[Edaily Marketin, Reporter Song Seung-Hyeon ] StoneBridge Capital (hereinafter “StoneBridge”) has prevailed in a legal dispute with private equity fund (PEF) manager Han & Brothers, with whom it had partnered to acquire Bodyfriend.

The court ruled that even if both companies are registered as general partners (GPs) jointly managing the fund, if the fund’s articles of association do not contain provisions regarding “joint GPs,” one GP may convene a general meeting of partners to discuss the dismissal of the other GP on its own. This means that the provisions in the fund’s articles of association take precedence over the joint GP status claimed by Han & Brothers.

Han & Brothers filed an appeal immediately following the ruling, and the legal battle between the two sides is expected to enter its second round.

According to investment banks (IBs) and legal circles on the 10th, the 30th Civil Division of the Seoul Central District Court (Presiding Judge Kim Seok-beom) last month rejected Han & Brothers’ claims in a lawsuit it filed against two private equity funds (PEFs) affiliated with StoneBridge. Han & Brothers lost the case.

The dispute began in June 2022. Han & Brothers and StoneBridge, both private equity fund (PEF) managers, established a private equity fund in the form of an investment partnership to acquire Bodyfriend, with each participating as a general partner (GP) responsible for managing the fund. A GP is a company responsible for the fund’s investments and operations.

On July 28 of that year, a special purpose company (SPC) established by these PEFs acquired 36,856,492 shares (46.30%) of Bodyfriend for 417 billion won, becoming the largest shareholder. An SPC is a company established separately for the fund to make actual investments.

The total capital contribution for the PEF in question was 53.601 billion won. Four investors (LPs), including institutional investors, contributed 53 billion won, while the GP, StoneBridge, invested 600 million won, and Han & Brothers invested 1 million won. An LP refers to an investor who contributes capital to a fund and receives a share of the investment returns.

The rift began during the executive appointment process at Bodyfriend immediately following the acquisition. This occurred when the largest shareholder, who held all of Han & Brothers’ issued shares, was appointed as Bodyfriend’s chairman in September 2022, and the mother of Han & Brothers’ CEO was appointed as Bodyfriend’s chief financial officer (CFO).

The chairman was set to receive an annual compensation package of 495 million won and a signing bonus of 3 billion won (a one-time payment made separately to newly appointed executives). The CFO held the authority to pre-approve contracts or expenditures exceeding 200 million won.

StoneBridge and the limited partners (LPs) determined that these appointments had not followed proper procedures and constituted a conflict-of-interest transaction involving Han & Brothers. Consequently, after holding a briefing session in February 2023 to hear Han & Brothers’ explanation, they convened an extraordinary general meeting of shareholders on March 10 of the same year and decided to dismiss Han & Brothers with the unanimous consent of all investors, excluding Han & Brothers.

Han & Brothers first challenged whether StoneBridge had the authority to convene the meeting on its own. They argued that since Han & Brothers and StoneBridge had agreed to act as co-GPs under an agreement between managing partners—and since both were listed as co-representative partners in the corporate registry—it was improper for StoneBridge to convene the meeting unilaterally.

However, the court did not accept this argument. It reasoned that if the fund’s articles of incorporation do not explicitly stipulate a system of jointly managed GPs, one GP may exercise authority independently.

While the articles of association for the private equity fund in question specified the authority of each managing partner and who could convene the general meeting of partners, they did not stipulate that the two GPs must make decisions jointly.

The court also ruled that the mere fact of being listed as co-representative partners in the corporate registry does not confer joint GP authority not specified in the articles of incorporation. The court held that the registry is merely a mechanism to protect counterparties in external transactions and cannot substitute for the fund’s internal operating rules.

Han & Brothers further argued that the notice convening the general meeting did not sufficiently specify the specific grounds for dismissal, and that StoneBridge had provided incorrect information to investors by informing them of the possibility that the acquisition financing loan might be canceled.

This argument was also rejected. The court acknowledged that, based solely on the initial notice, the grounds for dismissal were not sufficiently specific. However, it ruled that Han & Brothers could have fully understood the grounds for dismissal through the February 20, 2023, briefing session, the March 8 agenda briefing materials, and documents summarizing the breaches of duty.

Whether Han & Brothers had actually violated rules during the fund’s operation was also subject to the court’s review.

In particular, the process of appointing the CFO was in question. The fund management agreement stipulated that the two GPs must consult with each other to appoint Bodyfriend’s CFO. However, it also included a provision stating that if no agreement was reached by a specified deadline, Han & Brothers could make the appointment.

The court ruled that this clause did not mean Han & Brothers could unilaterally appoint a CFO without sufficient consultation with the other GP.

The court pointed out that no evidence was found showing that the two companies had reviewed candidates or exchanged opinions during the actual appointment process, and that the “day immediately prior to the deadline” referred to in the agreement was not clearly defined.

The court also found issues with the process of appointing the chairman by the largest shareholder. It noted that the appointment of the chairman and the determination of his compensation are matters that should be discussed by the board of directors, yet these procedures were not followed. Accordingly, the court ruled that the annual compensation of 495 million won to be paid to the chairman also lacked a legitimate basis.

Consulting and marketing contracts were also found to be problematic. The court noted that while the contracts listed items by date, there was insufficient documentation to verify what services were actually provided, and that all personnel listed as having performed the work were employees of Han & Brothers.

This ruling is significant in that it confirms the importance of the provisions in a fund’s articles of incorporation within the joint GP structure commonly seen in domestic private equity funds (PEFs).

This is because the court ruled that even if the two asset managers entered into a separate agreement to operate jointly, one GP may make decisions independently if the same terms are not clearly reflected in the fund’s articles of incorporation.

Han & Brothers filed an appeal immediately following the ruling. The date for the first hearing in the appellate proceedings and the presiding court have not yet been determined.