Doosan Resolves DICC Litigation Risk... 'Favorable Position' Even if FI Negotiations Occur

[Asia Economy Reporter Ki-min Lee] In the lawsuit concerning the stock purchase payment related to Doosan Infracore's China subsidiary (DICC), Doosan Infracore has effectively won, making it difficult for financial investors (FIs) to exercise their drag-along rights again. This is due to the Supreme Court ruling tightening the conditions for exercising drag-along rights and the need to reassess the corporate value as Doosan Infracore's position in the Chinese market has improved.

According to the Supreme Court and industry sources on the 16th, the Supreme Court's 3rd Division (Presiding Justice Kim Jae-hyung) overturned and remanded the appeal trial on the 14th, ruling in favor of Doosan Infracore in the payment claim lawsuit filed by Odin2, a group of FIs, against Doosan Infracore. The court judged that it was difficult to see that Doosan Infracore obstructed the FIs' exercise of drag-along rights.

Previously, Doosan Infracore sold a 20% stake in DICC to FIs for 380 billion KRW in 2011, promising to list DICC on the Chinese stock market within three years to recover the investment. The shareholders' agreement at the time stipulated that drag-along rights could be exercised if the IPO did not occur. However, the IPO did not materialize, and the DICC sale was ultimately canceled. The FIs filed a lawsuit claiming that Doosan Infracore failed to provide sufficient disclosure, preventing the sale. The first trial ruled in favor of Doosan Infracore, while the second trial ruled in favor of the FIs.

Stricter Drag-Along Conditions and Changing Market Environment... FIs Face Difficulties Exercising Drag-Along Rights

The Supreme Court strictly defined the establishment of drag-along rights in this lawsuit and ruled that some drag-along clauses related to DICC are not mandatory. Therefore, even if FIs attempt to exercise drag-along rights on DICC shares in the future, coordination with Doosan Infracore will be required for each case.

The court first ruled that, aside from the first clause of the drag-along rights between Doosan Infracore and the FIs, other clauses are not mandatory. According to the ruling, the DICC drag-along clauses between Doosan Infracore and the FIs consist of three parts. The counterparty consents to the drag-along by the selling shareholder. Alternatively, the counterparty purchases all shares held by the selling shareholder at the price stated in the sale decision notice or a pre-agreed price chosen by the counterparty. Or, the selling shareholder may propose selling all shares to a new third party under more favorable conditions. However, if the counterparty does not notify within 14 days after receiving the sale decision notice, it is deemed to follow the first clause. The court judged that "unless there are special circumstances such as the counterparty being required to hold the shares, the second and third clauses are rights to choose, not obligations."

Furthermore, the court pointed out, "Even if there is a breach of the duty to cooperate contrary to good faith and the condition fulfillment is presumed, the drag-along exercise by the selling shareholder alone does not specifically identify who the counterparty selling the DICC shares is or the sale price, so the prospective buyer and sale price cannot be presumed." It explained, "Since the prospective buyer and sale price cannot be specified, even if the condition fulfillment is presumed due to obstruction, it does not directly determine what legal effect arises between the selling shareholder and the counterparty."

The court also stated that the DICC drag-along exercise assumes 100% of shares are sold, similar to a corporate acquisition process. Due to the complexity and variables in acquisition procedures, it is difficult to consider Doosan Infracore's mere non-response to data requests as obstructing the fulfillment of drag-along conditions.

Moreover, since China began large-scale infrastructure investments last year, the excavator market has expanded, and Doosan Infracore's position locally has changed, industry insiders say the corporate value needs to be reassessed. Doosan Infracore sold 18,686 excavators in China last year, a 22.4% increase from 15,270 units in 2019, marking the highest volume in 10 years since 2011 (about 16,700 units). Among foreign companies in the Chinese excavator market, Doosan Infracore raised its market share from about 13% in 2015 to 23% currently, competing closely with the world's No.1 company, Caterpillar (CAT). In November last year, it became the first foreign company in China to surpass cumulative production of 200,000 excavators. An industry official said, "Due to the Supreme Court ruling and the changed corporate value of DICC over 10 years, the FIs' calculations are inevitably complicated."

Doosan's Self-Rescue Plan Nears Completion Upon Successful Infracore Sale

With this victory, Doosan has significantly reduced the risk of an 800 billion KRW contingent liability. Doosan signed an MOU related to the sale with the Hyundai Heavy Industries Holdings-KBD Investment consortium at the end of last year and plans to sign the final contract by the 31st of this month.

Accordingly, Doosan Group's intensive self-rescue plan is entering its final stage. Since April last year, to resolve Doosan Heavy Industries' liquidity crisis, the group secured 3.6 trillion KRW in support from creditors including KDB Industrial Bank and has raised about 3 trillion KRW in liquidity through asset and affiliate sales such as Doosan Tower and Doosan Solus. Additionally, major shareholders of Doosan Co., Ltd., including Chairman Park, donated 23% of their Doosan Fuel Cell shares to Doosan Heavy Industries as part of responsible management. Doosan Heavy Industries also conducted a 1.3 trillion KRW paid-in capital increase at a board meeting in December last year. Furthermore, if the sale of Doosan Infracore, valued at 800 billion KRW, is completed, Doosan Group's self-rescue plan will effectively conclude.

This content was produced with the assistance of AI translation services.