[Why&Next] What Led Oscotec and the Shareholders' Alliance to Settle Their Dispute Ahead of the Shareholders’ Meeting?

No Benefit for the Alliance After Injunction Dismissal
Oscotec's Weak Equity Position Leads Both Sides to Compromise
Key Issues Ahead: Largest Shareholder's Inheritance, Expansion of Authorized Shares, and More

Oscotec, the original developer of Lekraza, and the minority shareholders’ alliance have reached a temporary resolution regarding the composition of the board of directors ahead of the annual general shareholders’ meeting. The conflict, which had surfaced during the push for the listing of its subsidiary Genosco, has now been settled after more than a year. The background to this compromise appears to be the uncertainty over the minority alliance's entry to the board after the court dismissed their request to suspend the supermajority voting requirement, as well as Oscotec’s risk of key proposals being rejected if the proxy battle dragged on due to its shareholding structure. Both sides are seen as having greater incentives to compromise rather than to stick to their respective positions.

According to the pharmaceutical and biotech industry on March 18, Oscotec announced via a revised disclosure on March 16 that the agenda for the appointment of directors at the shareholders' meeting would be consolidated into a single slate of five candidates through cumulative voting. Among these, Professor Kang Jinhyeong of Seoul St. Mary's Hospital (inside director) and attorney Lee Kyungseop of Barun Law LLC (outside director) were recommended by the minority shareholders’ alliance and have been incorporated into the company’s list of candidates. Initially, each side had put forth its own candidates, making a proxy contest inevitable, but with the move to a unified five-person slate, the proxy battle itself has been eliminated.

The minority shareholders’ alliance succeeded in implementing the cumulative voting system at last March’s annual shareholders’ meeting. This system allows shareholders with small stakes to concentrate their voting rights on a particular candidate to gain board representation. The alliance had adopted this system preemptively, ahead of amendments to the Commercial Act, and was counting on it as their main strategy for this year’s meeting.

The situation reversed on March 6 when the court dismissed the alliance’s request for an injunction to suspend the effectiveness of the shareholders’ meeting resolution. As a result, Article 27, Section 3 of Oscotec’s articles of incorporation remained intact. The court ruled that this provision does not completely exclude the exercise of shareholder proposal rights. Introduced in 2007, this clause requires at least four-fifths (80%) approval from all outstanding shares to appoint or dismiss directors via a shareholder proposal—a threshold higher than the usual special resolution (two-thirds). Although this provision was ruled invalid in a lower court decision, it remains in effect for this year’s meeting.

With the 80% threshold reinstated, the cumulative voting strategy of the minority alliance lost its effectiveness. Even if votes are concentrated on a candidate proposed by shareholders, at least 80% of the total shares must approve for the candidate to be appointed as a director. This has made it virtually impossible for the alliance’s candidates to join the board. This is seen as the reason why the alliance concluded it had no practical benefit in continuing the fight.

The Oscotec board was not in an entirely advantageous position either. For management, the supermajority voting requirement is a key tool to defend control, compensating for the low ownership of the largest shareholder. Since the passing of founder and former advisor Kim Jeonggeun last month, the largest shareholder’s stake has fallen to just 12.46%, and even including related parties, it is only 12.67%.

Meanwhile, the minority shareholders’ alliance holds 12.38%, nearly matching the largest shareholder’s side. Combined with the 9.9% stake of Lee Kiyoon, chairman of GK Asset, who is reportedly allied with the alliance, the total rises to around 22%. This is enough to potentially sway the outcome of key proposals. The longer the conflict continued, the more uncertainty there was for each proposal to pass.

In the end, both sides found a compromise. By absorbing the alliance’s recommended candidates as board-nominated candidates and fixing the number of directors at five, an agreement was reached. If the proposal passes, the board will expand from the current four members to seven, with five from management and two from the alliance. An Oscotec representative stated, “The board decided to prioritize management stability over unnecessary confrontation,” adding, “The intention is to focus on core business and R&D.” At the shareholders’ meeting scheduled for March 30, other major items include the establishment of new board committees and approval of director and auditor remuneration limits, in addition to the appointment of directors and auditors.

However, there is a prevailing view that the agreement amounts to a temporary truce limited to this shareholders’ meeting. Several structural variables in the control dispute remain unresolved. The first variable is the outcome of the second trial in the main lawsuit. The alliance won the first trial, which challenged the validity of the supermajority clause, and Oscotec has appealed, with the appellate trial underway. If the appellate court upholds the lower court’s decision, the legitimacy of the board members appointed at this meeting could be called into question after the fact. The alliance has stated its intention to take the case to the Supreme Court even if it loses on appeal, suggesting a prolonged legal battle.

The inheritance of the largest shareholder’s stake is another variable. Following the passing of former advisor Kim last month, his shares are expected to be transferred to his son, Kim Seongyeon, manager at Genosco. The issue is the inheritance tax, estimated at approximately 140 billion won. There is speculation that some shares may be sold to cover the taxes, and depending on how the shares are sold, the balance of power on the board could shift. The full incorporation of Genosco as a subsidiary also remains unresolved. The proposal to increase the number of authorized shares—a key step for the incorporation—was rejected at the extraordinary shareholders’ meeting last December and has not been submitted for this regular meeting. With funding for the incorporation still uncertain, it appears that discussions on the matter will be further prolonged.