Reasons for Significant Reduction in Eastar Holdings' Compensation Amount for M&A Failure in Second Trial

"Fundamental Breach of Contract and No Intentional Deception"
Eastar Air Acquired by VIG Partners Begins Turnaround to Profitability

Since the collapse of the merger and acquisition (M&A) deal for low-cost carrier (LCC) Eastar Jet in 2020, a legal battle has continued between Jeju Air and Eastar Holdings, the former holding company of Eastar Jet. The court recognized Eastar Holdings' liability in the appellate trial of the civil lawsuit filed by Jeju Air, but the compensation amount was significantly reduced compared to the first trial.

According to the legal community on the 7th, on the 2nd, the Seoul High Court Civil Division 18 (Presiding Judge Jeong Jun-young) ruled in the appeal trial of the monetary claim lawsuit filed by Jeju Air against Eastar Holdings and others that Eastar Holdings must pay 13.8 billion KRW. Compared to the first trial, which fully accepted Jeju Air's claim amount of 23 billion KRW, the recognized amount in the appeal trial was reduced by about 40%.

The M&A Deal, Once Highlighted as a "New Chapter in the LCC Market," Turns into a Full-Fledged Legal Battle After Collapse

The dispute between the two parties began at the end of 2019 when Jeju Air signed a stock purchase agreement (SPA) with Eastar Holdings, then the major shareholder of Eastar Jet. As the leading LCC with 45 aircraft, Jeju Air publicly declared that it would acquire Eastar Jet, which had 23 aircraft, to create synergy effects. Eastar Jet was founded in 2007 by former lawmaker Lee Sang-jik, an analyst and entrepreneur, and Eastar Holdings held a 39.6% stake in the company.

However, the COVID-19 pandemic became a major obstacle. In 2020, Eastar Jet failed to pay employee wages on time and suspended all flight operations in March of that year. As unpaid wages increased, discussions between the two sides to resolve the outstanding payments reached an impasse. Jeju Air demanded that Eastar Holdings resolve issues such as ▲unpaid wages ▲operating expenses ▲handling fees ▲fuel costs, while Eastar Holdings argued that Jeju Air, as the acquiring party, should be responsible. Ultimately, Jeju Air announced the termination of the SPA about seven months after the acquisition talks began.

In September 2021, Jeju Air filed a civil lawsuit against Eastar Holdings. Eastar Holdings also filed a countersuit against Jeju Air. The first trial ruled that "Eastar Holdings must pay 23 billion KRW to Jeju Air," holding Eastar Holdings responsible for the failed M&A. The SPA contract stipulated that if the contract was terminated due to the seller, the deposit must be returned to the buyer along with an agreed amount of damages. Since the deposit was 11.5 billion KRW, twice that amount, 23 billion KRW, had to be paid. Eastar Holdings' countersuit was dismissed.

The second trial also held Eastar Holdings liable for the failed M&A. However, it deemed the agreed damages amount excessive and reduced the damages portion to about 20%. The appellate court stated, "According to the contract, if the seller breaches representations and warranties causing damage to the buyer, unless there was intentional fraud, deception, or concealment by the seller, the total damages cannot exceed 10% of the purchase price."

It further stated, "Although Eastar Holdings violated representations and warranties in important respects, it is difficult to see this as a fundamental breach or one arising from intent or deceit." "Jeju Air dispatched its own employees as financial managers, so it would have been aware of Eastar Jet's financial difficulties in advance. The new defaults by Eastar Jet also occurred due to business disruptions caused by COVID-19, which must be taken into account," the court added.

Eastar Holdings Completes Corporate Rehabilitation Process... Preparing for a New Leap Under VIG Partners

Eastar Jet is preparing for the takeoff of its first flight after resuming international flights from Incheon on September 20 last year at the runway of Incheon International Airport. [Image source=Yonhap News]

Meanwhile, after failing to be acquired by Jeju Air, Eastar Jet faced an even greater management crisis when its Air Operator Certificate (AOC) was suspended. Eventually, it had to enter rehabilitation proceedings in February 2021. The rehabilitation process was completed when Seongjeong, a golf course management and real estate rental company, acquired Eastar Jet for 110 billion KRW. As a result, all old shares held by Eastar Holdings and others were canceled. Seongjeong attempted to normalize Eastar Jet's management through financial restructuring. However, the issuance of the AOC was delayed, and Eastar Jet had to find a new owner again.

The new savior for Eastar Jet was the private equity firm VIG Partners. In January last year, VIG Partners acquired Eastar Jet and conducted a paid-in capital increase of about 110 billion KRW. Through this, Eastar Jet was able to escape complete capital erosion. Based on financial restructuring, it also succeeded in reissuing the AOC in February of the same year. After resuming route operations with three aircraft and increasing flight frequencies, Eastar Jet aims to return to profitability this year.

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