Kwangmu, a KOSDAQ-listed company in the secondary battery business, has been caught up in a management control dispute. An individual investor and a corporation acquired 5.32% equity and then applied to convene an extraordinary shareholders meeting aimed at shareholder returns, including canceling treasury shares, and replacing management.
Those who demanded a shareholder return policy also sought to hold management accountable for the worsening results and argued that management should be replaced, saying the credit extension to the largest shareholder may be illegal.
However, Kwangmu countered that while it is true that results deteriorated because its core business of secondary battery distribution hit a "chasm" (a temporary demand slump), a rebound is possible. On the credit extension controversy, the company said it acted within the relevant regulations and sees no issue.
According to the Financial Supervisory Service's electronic disclosure system on the 27th, Kwangmu became embroiled in a management control dispute after applications were filed with the Seoul Central District Court to prohibit holding an extraordinary shareholders meeting and to approve convening a separate extraordinary meeting. A shareholder of Kwangmu, a person surnamed Lee, filed suit asking the court to block the extraordinary meeting that the current management plans to hold on the 28th of next month and to allow a new extraordinary meeting that would propose replacing management.
Lee argued that Kwangmu holds excessive financial assets relative to its business scale and demanded shareholder returns, including a 45 billion won treasury share purchase and cancellation. As of the end of last year, Kwangmu's distributable income totaled 56.9 billion won. Of the 50 billion won or so set aside as a contract amount for acquiring treasury shares, Lee asked that 45 billion won out of the remaining 50 billion won be used to enhance shareholder value.
When these demands were not accepted, Lee's side raised issues over poor results and margin trading to the largest shareholder and called for a management shake-up. Kwangmu's results have worsened by 90% over the past three years. They also took issue with a transaction in May in which Kwangmu purchased Joongang Advanced Materials equity for 15 billion won from Atlas Palcheon, then the largest shareholder. They argued the transaction effectively constituted a purchase of securities with the nature of providing funds to the largest shareholder, namely a credit extension. Under the Commercial Act, listed companies cannot provide credit extensions to major shareholders and their related parties, and they claimed this was violated. They also claimed the company suffered a loss because an unrealized valuation loss of about 4 billion won has occurred to date from this transaction.
Kwangmu, however, countered that the claims related to this management control dispute lawsuit are somewhat difficult to understand.
A Kwangmu official said, "Due to a global chasm phenomenon, the results of all corporations related to secondary batteries have deteriorated," and added, "Even after considering debt ratio and reliance on borrowing fund, Kwangmu's management performance is very good."
Last year, Kwangmu recorded about 150 billion won in non-operating income through a total return swap (TRS) based on Enchem shares. Last year's sales were 6.5 billion won and operating loss was 4.7 billion won, but net income, including non-operating income, reached 104.2 billion won. In effect, the company secured massive profits through investment rather than its core business. A TRS is a transaction in which a securities firm purchases the underlying asset directly, receives only a certain percentage as a fee, and transfers the investment gains and losses to the client.
The company also argued that the credit extension was carried out within legal bounds. A Kwangmu official said, "Since the credit extension controversy was decided only after all legal reviews were completed, we believe there will be no issue at all." This is interpreted to mean that the share transaction in Joongang Advanced Materials with Atlas Palcheon did not have the nature of providing funds to the largest shareholder.
Even so, some in the market say the key issue in this management control dispute will ultimately be whether there was a credit extension. In particular, as Atlas Palcheon, then the largest shareholder, is known to have secured substantial funds through the TRS transaction and the purchase of Joongang Advanced Materials equity, there is an outlook that whether this transaction was for "the purpose of supporting a specific party" will be a point of determination going forward. Atlas Palcheon is a company in which Enchem chief executive Oh Jeong-gang is the largest shareholder.
A source at a capital markets firm said, "Whether there was a credit extension will likely be determined by comprehensively considering the intent at the time of the transaction, the flow of funds, and the real beneficiary," and added, "Although the transaction was an issue once at the time, the current management control dispute will likely draw market attention to it again."