As the July 1 deadline for stricter delisting criteria approaches, companies are increasingly anxious, particularly those on the brink of failure. With enhanced requirements looming, how should these companies respond and where can they find solutions? We sought advice from the Delisting Response Team at Law Firm Gwangjang.
-Strengths and Unique Aspects of the Law Firm's Delisting Response Team
Park Hyun-soo: Responding to delisting is often described as a "comprehensive art form." It requires simultaneous engagement in litigation, responses to the Korea Exchange, finance, accounting audits, taxation, and corporate rehabilitation. Few large law firms possess strength across all these areas. Law Firm Gwangjang has experience with the Gammanu case and includes specialists such as a former chief judge of the Securities Division at the Seoul Southern District Court and a former head of the Securities Crime Joint Investigation Team at the Seoul Southern District Prosecutor's Office. We have a well-organized system for forming project teams tailored to the nature of each case.
Cho Jun-woo: I have served on the KOSDAQ Disclosure Committee and the KOSDAQ Listing Disclosure Committee. The key to responding to the exchange is effectively communicating in the exchange's language. Our team includes many experts from the Financial Supervisory Service and the Financial Services Commission, such as advisors and lawyers with extensive backgrounds. Since the exchange operates based on financial authority policies, their expertise significantly contributes to our strategic planning.
-Impact of the Gammanu Case on Delisting Regulations
Park Hyun-soo: The Gammanu case is essentially the only definitive ruling that invalidated an individual delisting decision by the exchange. At that time, the exchange had a structure that mandated immediate delisting upon a single rejection of an audit opinion. After the delisting decision in September 2018, a provisional injunction was granted, and four months later, the audit opinion was revised to favorable. The court ruled, "Why hastily killed a company that could be revived with just a little patience?" Law Firm Gwangjang won in all three trials.
Since then, three significant changes have occurred. First, the requirements for re-auditing have been relaxed. Previously, a company had to undergo re-auditing within six months after an unfavorable opinion, which was nearly impossible. Now, if the auditor changes in the following year, the new auditor can provide a favorable opinion. Second, confusion arose when a provisional injunction was granted during the orderly trading period. For seven years, no injunction had been accepted, but one was issued during the trading period, leading to a new practice of suspending orderly trading upon confirmation of an injunction. Third, the review process for the Delisting Review Committee has changed. Previously, 15 companies were reviewed in a day, with Gammanu being the 14th. Now, the process has shifted to reviewing only 1-2 companies per day.
-Is the Recent Regulatory Change a Step Backward?
Park Hyun-soo: Following the Gammanu case, the exchange's procedures have become more cautious, allowing for sufficient improvement periods. Consequently, since the Gammanu case, there have been no final rulings invalidating the exchange's delisting decisions in court.
The issue is that negative consequences have emerged. Companies that should be delisted are not being removed in a timely manner, leading to discussions about the "Korea Discount," which has influenced this regulatory change. In some ways, this represents a return to the pre-Gammanu era, albeit with a more cautious structure that includes a standard of two consecutive years of unfavorable audit opinions.
-Future Court Judgments and Litigation Strategies
Park Hyun-soo: Due to the regulatory changes, we expect a surge in delisted companies within the next 1-2 years. As cases increase, there will be instances where companies are hastily delisted, leading to potential misjudgments. This could prompt courts to scrutinize these decisions more closely, increasing the likelihood of overturning exchange decisions. Recent cases like Jeil Bio and Selpi Global can be viewed in this context.
-Analysis of the Selpi Global Injunction Decision
Park Hyun-soo: The apparent reason for the delisting was embezzlement and breach of trust, but underlying this were two consecutive years of unfavorable audit opinions. However, the re-audit resulted in a favorable opinion, and with a change in management and major shareholders, minority shareholders banded together to try to save the company. The court's perspective was, "This company could survive if given a chance; why was it not allowed any opportunity before being delisted?"
The legal principle mirrors that of the Gammanu case. It argues that "failing to provide a reasonable improvement period for a company that could survive is an abuse of discretion." There is a possibility that the exchange may shift towards granting improvement periods. The delay caused by the injunction effectively provides a de facto improvement period. However, the exchange may hesitate to overturn its own decisions due to the associated burden.
-Recommended Defense Strategies for Companies Facing Stock Price Issues
Cho Jun-woo: The requirement for 45 consecutive trading days is honestly a challenging mission. Therefore, our initial advisory direction is paradoxically to focus on fundamental improvements. While stock consolidation or reverse stock splits can reduce the likelihood of being classified as a penny stock, these are merely temporary fixes. Companies need to enhance their actual value through new business development, mergers and acquisitions, and improved communication with shareholders. Share buybacks and enhanced investor relations activities can also be effective strategies.
Park Hyun-soo: This regulatory change sends a strong signal that surviving through short-term fixes will be difficult. Once a company is classified as a management issue or faces trading suspension, the stigma makes recovery very challenging. If such cases arise this year, companies will realize by next year that they need expert assistance to survive.
-How to Respond to Strengthened Market Capitalization Requirements
Cho Jun-woo: Addressing market capitalization requirements cannot be achieved through stock consolidation alone. Companies need to see genuine increases in stock prices or raise capital through new stock issuance. Ultimately, positive developments must occur within the company. Therefore, I anticipate increased mergers and acquisitions among small listed companies. Following the amendment of the Commercial Act, directors must consider not only company profits but also shareholder interests, necessitating more nuanced legal advice than before.
There are many calls for easing or delaying requirements in the venture industry, but it seems that the government will adhere to its current policy. The government has shown a willingness to accept over 100 delistings, indicating a commitment to proceed with the current regulations and monitor their effects.
-Advisory Directions Vary by Industry
Cho Jun-woo: While there are not significant differences, there are cautious aspects for biotech companies. Many firms that listed under technology exceptions have not generated revenue, and it is often challenging to recommend fundamental changes. Realistically, attracting external funding or pursuing mergers and acquisitions are the most viable alternatives.
Park Hyun-soo: There are differences based on industry. The structure has changed to evaluate companies based on semi-annual results, affecting seasonal industries with significant performance fluctuations between the first and second halves. For instance, IT companies may have poor first-half results due to orders placed at the beginning of the year, with payments received at year-end. Effectively communicating these seasonal factors to the exchange can be a specialized strategy to avoid immediate delisting based solely on semi-annual results.
-How to Address Audit Opinion Shortfalls as a Leading Cause of Delisting
Park Hyun-soo: The leading cause of delisting is audit opinion shortfalls, followed by embezzlement and breach of trust, and then inadequate disclosures. In the Gammanu case, we argued that "audit opinion rejections are not a monolith but exist on a spectrum." There are gray areas where auditors may issue unfavorable opinions to avoid liability, even when the situation is close to favorable. In many advanced countries, audit opinion shortfalls are not commonly used as formal grounds for delisting.
With the strengthening of auditor independence and accountability, the number of unfavorable opinions has significantly increased. The recent regulatory change mandates delisting after two consecutive unfavorable opinions, which will undoubtedly lead to unjust cases. Such companies must seek redress in court, and that is where we come in.
* This article has been translated by AI.
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