On December 1, 2020, Kim & Chang successfully defended Hanjin KAL in an injunction case where Grace Holdings Ltd. (a special purpose vehicle under KCGI (Korea Corporate Governance Improvement Fund)) and seven others (the “Petitioners”) sought to prohibit Hanjin KAL’s issuance of new shares by third-party allotment to Korea Development Bank (a government-owned policy bank, “KDB”).  This enabled Hanjin KAL to participate in the paid-in capital increase of its subsidiary Korean Air by using the funds financed through third-party allotment for Korean Air to ultimately acquire Asiana Airlines.  As a result, the Korean aviation industry, which was facing a profound crisis, can now accelerate the process of stabilizing businesses and reinforcing competitiveness through reorganization.  In addition, the three-year-long dispute over the control of Hanjin KAL also stabilized.

As part of Hanjin KAL’s initiative to strengthen its global competitiveness through the acquisition of Asiana Airlines by its major subsidiary, Korean Air, Hanjin KAL participated in the capital increase of Korean Air by using the funds procured from issuing new shares of KRW 500 billion to KDB by third-party allotment (the “Rights Issue”) and exchangeable bonds of KRW 300 billion.  Korean Air planned to acquire Asiana Airlines with the funds obtained from this paid-in capital increase valued at KRW 2.5 trillion in total (participated in by the parent company Hanjin KAL).

In response, the petitioners, as the major shareholders of Hanjin KAL (the “Petitioners”), filed an injunction seeking prohibition of Hanjin KAL’s Rights Issue (the “Injunction Case”) on the grounds that (i) the Rights Issue was aimed at maintaining the Hanjin KAL management’s control and was determined to meet the needs of KDB and Hanjin KAL’s current management regardless of the interests of Hanjin KAL and its shareholders, and therefore, (ii) the Rights Issue was unlawful because it materially infringed upon Hanjin KAL shareholders’ preemptive rights.

Article 418 (1) of the Korean Commercial Code (the “KCC”) provides that “shareholders have the right to be allotted with new shares according to the number of shares they own,” guaranteeing shareholders’ preemptive rights in principle.  However, Paragraph (2) of the same Article, allows allotting new shares to a third party against shareholders’ preemptive rights in accordance with the relevant provisions under the Articles of Incorporation, provided that such allotment is necessary for achieving the company’s operational objectives (“notwithstanding Paragraph (1), a company may make an allotment of new shares to third parties, as provided in the Articles of Incorporation if necessary for the achievement of the company’s operational objectives, such as introduction of new technology, improvement of financial structures, etc.”).

The key issue of the Injunction Case was whether the Rights Issue—i.e., issuance of new shares to KDB by third-party allotment, was necessary to achieve the company’s operational objectives under the KCC and Articles of Incorporation, such as “important capital alliance from a business perspective” or “urgent financing,” especially when a dispute has been ongoing over the control of the company.

In this respect, the Seoul Central District Court (the “Court”) dismissed the Petitioners’ claim for injunction prohibiting the Rights Issue on grounds that (i) the Rights Issue was made to the extent necessary for Hanjin KAL to achieve the “operational objective” of acquiring Asiana Airlines and operating the integrated airline in line with the applicable provisions under the KCC and Hanjin KAL’s Articles of Incorporation, and (ii) it is difficult to consider that the Rights Issue was intended to defend the managerial power or control of Hanjin KAL’s current management.  Specifically, the Court acknowledged that the Rights Issue is necessary for an “important capital alliance from a business perspective” and “urgent financing” because (i) after Hanjin KAL acquires its competitor Asiana Airlines through its major subsidiary Korean Air, Korean Air will function as the only flag carrier in Korea, which will resolve any issues concerning the survival of Hanjin KAL and Korean Air and eventually in the mid- to long-term, achieve economies of scale and stronger global competitiveness, and furthermore (ii) by soliciting investments from the policy bank KDB and establishing a strategic partnership between Hanjin KAL and KDB, Hanjin KAL will be able to secure a continued and stable source of financial support for the future and actively engage in the reorganization of the aviation industry.

The Court’s decision bears the following implications from M&A, management dispute and legal perspectives:

• M&A perspective: The Court’s decision is significant in that by allowing KDB to invest funds in Hanjin KAL for Korean Air’s acquisition of Asiana Airlines, the Court enabled Hanjin KAL to participate in the paid-in capital increase of Korean Air for financing the acquisition and ultimately led to Korean Air’s acquisition of Asiana Airlines.

• Management dispute perspective: The Court’s decision also bears significance as by consummating Hanjin Group’s acquisition of Asiana Airlines, it allowed KDB to participate in the management of Hanjin KAL—Hanjin Group’s highest parent company—as a shareholder and brought stability to the fierce, three-year-long dispute over the control of Hanjin KAL.

• Legal perspective:  This Court decision directly permitted a company to allot new shares to a third party even when there was a management dispute over the company.  The finding attracted significant interest because legal experts previously did not believe this was possible.  This Court precedent confirmed that even in the midst of a management dispute, issuing and allotting new shares to a third party can be deemed lawful, given that such allotment is highly “necessary to achieve operational objectives” as defined under Article 418 (2) of the KCC, and will serve as a new milestone.  This case is particularly significant in that it acknowledged Hanjin KAL’s “operational necessity” of issuing and allotting new shares to a third-party policy bank KDB based on the “important capital alliance” between Hanjin KAL and KDB “from a business perspective” in consideration of the legal status and relationship between Hanjin KAL and KDB (while Hanjin KAL would be able to receive KDB’s stable financial support as a holding company responsible for managing the merged airline of Korean Air and Asiana Airlines, KDB would be able to efficiently oversee the integration process between the highly publicly-invested airlines).