After the court again found that launching Dong Sung Bio Pharm's rehabilitation (court receivership) process was justified, the largest shareholder is pushing back.
At Dong Sung Bio Pharm, an uncle and nephew are locked in a second- and third-generation management control dispute. The corporations ultimately entered rehabilitation, and legal battles over the rehabilitation have become entangled. What is happening at a drugmaker with a 68-year tradition?
According to legal sources on the 16th, Brand Refactoring, the largest shareholder of Dong Sung Bio Pharm, filed a further appeal with the Supreme Court on the 11th against the Seoul High Court Civil Division 40 (Presiding Judge Hong Dong-gi) decision finding that the corporations rehabilitation process launch was lawful. A further appeal is an appeal filed with the Supreme Court against a ruling by the appellate court.
Dong Sung Bio Pharm applied to the court for rehabilitation in May. The reason for Dong Sung Bio Pharm's rehabilitation application was to normalize management. Rehabilitation is a system in which corporations with heavy debts repay part of the debt in installments under court supervision and receive partial forgiveness.
The Seoul Bankruptcy Court Administrative Division 11 (Presiding Judge Kim Ho-chun) accepted this and opened the rehabilitation process. Former CEO Na Won-gyun of Dong Sung Bio Pharm and a third party, Kim In-soo, were appointed co-administrators and are pursuing a pre-approval merger and acquisition (M&A).
Brand Refactoring appealed in July but the Seoul High Court rejected the appeal on the 10th. The largest shareholder of Dong Sung Bio Pharm has repeatedly appealed and further appealed against the court's decisions.
The conflict began between former Chairman Lee Yang-gu of Dong Sung Bio Pharm and his nephew, former CEO Na Won-gyun.
Founded in 1957, Dong Sung Bio Pharm is known for the antidiarrheal Jeongro-hwan and the hair dye Seven-Eight. After the death of former Chairman Lee Seon-gyun in 2008, the youngest of three sons and one daughter, former Chairman Lee Yang-gu, led the company. Lee stepped down from management last year, and Na took over as CEO.
When his nephew took over the company, the former chairman abruptly transferred his stake to an outside party in April. He sold a 14% equity stake in Dong Sung Bio Pharm to the marketing firm Brand Refactoring for 12 billion won.
At the time, former CEO Na held only a little over 4% of the company's equity. In this situation, Dong Sung Bio Pharm ended up applying for corporate rehabilitation.
Dong Sung Bio Pharm's management then changed. Former CEO Na stepped down in September, and CEO Yu Young-il took office.
Then Dong Sung Bio Pharm separately applied last month to the Seoul Bankruptcy Court to terminate (abolish) the rehabilitation process. The corporations had applied for rehabilitation and, after the CEO changed, asked to halt it.
A legal source said, "Dong Sung Bio Pharm's further appeal to the Supreme Court and its application for termination to the bankruptcy court are separate matters." Brand Refactoring is said to believe that the debt can be repaid by selling non-operating assets. The former CEO Na's side is continuing the merger and acquisition process.
Dong Sung Bio Pharm is currently pursuing the M&A using a stalking horse method. This is a bidding method originating from a disguised "stalking horse." With United Asset Management (UAMCO) as the preliminary acquirer, if an investor presents better terms, the final investor can be changed. UAMCO is a quasi-public institution funded by commercial banks. Dong Sung Bio Pharm plans to close submissions for bids on the 19th.
How will the process proceed from here? Once a final acquirer is selected, Dong Sung Bio Pharm will prepare a rehabilitation plan and submit it to the court. The plan outlines how the debt will be repaid with the acquisition price. If creditors agree to the plan, rehabilitation is approved, and the corporations proceed with normalization.
The court has not yet decided whether to terminate Dong Sung Bio Pharm's rehabilitation. The court plans to hear from creditors, the debtor, and the administrator to review whether there are grounds to terminate the rehabilitation.
If the court does not accept termination, the existing procedures will continue as is. Conversely, if it decides to terminate, the ongoing M&A is expected to fall through.
As the uncle-nephew conflict has escalated into litigation over corporate rehabilitation, the pharmaceutical industry is watching to see who the final winner will be.