Posted on : Nov.29,2018 17:36 KST
Ruling invalidates stockholders’ authorization of plan for separate R&D firm
A South Korean court has put the brakes on a scheme by the headquarters of US company General Motors (GM) to split GM Korea into two companies through an extraordinary stockholders’ meeting without the consent and participation of the Korea Development Bank (KDB), its second-largest stockholder. For now, at least, the courts have acknowledged that the KDB had the right to exercise a veto in the stockholders’ meeting.
But since the court left open the possibility that a physical division of the company might not be subject to the KDB’s veto, the next question is how events will play out in the future. Considering that GM has announced its plans to carry out a robust global restructuring and to refocus its business operations on cars of the future, some expect that it’s only a matter of time before it makes another attempt to reorganize GM Korea by dividing it into separate companies.
On Nov. 28, Hon. Bae Gi-yeol, head of the 40th civil law division at the Seoul High Court, partially accepted an injunction filed by the KDB to invalidate the stockholders’ authorization of the plan to split GM Korea into an R&D company and a production company and to block the execution of that plan.
“On the condition that the KDB deposits 1 billion won (US$893,140) as a guarantee for GM Korea, we invalidate the resolution to approve the corporate division plan that was made during the extraordinary stockholders’ meeting on Oct. 19. GM Korea is not permitted to execute that resolution,” the court said. But GM Korea, whose restructuring plans were halted just before it intended to execute them on Nov. 30, expressed regret and announced its plans to appeal.
Despite GM’s arguments, the court found that GM Korea’s plan to divide into two separate corporations through an equity spin-off was subject to the veto of the KDB, which holds a 17.02% share in GM Korea. “Since this resolution did not receive the support of 85% of the total regular shares, it represents a severe violation of the articles of association,” the judge said, referring to the provision about veto power.
The KDB was guaranteed a veto by a section of the articles of association that allowed just 15% of shares to block 17 special kinds of stockholders’ resolutions, providing a way for the minority stockholder to counter moves by management. The provision of the articles that was at dispute in this case stipulated that mergers, consolidations and other kinds of corporate restructuring are subject to veto power. The KDB contended that it had the right to exercise a veto because a corporate spin-off counts as corporate restructuring, while GM rejected this argument by citing a clause stipulating that mergers that don’t affect the actual situation of shares at the company and similar actions aren’t subject to veto power. The courts have given conflicting rulings in this case, with the district court buying GM’s argument and the high court finding in favor of the KDB.
But the fact that the court ruled that an equity spin-off is subject to a veto but that a physical division of the company might not be makes it impossible to predict what will eventuate.
“Presuming there are no unusual circumstances, a physical division [. . .] could be seen as not being subject to the supermajority required for special resolutions per the articles of association,” the court said, referring to the KDB’s veto power.
Physical division vs. equity spin-off
Physical division is what happens when one of the business divisions of a corporation is turned into a subsidiary that is completely owned by that corporation. This method is frequently used when the corporation needs to sell off a business division at a future point. While it’s clear that physical division wouldn’t create any changes to the existing stockholders’ shares, it wouldn’t be as effective as an equity spin-off if GM Korea’s goal is to maintain an independent R&D corporation during future restructuring of its production operations.
An equity spin-off means dividing the corporation’s assets into two and then distributing these among newly created independent corporations, after which the shareholders are assigned shares of the new corporations according to the ratio of their current shares. GM Korea appears to have rammed through its spin-off plan based on the fact that the shareholder ratio would remain the same in the new corporations. But the high court concluded that an equity spin-off still has a practical effect on the situation of the shares.
Even if the combined share value of the two new corporations is quantitatively equal to that of the original corporation, the court said, the fact that the new corporations are independent means that there’s a qualitative effect on shareholders’ rights.
“We haven’t had an internal review of a physical division, so we’re looking into that scenario carefully. The division of the company has been blocked for now, but we don’t think that GM will give up easily,” said a spokesperson for the KDB.
“In the future, we’ll continue working on reinforcing the company’s position through the establishment of the GM Technical Center Korea,” GM Korea said, referring to the name of the R&D corporation that would have resulted from a spin-off.
“While the court has bought a little time by putting a halt to the equity spin-off, GM probably has a number of scenarios in place for splitting up the company. Look how GM announced its restructuring of factories in the US on Nov. 26 despite pushback from the Trump administration. The restructuring of underperforming factories overseas, like the factory in Changwon, South Korea, is being scheduled according to circumstances in each country, but it could happen at any time,” said Kim Pil-su, professor of automotive engineering at Daelim College.
By Jung Se-ra, Hong Dae-seon and Kim Min-kyoung, staff reporters
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