Leveraged buyout tactics for mergers and acquisitions of listed companies in South Korea have triggered 34 cases of unfair practices in the wrong hands over the past five years, which swindled retail investors out of a combined 295.1 billion won ($244.3 million), a Korean lawmaker said Oct. 8.
While the activities of using borrowed money to acquire a company is not against the law, the stock market that allows such tactics has become a hotbed of various financial crimes for those seeking short-term profits, said Rep. Go Yong-jin of the ruling Democratic Party.
In the meantime, the listed companies being acquired suffered a hefty financial burden and had to be delisted, because bad acquirers often used assets of the acquired companies as collateral and did not use their own money for the transaction.
FSS Gov. Yoon Suk-heun (right) on Oct. 8 reports to the National Assembly during a parliamentary audit.
“Leveraged buyouts without the use of own capital by ‘company hunters’ must be eradicated for a sound M&A market and investor protection,” Go said “Financial authorities should come up with a stronger monitoring process against such unfair practices that undermine market transparency.”
His arguments are based on data compiled by the Financial Supervisory Service, which from 2015 to September 2019 spotted crimes such as erroneous disclosure, fraudulent transactions, insider trading and market manipulation in 34 acquisition cases.
The revelation came during a parliamentary audit that kicked off Sept. 30 and runs through Oct. 18.
In response, the FSS said Oct. 8 it is strengthening its in-house team to probe such dubious M&A cases and has moved to prevent the reentry of such bad acquirers. In April, the FSS, which also operates online company disclosure portal DART, revised its internal guidelines to toughen rules for major shareholders of the listed companies in revealing the source of their equity investments.
The highly-leveraged buyout method was recently under the spotlight with a high-profile case involving Justice Minister Cho Kuk’s relative.
Cho Beom-dong, the minister’s relative and de facto owner of private equity firm Co-Link Private Equity, disguised 5 billion won leverage using collaterals of the acquired company WFM as its own money, according to the prosecution. He was also accused of disseminating wrong information that WFM had raised 15 billion won by issuing convertible bonds.
WFM is trading on second-tier stock market Kosdaq and is now alleged to have played a central role in the backdoor listing scheme of companies dedicated to secondary battery business. Meanwhile, Co-Link PE’s funding into portfolio firms had allegedly disappeared. The prosecution is reportedly looking into the possible involvement of Cho’s wife in the scheme, which, if found to be true, is a violation of Public Service Ethics Act by Minister Cho during his tenure as a presidential aide.
FSS said during the parliamentary probe it would cooperate with prosecutors who are probing Co-Link PE cases.
By Son Ji-hyoung (firstname.lastname@example.org)