Investee companies are gaining the upper hand in a series of legal battles with private equity (PE) investors, raising concerns of a potential decline in minority-stake deals.

Seoul prosecutors indicted three accountants at Deloitte Anjin, one official at Affinity Partners and another at IMM Private Equity for unjust enrichment in January. The prosecutions came nine months after Kyobo Life Insurance accused the three firms of setting an exercise price for a put option excessively high so they would benefit.

The row concerns a 2012 deal in which an investor consortium including Affinity Partners and IMM Private Equity bought a minority stake of 24% in Kyobo Life. The investors decided to exercise a put option to sell their shares back to Kyobo Life in 2018 after the insurer failed to go public by 2015, as permitted in the sale agreement. They then allegedly worked with Deloitte Anjin to calculate the stock’s valuation.

Meanwhile, the Supreme Court last month overruled an appeal court’s decision in a case involving Doosan Infracore and its financial investors led by Mirae Asset Private Equity. The Supreme Court backed the initial ruling that Doosan Infracore’s failure to share information about its Chinese subsidiary, Doosan Infracore China Co (DICC), had not obstructed the investors from selling their minority stake in DICC.

Doosan Infracore sold 20% of DICC to the investors in 2011, promising to list DICC’s shares on the Chinese stock market within three years to help them exit. It failed to do so and the investors tried to exercise their right of drag along, in which a prospective owner can force other minority shareholders to join in the sale of a company if the majority shareholder sells its stake.

However, Doosan Infracore refused to cooperate with the investors on due diligence, and the dispute ended up in court.

Both cases show that a protection scheme typically used by minority-stake investors can be negated, industry watchers said.

“These two legal events are being recognized as a warning to the private equity industry,” an industry insider said. “They also highlight the need for more thorough negotiations on protection terms with investee companies.”

Minority-stake investments have accounted for a large portion of PE transactions, because there are more companies wanting to raise capital in that way than buyout candidates. But there is concern of a slowdown in these deals, as more PE investors are likely to take a cautious approach to minority stake investing in the future.

Some investors are trying new ways to secure downside protection. When Mirae Asset Daewoo acquired about 8% of the combined entity of SK Broadband and Tbroad last year the structure of the deal included the issuing of a participating bond, which provides a guaranteed minimum rate plus extra payments up to a specific level.

“Private equity investors will likely pay more attention to enhancing protection when it comes to minority stake investing,” another industry insider said.

The concerns are echoed by institutions like pension funds and credit unions. An official at one institution said it will study proposals for minority-stake investments “in a more thorough manner than before,” especially looking at whether proposals offer sufficient protection. (Reporting by Ik-hwan Choi)

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