As the Seoul Central District Court recently rejected an injunction request related to Taekwang Industrial's issuance of exchangeable bonds (EB) backed by its treasury shares, Democratic Party of Korea lawmaker Kim Nam-geun said it "distorted the intent of the Commercial Act amendment."
On the 1st, Kim said in a press release, "Treasury shares are originally a means of returning value to shareholders, but in reality they have often been abused to strengthen controlling shareholders' dominance, infringing on minority shareholders' rights."
Earlier, the Civil Division 50 of the Seoul Central District Court on Sept. 10 dismissed all injunction requests filed by Truston Asset Management regarding the issuance of exchangeable bonds backed by Taekwang Industrial's treasury shares. The court said the case falls within the scope of the board of directors' business judgment and should be respected.
On Jun. 27, Taekwang Industrial resolved at its board meeting to issue exchangeable bonds worth 318.5 billion won, pledging all of its treasury shares—equivalent to 24.4% of outstanding shares—as collateral. Kim's office said, "This is a change from three months ago, when the company disclosed it had no plan to dispose of treasury shares," adding, "Afterward, as the Taekwang Industrial consortium was selected as the preferred bidder to acquire Aekyung Industrial, suspicions were raised that the EB issuance was intended to support T2PE, an investment company that is both an affiliate of the group and partly owned by members of the owner family."
According to the Economic Reform Research Institute and others, T2PE is an investment affiliate of Taekwang Group established on Dec. 9, 2024, with Taekwang Industrial and T-sys each holding 41% equity, and the children of the same person, former Chairman Lee Ho-jin—Lee Hyeon-jun and Lee Hyeon-na—each holding 9%. In addition, co-largest shareholder T-sys is a company in which the largest shareholder and related parties hold 100% equity, with Lee Hyeon-jun and Lee Hyeon-na holding 11.30% and 0.55%, respectively.
Kim's office said, "In this context, the court's decision on the injunction could have been an opportunity to correct the bad practice of abusing treasury shares to secure controlling shareholders' control," adding, "Nevertheless, the court focused only on respecting business judgment and, without properly examining the infringement of shareholder value from the perspective of ordinary shareholders, ruled in effect that there was no breach of the duty of loyalty."
Critics say that although Taekwang Industrial's chosen method of disposing of treasury shares inevitably creates conflicts of interest between existing shareholders and new investors, and between the largest shareholder and minority shareholders, the court treated it merely as a matter of managerial autonomy while overlooking conflicts of interest or infringement of shareholder value, thereby avoiding controversy.
In particular, concerns are growing in the market that Taekwang Industrial's case is setting a precedent that is prompting a series of similar EB issuances. Daewon Pharmaceutical decided to issue EBs worth 15.8 billion won backed by all of its treasury shares, and companies in the pharmaceutical and biotech sectors, including Sam Chun Dang Pharm and Sugentech, are showing similar moves.
Kim Nam-geun said, "Legislation is needed to restrict or ban the issuance of exchangeable bonds backed by treasury shares, and the system should be swiftly overhauled so that, in principle, treasury shares are retired."