U2Bio Co., a KOSDAQ-listed company in the medical IT field, has been mired in a dispute. The standoff pits founder and CEO Kim Jin-tae against NDS, the company of the broader Nongshim family and the largest shareholder.
What they have failed to agree on, despite having worked together since before the listing, is a plan to convert the company—whose main business is in vitro diagnostic testing and medical IT solution services—into a venture holding company. Kim plans to convert the company into a venture holding company, but NDS opposes it. Kim recently decided to carry out a third-party allotment paid-in capital increase targeting former SOCAR CEO Lee Jae-woong, and if the capital increase is completed, Kim will surpass NDS in the equity contest.
U2Bio Co. said on the 4th that the (equity) joint holding relationship between CEO Kim Jin-tae and NDS had been dissolved. As a result, Kim and NDS will no longer exercise mutual rights such as joint exercise of voting rights and granting of rights of first refusal. Kim and NDS had entered into a joint purpose holding commitment at the time of the 2023 initial public offering (IPO).
Nominally, the commitment expired, but underlying it is the two sides' conflicting aims over the company's business conversion and the resulting clash. The conflict surfaced after the largest shareholder NDS filed for an injunction to prohibit the issuance of new shares over the capital increase plan the company released last month.
On Oct. 29, U2Bio Co. announced a 9 billion won paid-in capital increase. U2Bio Co. said the purpose of this capital increase is to bring in strategic investors to advance new business. The new business the company refers to is venture investment. Kim announced a plan to convert the company into a venture holding company. (Related article☞"Alumni of the 'startup cadet school' Yeongdong High join forces... U2Bio and former SOCAR CEO Lee Jae-woong, stock swap")
The problem is that NDS has taken a stand against Kim's plan. NDS is skeptical that converting into a venture holding company will contribute to the company's growth or increased profits. It argues that the purposes of a venture holding company—investment and mergers and acquisitions (M&A)—are unrelated to U2Bio Co.'s core business to date and therefore would not be an efficient use of company resources. NDS instead expressed concern that this capital increase will heighten uncertainty in the company's governance structure.
The clash was predictable. The capital increase the company is pursuing is focused more on rallying allies for Kim than on raising fresh funds. The company plans to issue 2,257,000 new shares through this capital increase, and these will be allotted to former SOCAR CEO Lee Jae-woong. Lee plans to contribute in kind approximately 778,000 SOCAR common shares (about 2.3%) that he holds.
If funds are paid in on Nov. 6, former CEO Lee Jae-woong will hold 16.67% equity in U2Bio Co. In contrast, with the issuance of new shares, existing shareholder NDS's equity will drop from 30.13% to 25.12%, and CEO Kim Jin-tae's equity will also fall from 11.52% to 9.60%.
Kim will step back to the No. 3 shareholder, but combined with Lee's equity, Kim will edge out the largest shareholder NDS. Adding the 5.94% equity of major shareholder Jeon Chang-mu, Kim could also gain the upper hand in the equity battle through allied holders.
Investors are watching for the court's decision. If the court sees the purpose of this capital increase as a move to defend management control, the injunction could be granted. Precedent holds that new share issuances for the purpose of securing control over the company or defending management control are invalid.
The company is emphasizing the push for new business as the purpose of the capital increase. Attention is on how the court will assess this. Even if it is not for defending management control, the court will not allow new share issuance if there are procedural flaws. The company said, "The decision on the capital increase was resolved through lawful procedures under the articles of incorporation and relevant regulations for the company's long-term growth," and regarding the lawsuit filed, said it "plans to respond diligently in accordance with legal procedures."
NDS also expressed a cautious stance, saying it would wait for the outcome. NDS is a subsidiary of Megamart, led by Vice Chairman Shin Dong-ik, the third son of Nongshim Group's founding Chairman Shin Chun-ho. NDS first acquired equity (11.85%) in Oct. 2018, then acquired convertible bonds (CB) issued by the company in 2019 and converted them to become U2Bio Co.'s largest shareholder in 2021.