"Transactions Will Be Cut Off If You Oppose?"...Dong Sung Pharm Administrators Face Neutrality Controversy Over Creditor Pressure

Allegations of pressure on trade creditors and controversy over the neutrality of the court-appointed administrator have simultaneously arisen around KOSPI-listed company Dong Sung Pharm, which is currently undergoing rehabilitation proceedings.

On the 9th, Brand Refactoring, the largest shareholder of Dong Sung Pharm, stated, "It has come to light that the administrator's side pressured trade creditors by saying, 'If you do not approve the rehabilitation plan, transactions may be suspended,'" and criticized this as "a clear violation of the administrator's duty of neutrality."

Although the official letter did not explicitly mention suspension of transactions, critics point out that when the document is combined with individual follow-up contacts, creditors may end up making decisions under economic pressure, which could easily escalate into a dispute over abuse of a superior bargaining position.

The particularly problematic point being raised is that the official letter was sent "in the name of the administrator." The current administrators of Dong Sung Pharm are former Dong Sung Pharm CEO Na Wonkyun and Kim Insoo. In rehabilitation proceedings, the administrator is required to convey facts neutrally to creditors and shareholders and must not induce support for or opposition to any particular acquisition proposal or rehabilitation plan.

In response, the administrator's side said, "All we did was call trade creditors and tell them that 'the acquirers (including Taekwang Industrial) said they would focus on growing the company in cooperation with existing business partners,'" and added, "This does not mean that transactions will be cut off if they do not support the rehabilitation."

Previously, Dong Sung Pharm had sent an official letter in the name of the current administrators to all trade creditors. The letter stated, in essence, that "the pre-approval M&A has already obtained authorization from the Seoul Bankruptcy Court and has been successfully carried out, and the consortium of Union Asset Management and Taekwang Industrial has been confirmed as the final acquirer."

Another contentious point is the guidance in the same letter that "if the rehabilitation plan is approved, 100% of the trade claims will be repaid without any change in conditions." The same document explicitly states that repayment is premised on the approval of the rehabilitation plan, leading some to argue that this effectively gives creditors the impression that "approval of the rehabilitation plan and repayment of claims" are causally linked.

Brand Refactoring argues, "This official letter describes the pre-approval M&A as if it were an effectively finalized transaction and gives the impression that approval of the rehabilitation plan is tied to repayment, which may run counter to the administrator's duty of neutrality."

The "proxy voting guidance" included in the letter is also drawing criticism. The letter informs creditors that if it is difficult to attend the stakeholders' meeting, they may delegate their voting rights to an employee of Dong Sung Pharm, which critics say effectively means that creditors' voting rights would be vested in a party aligned with the debtor's interests.

A Brand Refactoring representative said, "Most trade creditors are small and medium-sized partner companies and are inevitably sensitive to whether transactions will continue," and strongly criticized, "If, under these circumstances, a particular direction of consent was induced through an official letter in the administrator's name and through individual contacts, this is an issue that shakes the very foundations of the rehabilitation system."