Bourse fails to properly screen SPAC takeover

HONG KONG - The Korean bourse operator has failed to properly screen a special purpose acquisition company’s (SPAC) takeover of a firm, documents showed yesterday, raising concerns that retail investors could suffer unnecessary losses in the future.

In November, Korea Exchange (KRX) approved an acquisition by Kyobo-KTB SPAC of auto-parts maker Korea Fueltech.

Kyobo-KTB SPAC is a jointly-built paper company between two brokerages, Kyobo Securities and KTB Securities, that aims to raise proceeds through an initial public offering to acquire another firm.

The ownership structure of Korea Fueltech’s Chinese subsidiary, however, turned out to be different from what had been made public in a regulatory filing, according to a Chinese government document obtained exclusively by Yonhap News.

The Certificate of Approval for Establishment of Enterprises with Foreign Investment in China, issued in May by the Beijing municipal government, showed that a 45 percent stake in Beijing KFTC, the Chinese unit of Korea Fueltech, was owned by Chinese firm Cheerplan Investment, which had invested $1.71 million.

Korea Fueltech had invested $1.8 million in Beijing KFTC, which was capitalized at $3.8 million, the certificate showed.

But a regulatory filing provided by KRX showed Korea Fueltech owning an 87.5 percent stake in its Chinese subsidiary.

“It is definitely a case of lacking due diligence. Kyobo-KTB either missed or deliberately omitted the fact,” claimed a financial source in Hong Kong, who is familiar with the matter.

Earlier in March, Kyobo-KTB SPAC was also suspected of neglecting due diligence, when it canceled the acquisition of cosmetics firm Genic, just seven hours after it had announced plans for a takeover.

Since late 2009, Korea has allowed the establishment of SPACs in a move to spur corporate takeovers and restructuring efforts.

A shell company created for the purpose of acquisitions is now allowed to list its shares on the Seoul bourse.

SPACs have garnered a lot of interest from retail investors, as they allow public stock market investors to invest in deals that are usually considered the sole domain of private equity firms.

Kyobo-KTB SPAC managers admitted that the two documents stated the ownership structure of Korea Fueltech’s Chinese operation differently.

“It is a customary practice required in China. The Chinese government requires the completion of the transfer of stakes before it gives an approval of the transfer,” said a high-ranking official from KTB Securities.

He explained Cheerplan had earlier agreed to pay after having handed over some shares of Beijing KFTC to it, but Cheerplan did not follow through on its pledge.

“Korea Fueltech has already filed a lawsuit against Cheerplan with the International Chamber of Commerce (ICC) Court’s Hong Kong office. The reason we did not disclose the fact to our investors is that we did not want to create unnecessary complications since Korea Fueltech can surely win the case,” the official said. “This is a sensitive issue to us.”

An expert in Chinese business law had a different take on the matter.

“I have never heard that such a practice exists in China,” said Chueng Mingfai, a licensed Chinese lawyer working for Beijing Yingke Law Firm’s Hong Kong office.

“The ICC’s role is to ‘arbitrate.’ It does not have any law enforcement power in China.”

KRX, which should have carefully examined a SPAC acquisition, did not even know that the change in the structure of Beijing KFTC had taken place.

“We know that they had planned on the transfer of shares, but the agreement was not carried out in the final stage and the Chinese company failed to make payments by July,” said an official at KRX’s department for the listing examination.

According to the regulatory filing, Beijing KFTC has been contributing to a large part of the net profits posted by Korea Fueltech.

“The ownership change in Beijing KFTC means a change in the profit structure of Korea Fueltech,” warned a Hong Kong financial source.

Yonhap