CHA Biotech(085660) Eleven minority shareholders partially won a damages suit they filed, saying the stock price fell and they suffered losses due to the company's false disclosure. As a result, CHA Biotech must pay shareholders about 1.2 billion won in compensation.
The Supreme Court's second division (presiding Justice Eom Sang-pil) said on the 31st that on May 5 it finalized an appellate ruling in a damages suit brought by a person surnamed Kim and 10 other CHA Biotech shareholders, holding that CHA Biotech is liable to compensate 30% of the shareholders' losses.
In Feb. 2018, CHA Biotech filed a provisional disclosure with the Financial Supervisory Service's Data Analysis, Retrieval and Transfer System (DART) stating it posted 1,298.74 million won in operating profit in 2017. It also disclosed operating profit in its semiannual and third-quarter reports for 2017.
However, Samjong KPMG, after auditing CHA Biotech's 2017 financial statements, issued a qualified opinion, saying that if new drug research and development costs were treated as an expense rather than an asset, the company would record an operating loss of 881.79 million won in 2017. A qualified opinion means some items in the financial statements are misstated, making it impossible to accurately assess the financial condition of corporations.
In that case, CHA Biotech would have posted operating losses for four consecutive years from 2014 to 2017. In its annual report disclosed in Apr. 2018, CHA Biotech stated it recorded an operating loss of 881.79 million won in 2017.
Under its rules, the Korea Exchange (KRX) designated CHA Biotech shares as an issue under administrative watch on Mar. 23, 2018. One more year of operating losses would trigger grounds for delisting. On the day before the designation, CHA Biotech closed at 33,850 won; in a single day it fell to 23,700 won, and after the weekend, on Mar. 26, it plunged to 19,700 won.
CHA Biotech initially treated amounts spent from phase 1 of the initial new drug development process as intangible assets, and before that as an expense. In its corrective disclosure, however, it recognized amounts spent as intangible assets from the point when the new drug development project completed government approval. This followed an accounting treatment opinion the Financial Supervisory Service released in 2011.
The minority shareholders who sued CHA Biotech said they bought shares after CHA Biotech disclosed a turnaround to the black, and that they suffered losses when the stock was designated for administrative watch due to the false disclosure, and they sought damages from management.
In the first trial, the court ruled that CHA Biotech and its executives were liable to compensate the plaintiff shareholders. The court sided with the shareholders. The first trial panel said, "A reasonable stock investor would invest after confirming operating profit in the company's semiannual and quarterly reports," adding, "It was revealed that the semiannual and quarterly reports falsely stated operating profit, leading to designation for administrative watch, the stock price crashed, and the plaintiffs suffered losses."
The appeals court also recognized CHA Biotech's liability for damages but limited the compensation to 30% of the losses. As a result, the amount CHA Biotech must pay was set at 1,195.26 million won.
The appeals panel said, "CHA Biotech's stock price surged after the government's deregulatory announcement in Nov. 2017 amid a 'stem cell theme stock' boom, and the plaintiffs began buying shares from January to March 2018," adding, "When CHA Biotech was designated for administrative watch, the cooling of investor enthusiasm for stem cell-related stocks cannot be ruled out as having contributed to the price decline."
The Supreme Court found the lower court did not misunderstand the law and dismissed both the shareholders' and CHA Biotech's appeals.