Court in April. The firm argues that this decision contradicts previous Supreme Court precedents and that non-compliance with ICC international arbitration could erode foreign trust in the Korean judicial system, negatively impacting the investment environment.
Chairman Shin’s side has a significant incentive to delay the process and avoid determining the put option price if the daily indirect compulsory payment of 200,000 dollars is not imposed. Their strategy appears to be to hold out as long as possible, hoping that IMM Private Equity, like other private equity funds, will eventually give up. Earlier this year, Affinity Equity Partners and GIC of Singapore agreed with Kyobo Life Insurance to exit their investments at around 234,000 won per share. Considering their initial investment price of 245,000 won per share and a holding period of 13 years, even after accounting for dividends, their average annual return was only about 1.5 percent. This is effectively seen as a "cut-loss" exit.
As the dispute has escalated into litigation, a drawn-out battle now seems inevitable. The result of the second trial is unlikely to be available before the end of the year at the earliest. IMM Private Equity has indicated that if the appellate court does not rule in its favor, it is prepared to take the case to the Supreme Court, which could delay the final decision until the middle of next year. IMM Private Equity maintains that as long as it can cover acquisition financing interest with dividends and other income, it is prepared for a long-term fight. The firm also cannot easily withdraw, given that it received investment from the National Pension Service, as it could otherwise be accused of failing to fulfill its fiduciary duty as a general partner.
An investment banking industry official commented, "Given the many disputes with private equity funds in the past, it’s hard to predict what move Chairman Shin might make, but he is unlikely to eliminate or reduce dividends just to counter IMM Private Equity. Doing so could violate the revised Commercial Act’s duty of loyalty for directors and could also constitute breach of trust."
The fact that Chairman Shin is pursuing the conversion of Kyobo Life Insurance into a financial holding company adds another variable. All noise and conflicts among shareholders must be resolved before the conversion. Kyobo Life Insurance also recognizes the need to resolve issues with financial investors before the transition. For this reason, some observers believe there is still a possibility of a dramatic settlement despite the intense confrontation.
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