Shin Dong-kook's share purchases stir tender offer rule controversy

Questions are mounting over whether Shin Dong-kook, chairman of Hanyang Precision and the largest individual shareholder of Hanmi Science, violated mandatory tender offer rules under the Capital Markets Act through off-market share purchases he made this year.

If a violation is confirmed, the shares in question could be stripped of voting rights and subjected to a forced disposal order — a development analysts say could mark a critical turning point in the ongoing management control dispute at Hanmi Pharm Group.

According to disclosures filed with DART, the Financial Supervisory Service's electronic disclosure system, Shin entered into off-market share purchase agreements in February, July and October this year, contracting to acquire a total of 9,397,663 shares, or 13.74 percent, of Hanmi Science. His stake stood at 16.43 percent before the purchases.

The controversy centers on the July transaction, which followed the February deal. Article 133, Paragraph 3 of the Capital Markets Act and Article 140 of its enforcement decree require any shareholder holding a combined stake of 5 percent or more — including shares held by specially related parties — to conduct a formal tender offer if they acquire shares from 10 or more shareholders in off-market transactions within any six-month period.

Disclosure filings show that on Feb. 13, Shin purchased a 6.45 percent stake, or 4,410,032 shares, in Hanmi Science from six sellers in an off-market deal. Less than six months later, on July 7, he acquired an additional 5.27 percent, or 3,604,799 shares, from seven sellers. Some market observers note that even if three sellers appeared in both transactions, the total number of distinct sellers within the six-month window would reach at least 10 — meeting the legal threshold that triggers the mandatory tender offer requirement.

Under the Capital Markets Act, shares acquired in violation of tender offer rules cannot be voted at shareholder meetings. In addition, Article 145 of the act empowers the Financial Services Commission to order the disposal of such shares within a period of up to six months. A similar violation at Korea Real Estate Investment & Trust in 2014 resulted in voting rights being restricted at a shareholder meeting.

Should regulators confirm a violation and impose voting restrictions or a disposal order, Shin's personal financial burden could grow considerably. A forced sale of a large block of shares would likely intensify downward pressure on the share price.

Shin currently holds 432.2 billion won ($321 million) in stock-backed loans from financial institutions, using his Hanmi Pharm and Hanmi Science shares as collateral. Of that total, Hana Securities accounts for 234.2 billion won and Korea Securities Finance Corp. for 198 billion won. After NH Investment & Securities declined to extend an existing 113.2 billion won loan, Shin repaid it in full on Sept. 21 and refinanced through Hana Securities and Korea Securities Finance Corp.

Under the Hana Securities arrangement, the collateral maintenance ratio was set at 200 percent. The entire 432.2 billion won in stock-backed loans matures in mid-to-late March next year. Shin also disclosed on Oct. 2 that he plans to fund an additional share purchase worth 69.3 billion won through stock-backed borrowing.

Market analysts warn that a sharp drop in the share price triggered by a disposal order could push the collateral ratio below the required threshold, exposing Shin to margin calls and forced liquidation risk — and potentially undermining the credit quality of lenders, with Hana Securities, the largest creditor, facing the greatest exposure.

Some in the financial industry have raised concerns that the refinancing was approved outside normal credit review procedures, given that a previous lender had declined to extend the loan. Calls are growing for scrutiny of how the credit committee reached its decision to quickly refinance hundreds of billions of won in loans, despite publicly available disclosures flagging potential Capital Markets Act issues with the collateral.

"When a financial institution extends stock-backed loans worth hundreds of billions of won, conducting thorough legal due diligence to check for any legal defects or potential Capital Markets Act violations involving the collateral is standard practice," a financial industry official said. "If a lender took over a loan that a previous creditor refused to extend, and still failed to screen for even basic Capital Markets Act risk, that points to a fundamental flaw in its risk management and internal control systems."