Put Option Dispute Lost in First Trial... Kyobo Life IPO Virtually 'Canceled'

[Asia Economy Reporters Park Soyeon and Park Jihwan] In the put option dispute between Kyobo Life Insurance and the financial investors (FI), the first trial court ruled in favor of the FI side. Analysts suggest that this will negatively impact not only Kyobo Life’s ongoing initial public offering (IPO) but also the governance structure centered around Chairman Shin Chang-jae.

On the 10th, the Seoul Central District Court Criminal Division 22 (Presiding Judge Yang Cheol-han) acquitted Deloitte Anjin executives A and B, who were indicted without detention on charges of violating the Certified Public Accountant Act. One Deloitte Anjin employee and two executives of the Affinity Consortium, who were also indicted, were all acquitted.

They were prosecuted on charges of applying the valuation date favorably to the investors. The court stated, "If other market value evaluation methods not used by Deloitte Anjin were employed, a higher price of 429,000 KRW would have been derived," and added, "It appears that Deloitte Anjin applied various valuation approaches within a feasible range, and it is difficult to see that only methods favorable to the Affinity Consortium were used."

Kyobo Life Insurance had accused Deloitte Anjin of intentionally inflating the fair market value (FMV) corresponding to the put option price (the right to sell at a specific price) held by its FI, the Affinity Consortium, in violation of standards, and reported this to the prosecution in April last year.

The Affinity Consortium signed a shareholders’ agreement (SHA) with Kyobo Life’s largest shareholder, Chairman Shin Chang-jae, in September 2012. The agreement stipulated that financial investors would purchase 24% of Kyobo Life shares held by Daewoo International at 245,000 KRW per share, recover their investment through an IPO within three years, and if the IPO failed, exercise the put option.

As the IPO was repeatedly delayed, the financial investors exercised the put option against Chairman Shin in October 2018 at 410,000 KRW per share.

In the complaint submitted to the prosecution, Kyobo Life argued that although the put option exercise date was October 23, 2018, Deloitte Anjin calculated the fair market value based on June 30, 2018, thereby deliberately overestimating the put option exercise price.

Red Light for Kyobo Life’s First Half IPO... Governance Also Shaken

Kyobo Life applied for a preliminary review for listing with the Korea Exchange in December last year. The ongoing preliminary review is expected to be negatively affected by this trial outcome. Generally, judicial risks adversely impact IPOs.

According to the Korea Exchange’s listing regulations for the securities market, there must be no "litigation or dispute cases that could significantly affect company management." The Korea Exchange extended the review period without concluding the preliminary review for Kyobo Life’s KOSPI listing application within the scheduled time.

With the first trial acquittal, the Affinity side can now pressure Kyobo Life regarding the put option execution. At the price desired by Affinity, the value of the put option shares amounts to 2 trillion KRW. Industry insiders analyze that Chairman Shin may have no choice but to dispose of his shares (33%) to handle this. The put option dispute could thus shake Kyobo Life’s governance structure.

The FI side has announced plans to file a second arbitration against Chairman Shin Chang-jae. Following the first arbitration ruling, the court’s injunction decision, and the criminal trial’s judgment that found no issues with the put option exercised by the FIs and the submitted reports, it is expected that Chairman Shin’s position will be significantly weakened in the second arbitration.

An FI representative said, "Chairman Shin has cited the illegality of Anjin’s valuation report as the reason for not fulfilling the put option obligation so far," adding, "Of course, this claim ignores the contract that clearly states each party should appoint their own valuation institution to propose prices, regardless of the opposing party’s report." They further stated, "In the second arbitration expected to be filed in February, it will be difficult for Chairman Shin to avoid criticism that he aggressively attacked the FIs from the start to avoid fulfilling the put option obligation."

Kyobo Life stated, "The prosecution pointed out that when accountants, who are the watchdogs of the capital market, collude with market participants and shirk their responsibilities, the soundness of the capital market is compromised, which can undermine the fundamental order of the entire capital market beyond individual companies. We expect the prosecution to appeal and that an appropriate judgment will be reached in the appellate court."

Kyobo Life also emphasized, "Regardless of this ruling, we will successfully complete the IPO, proactively prepare for IFRS17 and K-ICS, and accelerate long-term preparations for transitioning into a financial holding company."

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