The financial authorities' policy to rapidly delist troubled companies, initiated in July, has encountered an unexpected obstacle. A court ruling has temporarily halted the government's plan to swiftly remove companies with market capitalizations below a certain threshold and penny stocks. This decision has raised the likelihood of additional legal actions from other companies facing delisting.
On October 6, the Seoul Southern District Court's 51st Civil Division ruled on October 2 in favor of a request for a suspension of the delisting decisions made by the Korea Exchange against KOSPI-listed Juyun Tech and KOSDAQ-listed KM Pharmaceutical.
The court found issues with the process of delisting based on insufficient market capitalization, particularly noting that companies were not given adequate opportunities to present their cases. It also criticized the decision to raise the market capitalization threshold earlier than initially planned. Specifically, the requirement for companies to avoid delisting was tightened from '10 consecutive trading days and a cumulative 30 trading days within 90 trading days' to '45 consecutive trading days within 90 trading days.'
Officials from the financial authorities and the Korea Exchange expressed their surprise at the ruling, which comes at a critical time for the delisting process of troubled companies. Kim Seong-cheon, head of the disclosure system team at the Korea Exchange's KOSDAQ market division, stated during the 'KOSDAQ Day' event, "We have received the recent court decision and are working on follow-up measures. While I cannot provide specific details as we are currently reviewing internally, we will have an explanation soon."
In September, the financial authorities had already introduced supplementary measures regarding the rapid exit policy for troubled companies. Initially, they planned to raise the market capitalization thresholds for KOSPI and KOSDAQ to 50 billion won and 30 billion won, respectively, starting in January. However, due to significant industry backlash, the implementation was postponed by six months to July of next year. Additionally, companies meeting certain criteria among those delisted from KOSDAQ will be given opportunities for transfer listings to KONEX.
The problem lies in the fact that the court's decision to grant the suspension effectively overturns the delisting decisions themselves. This increases the likelihood of legal challenges from other companies currently facing delisting due to insufficient market capitalization or being classified as penny stocks, with around 200 companies in this precarious situation. However, the authorities cannot further relax the market capitalization and penny stock requirements, as this could lead to allegations of discrimination against companies that have already been delisted. There are concerns that the KONEX transfer listing, initially proposed as a measure to mitigate the impact of delisting for companies with insufficient market capitalization, may also be affected, as companies awaiting legal judgments could remain in the existing market. The transfer listing schedule for Shilla S&G, the first company seeking a KONEX transfer, has already been delayed.
A securities industry official remarked, "This court decision has drawn attention not only from companies with insufficient market capitalization but also from others, as they are closely monitoring the exchange's follow-up actions. It is particularly important to observe how the newly introduced penny stock requirements will be implemented."
* This article has been translated by AI.
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