Dong Sung Bio Pharm applied to the court to terminate its rehabilitation procedure (court receivership), pushing the management control dispute into a new phase. Dong Sung Bio Pharm is locked in a control fight between former Chair Lee Yang-gu, the son of the late founding chair Lee Sun-gyun, and former CEO Na Won-gyun, his nephew. The legal community said the conflict between second- and third-generation heirs in the pharmaceutical industry has spilled over into a corporate rehabilitation issue.
According to the pharmaceutical industry and legal community on the 24th, Dong Sung Bio Pharm recently applied to the 11th bankruptcy division of the Seoul Rehabilitation Court (Presiding Judge Kim Ho-chun) to terminate its rehabilitation. It comes about six months after it sought rehabilitation. In the meantime, the management changed at Dong Sung Bio Pharm, and the company abruptly sought to end the rehabilitation, saying it can repay its debt. What happened at Dong Sung Bio Pharm, a company with a 68-year history?
◇ From court receivership to criminal complaints: uncle-nephew control dispute
Founded in 1957, Dong Sung Bio Pharm is known for the gastrointestinal remedy Jeongro-hwan and the hair dye Seven-Eight. After founding chair Lee Sun-gyun died in 2008, former Chair Lee Yang-gu, the youngest of three sons and one daughter, led the company. Lee stepped down from frontline management last year and Na took office as CEO. Na is the son of Lee's older sister.
In Apr., Lee sold his 14% equity in the company to the marketing firm Brand Refactoring for 12 billion won. With his nephew at the helm, the uncle abruptly sold his stake to an outside party. At the time, Na held only 4.1% of the company's equity and used corporate rehabilitation as a means to defend management control.
In May, Dong Sung Bio Pharm applied to the court for rehabilitation, citing the need to normalize management. Rehabilitation is a system under which corporations with heavy debt, under court supervision, repay a portion of what they owe in installments and have the remainder written off. The court accepted the request and opened the rehabilitation procedure. Na and a third party, Kim In-su, were appointed co-trustees.
During this process, former Chair Lee and Brand Refactoring, the new largest shareholder of Dong Sung Bio Pharm, filed a police complaint accusing Na and other executives of embezzlement and breach of trust totaling 17.7 billion won. They alleged that from Oct. last year to May, Na and others embezzled company funds by sending advance payments or lending funds to key counterparties. Na's side said the claims are groundless. Na stepped down in Sept., and Yoo Young-il took office as the new CEO.
◇ "Able to repay claims" vs. "keep court receivership"
With management changed, Dong Sung Bio Pharm is now pushing to end the rehabilitation. Brand Refactoring is said to take the position that it can repay the debt by selling non-operating asset and other means. Na's side is opposed to terminating the rehabilitation. Usually, after rehabilitation is terminated, corporations move into bankruptcy proceedings, but the legal community believes Dong Sung Bio Pharm will not be liquidated because it says it can repay the claims.
A legal industry source said, "According to the Dong Sung Bio Pharm investigative report, liquidation value exceeded going-concern value, so a merger and acquisition (M&A) process was underway," adding, "It is an unusual case where a company applied for rehabilitation, the management changed, and then abruptly pushed to end it."
Under the Debtor Rehabilitation and Bankruptcy Act, Dong Sung Bio Pharm must substantiate why the rehabilitation procedure should be terminated. The court considers the views of the debtor, creditors, and trustees comprehensively before deciding whether to accept termination. If the court accepts termination, the existing procedure is wrapped up. If rehabilitation is not terminated, the court receivership continues.
A legal industry source said, "Ultimately, creditors' views matter most," adding, "From the bench's perspective, it will assess how feasible and credible the plan to repay Dong Sung Bio Pharm's debt is."