In recent lawsuits seeking to nullify delisting decisions, courts have been issuing divergent rulings based on comprehensive reviews of companies' financial conditions and management transparency. With Kosdaq delisting standards set to tighten significantly from July this year — including the removal of so-called "penny stocks" — related litigation is expected to increase. Major law firms are also bolstering their response teams by recruiting experts from financial regulators and the Korea Exchange.
According to legal sources on the 26th, the Seoul Southern District Court on the 10th of this month ruled in favor of Jeil Bio (052670) in the first-instance trial of its lawsuit against the Korea Exchange seeking to nullify a delisting decision. The court determined that delisting was not warranted given Jeil Bio's business continuity and management transparency.
A key basis for the ruling was that, at the time of the delisting decision, approximately 16.1 billion won of Jeil Bio's 32.9 billion won in total assets was held in cash and deposits, indicating low liquidity risk. The court found it difficult to conclude that the company's financial soundness had been lost solely on the grounds of a disclaimer of audit opinion. The court also cited the fact that former executives had been criminally charged five times on embezzlement and breach of trust allegations, but all charges were dismissed. Attorney Kim Sang-il of Dongin Law Firm, who represented Jeil Bio, said, "This is a case in which the court found no grounds sufficient to warrant delisting, even though a disclaimer of audit opinion had been issued." The Korea Exchange appealed the first-instance ruling on the 23rd.
However, cases in which companies have prevailed in delisting nullification suits remain rare, with Gammanu (now Oneul ENM (192410)) among the few exceptions. In January this year, the Seoul Southern District Court ruled against the plaintiff in a similar suit filed by Daeyu against the Korea Exchange. The court found that the eligibility of Daeyu's changed de facto controlling shareholder had not been sufficiently verified, management transparency had not been secured, and grounds for delisting were recognized. The court also held that a reduction in the amount involved in breach of trust allegations alone was insufficient to find serious illegality in the exchange's delisting decision.
As courts scrutinize individual companies' financial soundness, management transparency, and whether the grounds for delisting have been substantively resolved, related litigation is likely to increase further. Beginning in July this year, Kosdaq delisting standards will be significantly tightened, including the designation of "penny stocks" trading below 1,000 won as candidates for delisting. Based on a simple simulation reflecting the new measures, the Korea Exchange projected that the number of Kosdaq companies subject to delisting this year will rise from around 50 to approximately 150. Some observers estimate the number could reach as many as 220, depending on whether penny-stock companies undertake share consolidations.
Major law firms are also moving quickly to prepare for delisting-related work. Kim & Chang has established a collaborative framework centered on its Accounting Supervision Team, which has operated since 2009, with experts from the Korea Exchange and the Financial Supervisory Service (FSS). Lee & Ko operates a delisting response team that includes attorney Park Hyun-soo, who led the Gammanu victory, and advisor Lee Kyu-yeon, a former executive director of the Korea Exchange's Stock Market Division.
Bae, Kim & Lee is running a listing risk response task force that has recruited former Financial Services Commission Chairman Koh Seung-beom and former FSS Deputy Governor Choi Sung-il. Shin & Kim has strengthened its listing maintenance response team by bringing in former FSS Assistant Governor Cho Hyo-je and former Korea Exchange Kosdaq Market Division Deputy Head Lee Chung-yeon. At Yulchon, the M&A and Corporate Advisory Division and the Capital Markets Unfair Trading Center handle such cases jointly, while Hwa Woo, Jipyong, Barun Law, and Daeryuk Aju are also responding to related cases, drawing on personnel from the Korea Exchange and financial authorities as well as capital markets specialist attorneys.
