As Ehwa Technologies Information and two other Ehwa Group companies were set to enter liquidation trading ahead of delisting, KOAS, a company listed on the main bourse that had pursued a hostile merger and acquisition (M&A), was designated by the Korea Exchange as an unfaithful disclosing entity and was given an unusually high 42 penalty points.
For now, it has avoided it, but KOAS now faces the risk of becoming subject to a substantive review of listing eligibility by the Korea Exchange. If many penalty points accumulate, the designation alone as an unfaithful disclosing entity can create the possibility of being delisted.
There is also concern that KOAS could receive additional penalty points for another disclosure violation, raising a considerable possibility of a substantive eligibility review. Previously, secondary battery company Kumyang was designated an unfaithful disclosing entity and has since faced a delisting crisis.
According to the Financial Supervisory Service's electronic disclosure system on the 15th, as of the 10th, KOAS was designated as an unfaithful disclosing entity. The reason was failure to disclose. The exchange said KOAS was late in disclosing and made incorrect disclosures during the process of acquiring shares related to the three Ehwa Technologies Information companies that were in liquidation trading at the time.
On Sept. 3, KOAS disclosed that it would acquire shares of three companies—Ehwa Technologies Information, ETRON, and EID—within a 30 billion won limit. However, it had already acquired shares of Ehwa Technologies Information and ETRON on Sept. 1, before the disclosure, which was an issue. It also initially disclosed there would be no additional purchases after the 3rd, but it bought more shares on Sept. 4 and 9, which also became issues.
The exchange imposed 42 penalty points on KOAS. This is the highest number of points the exchange has imposed at one time in the past year. In particular, for a company listed on the main bourse, observers say it is an unusually high score.
An industry official said, "Forty-two points is not a score that would come from a simple disclosure violation, so it makes me think a negative view of the company related to M&A and other matters may have been reflected."
As a result, KOAS shares, which were halted for a day on the 10th, swung sharply when trading resumed on the 13th. KOAS shares, which had been moving sideways in the 8,000–9,000 won range this year, topped 10,000 won in August on news it would acquire the unlisted bio firm Novelty Nobility, but plunged after the acquisition plan fell through. As the company's plan to acquire the three Ehwa Group companies also became uncertain, the stock fell to 4,995 won just before the trading halt. After trading resumed, it dropped at one point to 4,020 won.
Separately from the penalty points, a disclosure violation penalty of 620 million won was imposed. KOAS is currently in a state of complete capital impairment, with total equity at minus 6.6 billion won. There are concerns over whether it can bear a penalty exceeding 600 million won.
The only relief is that despite the high penalty points, it has avoided an immediate substantive review of listing eligibility. Under exchange rules, to be designated for a substantive review, a company must be placed under administrative issue status and have cumulative penalty points of at least 15, or there must be a willful or grossly negligent violation of disclosure obligations on matters that could have a significant impact on management. In the case of KOAS, although it received 42 points, it avoided the substantive review because this came before it was designated as an administrative issue.
However, the possibility remains that it could become subject to a substantive eligibility review. In August, KOAS said it would enter a new business in the pharmaceutical and bio sector and announced plans to participate in a paid-in capital increase by the bio company Novelty Nobility. But on Sept. 9, Novelty Nobility abruptly asked to withdraw from the investment talks.
Since KOAS still intends to make payment for the paid-in capital increase, no withdrawal disclosure has been issued. However, if the termination of the two companies' contract is formalized and a withdrawal disclosure is made, the exchange will begin reviewing from that point.
KOAS was designated an administrative issue on the 2nd over the disclosure violation related to Ehwa Technologies Information. If it is again designated an unfaithful disclosing entity over the Novelty Nobility paid-in capital increase and receives 15 or more penalty points in the process, it could become subject to a substantive review of listing eligibility.
A KOAS official said, "If the investment is not carried out as disclosed, it becomes a disclosure violation," adding, "The company still maintains that payment is possible under the contract and is seeking countermeasures."
Meanwhile, KOAS is in a dispute with Ehwa Technologies Information, in which it expressed its intention to acquire a stake. Ehwa Technologies Information decided on a 100-to-1 free capital reduction right after delisting. If Ehwa Technologies Information proceeds with a paid-in capital increase after the free capital reduction, the stake of KOAS, the second-largest shareholder with about 34% equity, will inevitably be diluted.
However, on the 13th, a court partially accepted an injunction filed by KOAS against the free capital reduction decision by Ehwa Technologies Information, making it difficult to push ahead with the reduction immediately.