11st Call Option Dispute Expected to Be Settled This Year

SK Square is expected to make a decision this year on how to handle its e-commerce subsidiary, 11st. The company is anticipated to support financial investors (FIs), such as the National Pension Service and private equity funds (PEFs), in recovering their investments in order to maintain trust with them.

According to the investment banking (IB) industry on September 23, SK Square has reportedly decided to exercise its call option (purchase right) on 11st. In 2023, SK Square gave up its call option on about 20% of 11st's shares held by FIs. However, according to the contract, starting from October 3, two years later, SK Square must decide whether to exercise the second call option. The call option period runs until the end of December.

11st logo.

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Currently, SK Square holds 80% of 11st's shares, while FIs own the remaining 20%. This structure was established in 2018 when the private equity fund manager H&Q Korea raised a fund called Nile Holdings and invested 500 billion won in 11st.

Major institutional investors such as the National Pension Service and Saemaul Geumgo also participated in the fund. The National Pension Service invested 350 billion won as a limited partner (LP) and an additional 50 billion won through indirect investment in the PEF, totaling 400 billion won.

The contract included a call-and-drag clause. If the company failed to complete an initial public offering (IPO) by September 30, 2023, the consortium could forcibly sell SK's shares as well (drag-along). However, before that date, SK was granted the right (call option) to buy back the shares.

SK Square's decision to shift back toward exercising the call option, after waiving it two years ago, appears to be influenced by the recent Homeplus incident. As Homeplus entered corporate rehabilitation proceedings, scrutiny of the National Pension Service's investments has intensified. If SK Square is once again seen as waiving the call option and not repaying the investment, it could affect the overall investment credibility of the SK Group.

However, industry sources believe that SK Square may propose to adjust the contract with FIs, repaying part of the investment while extending the investment period for the remaining shares. When 11st raised funds in 2018, it was valued at 2.7 trillion won. As of the first half of this year, however, the book value of SK Square's 80% stake in 11st stands at only about 660 billion won, representing a decline of about 80% from its original valuation.

In this situation, if SK Square exercises the call option under the existing terms, its shareholders may raise concerns. Since the call option is a right, not a legal obligation, there is no requirement to exercise it. Acquiring shares in a loss-making company could be seen as undermining shareholder value.

In particular, the recently revised Commercial Act has expanded the duty of loyalty of directors from the "company" to the "company and shareholders," specifying that directors must protect and treat all shareholders fairly. Violating this could expose directors to immediate civil and criminal liability from minority shareholders, making it essential to minimize shareholder backlash.

Meanwhile, the FI side remains open to accepting SK Square's proposal. During the first call option exercise, they adhered to the principle of guaranteeing a certain rate of return as stipulated in the contract. However, with their funds tied up for eight years, the focus has shifted toward recovering their investment. A representative from the FI side stated, "SK is clearly showing a willingness to resolve the issue, but we are waiting as no specific solution has been presented yet."

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