Taekwang Industrial received a correction order from the Financial Supervisory Service for attempting to issue an exchange bond (EB) with its own shares as the exchange target. This was due to the failure to disclose who the counterparty for the issuance is.
In the legal community, it is noted that if a resolution to issue an EB is made without a specified target, it becomes impossible to prove the 'necessity and legitimacy of the issuance.' Currently, the government is targeting the practice of corporations defending their management rights using their own shares. In this context, issuing an EB without even defining a target raises suspicions that it was an attempt to use a loophole for management defense.
According to the financial investment industry on the 1st, the FSS intervened that day to halt Taekwang Industrial's plan to issue an EB based on its own shares. Taekwang Industrial resolved to issue an EB worth 320 billion won, targeting all of its own shares (271,769 shares, 24.41%), but the issue arose because the counterparty was not specified.
The FSS's late intervention was influenced by the legal action of Truston Asset Management, the second-largest shareholder of Taekwang Industrial. The day before, Truston filed a request for a provisional injunction to stop the illegal activities of the directors at the Seoul Central District Court. The request aims to prevent actions that violate laws or regulations in advance.
The legal basis for Truston's claim that Taekwang Industrial's resolution is illegal is Article 22 of the Commercial Act Enforcement Decree. According to this provision, if an EB is issued to a third party that is not a shareholder in exchange for the company's own shares, the board of directors must specifically determine the counterparty (a specific individual or corporation) and the issuance conditions.
A related industry source said, "Taekwang Industrial has somewhat determined the party to whom it will issue the EB and is currently negotiating specific conditions," adding, "It appears they intended to leave the acquirer blank at first, referencing precedents of other corporations' EB issuances, and issue a correction notice once their acquisition status is confirmed." Institutions like Korea Investment & Securities are mentioned as parties under discussion for the EB acquisition.
The legal community states that the particular issue with Taekwang Industrial is that it cannot prove the 'legitimacy of the EB issuance.'
The current government's proposed amendment to the Commercial Act includes a measure to mandate the total scrap of own shares. This is prompting corporations to seek a 'two birds with one stone' effect by issuing EBs based on their own shares before the new law takes effect, thereby securing management rights and financing.
A capital markets lawyer from a large law firm said, "If you announce that you will issue an EB without specifying the counterparty in such a situation, it becomes impossible to refute questions about whether it is for the purpose of management defense." They added that claiming the issuance is for a purpose other than management defense while no acquirer is determined does not make logical sense.
In fact, other companies that recently issued EBs based on their own shares clearly stated the appropriate 'purpose' along with a specified target. Last May, LS announced its plan to issue an EB worth 65 billion won targeting Korean Air, also stating the purpose of 'debt repayment.' An industry source remarked, "Given that LS has been rumored to be under threat to its management rights from Hoban Group, if LS had also stated it would issue an EB without a target, it could have drawn suspicion from financial authorities as a loophole for management defense."