In a recent case, our firm successfully defended executives of a non-listed company against allegations of violating the Capital Markets Act (fraudulent unfair trading) and the Special Act on the Aggravated Punishment, etc. of Specific Economic Crimes (fraud and breach of trust) during the process of acquiring a listed company. The prosecution concluded with a disposition of no charges for the reason of insufficient evidence.
1. Case Overview
A non-listed company (hereafter "Company"), engaged in consulting related to pharmaceutical manufacturing, acquired a listed company A (hereafter "Company A") and expanded its business. During this process, the executives were accused of various crimes including embezzlement through a no-capital M&A, issuing stock options at a low price, fraudulent unfair trading through serial new share issuance and acquisition transactions with multiple companies, embezzlement by lending money without collateral, fraud through issuing exchangeable bonds with protected stocks, and failure to comply with reporting (disclosure) requirements (collectively "allegations").
2. Judgment (Disposition)
The Seoul Southern District Prosecutors’ Office dismissed some allegations due to the statute of limitations expiring and concluded with a disposition of no charges on all remaining allegations due to insufficient evidence.
3. Grounds for Judgment (Disposition)
The prosecution concluded that the company executives had no intent to commit breach of trust or cause damage to the company, resulting in a decision not to prosecute them based on the following reasons:
(a) Although the executives and a major shareholder B were accused of conspiring in the overall allegations, there was no evidence that the executives conspired with B regarding the allegations, and they were not aware of the reporting requirements.
(b) Providing protected stocks as exchangeable bonds was not considered a de facto sale prohibited under KOSDAQ listing regulations, making it hard to recognize this as a deceptive act.
(c) Transactions involving new share issuance and acquisition between the Company, Company A, and other companies were normal transactions conducted independently, without any fraudulent manipulation.
(d) Stock options granted to executives before the subsidiary’s listing could not be deemed excessively undervalued as the options were set before the public offering of the subsidiary’s stock.
(e) The lending of money to major shareholder B without explicit collateral was not considered arbitrary misuse of company funds because B was the largest shareholder, and according to the related documents, it is not evident that company funds were used improperly. Moreover, B provided collateral promptly at the request of the Company’s executives and eventually repaid all debts in full.
4. Our Argument and Role
1) We made it clear that the company and its executives had no intention or purpose of disrupting the capital market through a no-capital M&A. Instead, they were victims of a no-capital M&A orchestrated by other forces. We particularly established that the executives had no connection with major shareholder B, who was involved in the no-capital M&A, emphasizing the absence of any conspiracy regarding the allegations. We argued that the executives were unaware of the reporting requirement, thereby proving there was no subjective expectation of complying with this requirement.
(a) Through meticulous review of KOSDAQ listing regulations, we argued that providing protected stocks as exchangeable bonds was legally permissible.
(b) We demonstrated that the new share issuance and acquisition transactions were part of business expansion and diversification without any deceit and that the executives were not involved in transactions outside those directly conducted by the Company. We demonstrated that the transactions among the company, Company A, and other entities were legitimate business activities, each party trading shares and assuming debts on their own account. This established that the funds’ rotation did not involve any fraudulent tactics.
(c) We argued that the stock options were granted before the subsidiary’s value after the IPO was reflected in the Company’s stock and that the Company’s temporary and incidental events causing abnormal gains should be considered, calculating and presenting the Company’s reasonable values of net income and net assets, and proving the stock options were not excessively undervalued.
(d) We asserted that the executives diligently fulfilled their duty of care in recovering the loans to B, who provided sufficient collateral and ultimately repaid all principal and interest without any company losses, disproving any intent of breach of trust.
Ultimately, the prosecution accepted our arguments and concluded with a disposition of no charges for all allegations against the Company's executives due to insufficient evidence.
□ Attorneys in charge: Kang Joo-hun, Kang Tae-hun, Kwon Oh-jun and Kim Dae-hee
