The sharer trading of Samsung BioLogics has been suspended since November 15th. After the Securities and Futures Commission’s announcement of ‘intentional accounting fraud’, the Samsung BioLogics’ clock stopped.
Accordingly, a number of investors of Samsung BioLogics flooded every investment community websites with comments supportive of Samsung, such as “This decision by the Securities and Futures Commission is political, and this should be corrected through the administrative litigation”, and “If the political logic intervenes the corporate policy, it will have a negative impact on the entire economy”.
Some analysts released reports that the ripple effect of Samsung BioLogics would be limited. However, a significant number of experts predict that this will act as a negative factor in the stock market that has been so weak, and inevitably lead to the damage on Korean economy.
Samsung BioLogics revealed, “Our accounting process has not violated the business accounting standards”, and “We will make every effort to prove the legality of our accounting practice through the administrative litigation”.
In fact, the decision of the Securities and Futures Commission is completely opposite to the conclusion predicted by Samsung BioLogics.
In the previous government, the financial authorities judged there had been no problem in the audit by the Korean Institute of Certified Public Accountants. Despite this, a special audit was initiated by the new government, and after 19 months from the beginning of the audit, the previous conclusion was overturned.
The Financial Supervisory Service claims that the intensity of the special audit is different from that of the previous audit by the Korean Institute of Certified Public Accountants, but some in the industry point out that it is a political decision reflecting the current government’s intention of checking Samsung, and thus new industry has been sacrificed by media manipulation.
The Commission put a weight on the fact that business control was not changed even when Samsung BioLogics changed its accounting standards in 2015 regarding the change in accounting standards, which is a key issue. Accounting standards can be only changed when there is a change in business control.
However, the Commission already judged in 2012 that Samsung BioLogics and Biogen jointly controlled the business when Samsung Bioepis was established.
Documents that the Financial Supervisory Service submitted after the start of the re-audit also affected the decision. The Financial Supervisory Commission submitted the report that Samsung BioLogics had submitted to the Samsung Group Future Strategy Team regarding the change in accounting standards.
This document shows that Samsung BioLogics was aware that Biogen’s exercise of the call option was postponed in November 2015, and despite this, it changed the accounting standards on the ground that the possibility of Biogen’s exercise of the call option increased. In addition, the document also contained the details of the Samsung’s internal discussion of the way to minimize the losses on valuation of the call option and change the accounting standards in consideration of the adequacy of the merger ratio between Samsung C&T and Cheil Industries.
Samsung BioLogics has already filed a lawsuit against the conclusion of the Securities and Futures Commission that the omission of the call option in the regulatory news was intentional.
Samsung BioLogics is also facing a blow in winning contracts. With the commencement of operation of the third plant last month, improvement in performance was expected in full swing from next year, but the accounting risk is catching up with it.
The industry is concerned that Samsung BioLogics' Contract Manufacturing Organization (CMO) business for biologics will also be put on hold. This is because contracts with global pharmaceutical companies, which have strict code-of-ethics, may become difficult.
Although pharmaceutical companies are not directly related to the Contract Development and Manufacturing Organization (CDMO), they exclude a company under question from deals, and imposes conditions such as contract cancellation, and penalty for breach of contract, if ethical and legal problems including rebates occur.
Court battle with investors is also a worry. Law firm HYNKYUL, which is preparing lawsuits against Samsung BioLogics, said it has 276 investors who announced their intention to participate in the lawsuit. It is also possible that foreign investors may individually file civil lawsuits against the company and the accounting firm.
The Korea Stock Exchange has been in the process of reviewing Samsung BioLogics for its listing eligibility after the 15th.
In the eligibility review, whether or not to be subject to delisting, rather than whether or not to be delisted, is initially examined. Then, the Korea Exchange and Corporate Review Committee finally decides whether or not to be delisted. It takes less than 35 business days.
The Stock Exchange determines whether to submit Samsung BioLogics to the Corporate Review Committee within 15 business days, and in such a case, whether or not to be delisted is decided within 20 days from the submission date.
According to the Securities & Futures Commission, the size of Samsung BioLogics accounting fraud is 4.5 trillion won, which exceeds the equity capital of 3.8 trillion won.
Samsung BioLogics investors are concerned about its delisting.
The market capitalization of Samsung BioLogics is 22 trillion won, which is the sixth largest listed company in the KOSPI. Daewoo Shipbuilding & Marine Engineering, which had undergone similar procedures, could not even come close to the size of Samsung BioLogics. More than 90% of Samsung BioLogics investors are domestic personal investors and institutional investors. Thus, this will have a large impact on domestic investors.
However, it is too early to predict whether the 'worst-case scenario', in which 22 trillion won worth of stocks are delisted, will come true. There are still a number of procedures to be passed, and a legal battle is also planned.
Currently, the speculation that this will not result in delisting is prevalent in the securities industry.
In previous cases including Daewoo Shipbuilding & Marine Engineering, Korea Aerospace Industries and Dong-A Socio Holdings, mostly the focus was on the financial stability, and if there is no significant issue in the financial stability, it is expected that the decision will not be delisting of Samsung BioLogics.
However, investors cannot hide their concerns because the policy of the Korean government has been going back and forth depending on the situation.