A South Korean court has blocked stock exchange rules that force the delisting of companies falling below minimum market-capitalization thresholds, drawing attention to the fate of listed firms facing removal. Jooyontech (044380) and Kmpharmaceutical (225430) have had their delisting and liquidation trading suspended after courts granted their injunction requests. With other companies facing delisting on the same grounds mounting legal challenges, financial regulators now face unavoidable delays in their plan to clear out troubled firms.
The 51st civil division of the Seoul Southern District Court, presided over by Senior Chief Judge Kwon Sung-soo, on the 2nd granted injunction requests filed separately by Jooyontech, a KOSPI-listed company, and Kmpharmaceutical, a KOSDAQ-listed company, to suspend the effect of their delisting decisions by the Korea Exchange, according to financial investment industry and legal sources on the 3rd. The two companies will not proceed with delisting or liquidation trading until a final ruling in the main case.
The court found that exchange listing rules giving companies no opportunity to file objections or present their case excessively infringe on corporate rights to participate in the process. Market capitalization is shaped not only by corporate value but also by external factors such as economic shocks and investment fund flows, the court said, making it difficult to treat on the same footing as default or complete capital erosion. The court also took issue with supplementary provisions that applied the thresholds — 30 billion won ($21 million) for KOSPI and 20 billion won ($14 million) for KOSDAQ — starting in July this year, rather than in January next year as originally announced.
The ruling is expected to influence how other companies facing removal on the same grounds respond. About 30 KOSDAQ companies face delisting under the tightened market-cap requirements. Pintel and Medicox filed injunction requests to suspend their delistings on the 1st of this month. Earlier, Eutilex, Daejin Advanced Materials (393970), Gold&S, Jeil M&S and Samyoung Electronic & Communications also sought court rulings.
The decision does not, however, cancel the delistings of all affected companies at once. Companies that have filed injunction requests must await individual court rulings, and even those granted injunctions must receive final judgments in the main lawsuits. What the court objected to was the exclusion of any chance to present a case and the early application of tightened standards — it did not affirm the financial soundness or going-concern value of the companies. Rather than investing on the expectation that delisting can be avoided, investors need to examine the earnings and financial condition of the companies involved and monitor court rulings and follow-up measures by the exchange.
Regulators have reacted with dismay. First, a plan devised by authorities to allow transfers to the KONEX market has been thrown into question. The scheme was designed to let companies meeting certain financial requirements move to KONEX without going through liquidation trading, but companies granted injunctions are now more likely to remain on their existing markets while awaiting rulings in the main cases.
Financial authorities held a meeting the previous day to discuss responses, sources said. Because the court faulted both the lack of a process for companies to present their case and the early application of the standards, observers expect regulators may revise the system to guarantee an opportunity to file objections and to strengthen transitional provisions. "The exchange also faces growing pressure, given the possibility of losing the main lawsuits, to either halt delisting procedures entirely or revise its listing rules by creating a right to file objections and strengthening transitional measures," a legal industry official said.
