"Shin Dong-guk side's 'fewer than 10 people' explanation does not hold up logically"… Criticism emerges from legal circles

As suspicions of a violation of mandatory tender offer obligations by Shin Dong-guk, Han Yang-jeong-mil (Chairman), the largest individual shareholder of Hanmi Science, spread, criticism has emerged from some in legal circles that the rebuttal content from the Shin (Chairman) side does not make logical sense. The Shin (Chairman) side explained that it did not violate the Capital Markets Act because the number of counterparties was fewer than 10 when excluding special relationship parties and other exempted transactions, but there are points noting that Im Jong-yoon, Chairman of Core Group, who had been a party to the management rights dispute, cannot be considered a special relationship party and therefore does not fall under the "fewer than 10" category.

According to multiple legal sources on the 21st, the tender offer system stipulated in Article 133, Paragraph 3 of the Capital Markets Act is a core mechanism designed to provide shareholders in general with an equal opportunity to sell. The reason special relationship parties are excluded from the count of counterparties is that such transactions are viewed as internal share transfers within a group sharing identical interests.

However, while Shin (Chairman) has been grouped with Song Young-sook, Han Mi-geu-rup (Chairman), for large-scale holding reports, Lim Jong-yun (Chairman) and his family and companies (Core Pohang, DXVX, etc.) have fulfilled disclosure obligations as separate groups. Interpretations suggest that the two camps, which have been parties to fierce management rights disputes in the past, cannot be seen as a group with identical interests.

In particular, according to Article 141, Paragraph 3 of the Enforcement Decree of the Capital Markets Act, even if they are special relationship parties, they are not considered special relationship parties under both tender offer and large-scale holding report regulations unless they are "joint holders." In fact, Lim (Chairman)'s side has never been aggregated and disclosed as a special relationship party in Shin (Chairman)'s large-scale holding reports.

A legal source primarily dealing with the capital markets pointed out, "Since they have reported separately until now, they cannot be special relationship parties for tender offer exemption purposes, and if they were both special relationship parties and joint holders, the 5th% large-scale holding reports submitted so far would constitute false disclosures," adding, "The two claims cannot be true simultaneously."

It is also pointed out that the controversy has been fueled by the fact that the Shin (Chairman) side has failed to clearly specify even the applicable provisions. This is because, under current laws and regulations (Article 3, Paragraph 1, Item 1 of the Enforcement Decree of the Financial Company Governance Act), the scope of special relationship parties based on an individual is recognized only up to a maximum of "two stages" and is clearly cut off.

The law divides an individual's special relationship parties from sub-item (a) to sub-item (j), with the core being 'sub-item (a) (Stage 1 corporation/executive),' which refers to corporations in which one invests 30% or more or exercises de facto influence, and their executives, and 'sub-item (j) (Stage 2 grand-subsidiary/executive),' which refers to corporations and executives that the sub-item (a) corporation further controls by investing 30% or more. Legal effect ends completely at this "sub-item (j) (Stage 2)."

When viewed based on Shin (Chairman) as an individual, Hanyang Precision, in which Shin (Chairman) holds a large shareholding, falls under sub-item (a) (Stage 1 corporation). However, it is pointed out that Hanmi Science, the group's holding company, does not fall under either sub-item (a) (Stage 1) or sub-item (j) (Stage 2) when viewed by shareholding ratio criteria (23.38% in the first contract, 29.83% in the second contract), as it falls short of 30%.

Even if Shin (Chairman) proves on his own that he exercises "de facto influence" over Hanmi Science and is recognized as a Stage 1 corporation, the impact would only extend to Hanmi Pharmaceutical (sub-item (j), Stage 2 corporation), which is a subsidiary of Hanmi Science. Accordingly, it is interpreted that Beijing Hanmi Pharmaceutical, a grand-subsidiary and overseas subsidiary of Hanmi Pharmaceutical, or its executives, exceed Stage 3 and therefore cannot fall within the scope of special relationship parties under any legal interpretation.

There are also views that there are problems even when viewed from the seller's perspective. This is because the law recognizes only direct relationships such as "the person themselves or an executive's spouse/blood relative" as special relationship parties, and no exception provision exists to recognize "executives' families," such as Lim (Chairman)'s spouse and three children (four people in total), as special relationship parties.

Furthermore, Article 140, Paragraph 2 of the Enforcement Decree of the Capital Markets Act clearly calculates based on the "substantive number of counterparties." There is no provision to group sellers as one person just because they are family or under the influence of the same individual, and the Financial Services Commission's legal interpretation (November 18, 2020) also firmly stipulates individual calculation based on corporate personality and the subject exercising shareholder rights.

Legal circles believe that to explain the controversy over avoiding mandatory tender offer obligations, the Shin (Chairman) side must present clear grounds for the following three core questions.

First is the authenticity of the disclosure. If the Lim (Chairman) family and related companies are special relationship parties of Shin (Chairman), it must be clarified in which item of past large-scale holding situation reports they were aggregated and reported as special relationship parties.

It is also pointed out that legal grounds should be scrutinized. It is argued that sufficient explanation is needed on exactly who the sellers excluded as transaction exceptions, which "sub-item" under Article 3, Paragraph 1, Item 1 of the Enforcement Decree of the Financial Company Governance Act they fall under, and specifically on what basis the four second-tier sellers (spouse and children) were excluded. Along with this, there are also voices demanding that the "actual number of transaction counterparties" be revealed.

A legal expert who requested anonymity pointed out, "Tender offer regulations are a core norm of the capital markets for protecting minority shareholders," adding, "It is not acceptable to consistently provide self-contradictory explanations like 'fewer than 10 people when excluding exceptions' without specific statutory grounds, and authorities must conduct thorough investigations."

Previously, Shin (Chairman) contracted to purchase Hanmi Science shares (13.74%) off-market in three instances this year: February, July, and October. He purchased the shares through Shin Dong-guk, Lim Jong-yun (Chairman), the eldest son of the Hanmi Pharmaceutical owner family, DXVX, his wife Hong Ji-yoon, and others. During this process, he did not conduct 5% reporting (Report on Large-scale Holding Situation of Shares, etc.), raising suspicions of violating the Capital Markets Act. The Capital Markets Act mandates a tender offer if shares are purchased off-market from 10 or more shareholders within a certain period, resulting in held shares exceeding 5%.

In response to this, Law Firm Hwaoo, which recently handled the relevant share transactions, stated that Shin (Chairman)'s current transaction does not fall under mandatory tender offer obligations as it includes transactions with special relationship parties, among others.