[Edaily Marketin, Reporter Ji Young] It has been revealed that the largest shareholder of KOSDAQ-listed #Seojin Systems reaped capital gains from a rising stock price while the company’s tax risks in Vietnam remained undisclosed. Jeon Dong-kyu, CEO of Seojin Systems, received bridge financing from Shinhan Investment Securities and Hana Securities to alleviate the burden of capital recovery for existing financial investors (FIs). Subsequently, as the stock price surged, he cashed in on the value of call options for a portion of his shares.

Market observers are pointing out that the failure to disclose the Vietnam-related risks may have been motivated by the largest shareholder’s desire to profit from the stock price appreciation. Given that the largest shareholder secured economic gains based on a stock price that did not reflect the undisclosed risks, a conflict of interest controversy appears inevitable.

Seojin System CEO Reaps Stock Price Gains Amid Cover-Up of 'Vietnam Risk'

According to an exclusive report by Edaily on the 16th and a comprehensive review of the investment banking (IB) industry, it has been determined that Jeon Dong-kyu, CEO and largest shareholder of Seojin System, received a portion of the stock price gains from Shinhan Investment Securities and Hana Securities, the firms that provided the bridge financing. Last January, the two securities firms provided approximately 350 billion won in bridge financing to address put options held by Seojin System’s existing financial investors (FIs) and each acquired a total of about 10 million shares of Seojin System through special purpose companies (SPCs). Subsequently, as the stock price surged, profits were generated from the sale of the SPCs’ holdings, and a portion of these profits was paid to the former CEO.

A notable point is that there was no provision for profit settlement in the original bridge financing agreement signed in January. Nevertheless, it is understood that when the stock price surged, the former CEO’s side demanded a change to the contract terms to receive a share of the capital gains. Last March, the former CEO and the two securities firms discussed the profit settlement structure through a “separate agreement” outside the original contract, and a partial settlement was made.

The former CEO’s side based its demand for profit settlement on the call option stipulated in the initial contract. During the bridge loan process, Shinhan Investment Securities and Hana Securities each held approximately 5 million shares of Seojin System through their respective SPCs; of these, around 2 million shares are understood to be shares that the former CEO could repurchase at a price of around 28,000 won per share.

The issue is that Seojin System’s stock price surge—and the substantial capital gains Mr. Jeon received as a result—occurred before the market became aware of the Vietnam tax risk. In February, Seojin System received a demand from local Vietnamese authorities to pay approximately 100 billion won in value-added tax. This tax delinquency issue even led to a long-term travel ban on the CEO. The CEO’s travel ban, customs delays caused by tax issues, and the potential tax burden of 100 billion won were matters that could have significantly influenced investor decisions. Nevertheless, the Vietnam-related risks were not disclosed.

In January, when Shinhan Investment & Securities and Hana Securities were injecting bridge financing into Seojin System, the company’s stock price fluctuated between a low of around 23,000 won and a high of around 38,000 won. Subsequently, the stock price rose to around 47,000 won by the end of February, and as a result, the economic value of the call options that the former CEO could have exercised to repurchase shares at around 28,000 won also increased significantly. It is understood that instead of exercising the call options to repurchase shares, the former CEO received a settlement for a portion of the profit generated when the securities firms’ SPC sold its stake. Seojin System’s stock price even soared to as high as 80,000 won during the first half of the year. In effect, he monetized the increased value of the call options through a profit-sharing arrangement while the Vietnam tax risk had not yet been fully reflected in the stock price.

The market views this as evidence that former CEO Jeon had a significant financial incentive not to disclose the Vietnam-related risks. This is because the structure was such that the higher the stock price remained, the greater the economic value of the call options held by former CEO Jeon, and the more money he could secure through the profit-sharing arrangement when the securities firm sold its stake. If the Vietnam tax risks had been disclosed to the market and the stock price had fallen, the value of the call options and the amount of profit-sharing would likely have decreased.

An investment banking industry insider stated, “If the largest shareholder reaped substantial profits by riding a stock price that did not reflect undisclosed risks, this could pose a serious problem from the perspective of investor protection,” adding, “This is an issue that requires a clear explanation during investigations by the Financial Supervisory Service or the Korea Exchange.”

In response, Seojin System claimed that the settlement funds received by the former CEO were used to secure the company’s liquidity and to address the Vietnam tax issue.

A Seojin System official explained, “The CEO was originally supposed to reclaim that stake (which carried call option rights), but since the company lacked funds, he sold it and lent the proceeds to the company,” adding, “These funds were used to issue a local bank guarantee for the tax appeal in Vietnam.”

Shinhan Securities and Hana Securities Differ on 'Post-Settlement' for Unprecedented Contract

Meanwhile, regarding the “post-settlement” transaction—which is uncommon in the market—the two securities firms have taken differing positions. Shinhan Investment Securities settled the capital gains on the entire investment, while Hana Securities settled only a portion and is reportedly engaged in a dispute with Seojin System over the feasibility of further settlement.

Shinhan Investment Securities maintains that the profit settlement was not a retroactive special favor, but rather a settlement resulting from the former CEO’s waiver of his call option and the provision of downside protection. They explained that, under the bridge loan structure, the former CEO provided his held shares as collateral to bear the investors’ recovery risk, and the profit settlement structure was discussed through a separate agreement signed last March.

Hana Securities stated that while it had settled the profits on a portion of the shares that were subject to call options, it did not accept the request for additional settlement, and therefore the profits from the sale of the remaining shares were attributed to the company in accordance with the legitimate contract.