A three-party alliance is preparing a lawsuit to prevent Hanjin KAL from issuing new shares to Korea Development Bank (KDB), arguing the state-run lender’s intervention in the battle for control of conglomerate Hanjin Group is unfair, industry sources said.

Hanjin KAL, the holding company of Hanjin Group and the parent of Korean Air, approved a plan to issue new shares to KDB at a board meeting on Monday (November 16). The proceeds, worth 500 billion won ($452 million), will be used to finance Korean Air’s acquisition of Asiana Airlines, which is under the control of its main creditor KDB.

KDB would become the third largest shareholder in Hanjin KAL, with about a 10% stake, while the shareholding owned by the three-party alliance of activist fund KCGI, Bando Engineering & Construction and the former group chairman’s daughter Cho Hyun-ah would be diluted from 46.7% to around 42%.

The stakes held by another shareholder group led by Hanjin Group’s chairman Cho Won-tae, who is locked in a conflict with his sister Cho Hyun-ah for control of the conglomerate, would also decrease from 41.3% to 37%. But with support from KDB, he would have an edge in the battle with his sister.

KCGI, Bando and Cho Hyun-ah will likely argue in their court filing that it is illegal for Hanjin KAL to issue new shares to a particular party while the struggle for control of the conglomerate is underway, industry watchers said.

“There have been similar legal cases filed by some smaller firms,” said an official at one law firm in Seoul. “In most of those cases, the court upheld a ruling that prevented the issuance of new shares.”

However, the alliance may not get the result it wants if the court puts weight on the mandate of KDB as a policy bank, observers said. Aviation is one of the country’s key growth industries and, with its debt ratio of more than 2000%, Asiana Airlines can hardly find a buyer, leaving few options other than being acquired by its bigger rival Korean Air.

Along with the lawsuit, KCGI, Bando and Cho Hyun-ah are likely to seek a special shareholder meeting to remove a majority of the board members of Hanjin KAL and replace them with their choices. But Cho Won-tae would respond by filing a lawsuit to prevent the shareholder meeting from being convened, industry watchers said.

“It is likely that both the issuance of new shares and the convening of a special shareholder meeting could end up being determined by the court rulings,” said an industry insider.

Some observers said if the court battle drags on, KDB and Hanjin KAL may try to settle with the three-party alliance, allowing it to buy a portion of new shares. KCGI said in a press release on Monday that it would be “fair and rational” to issue new shares to all of the company’s existing shareholders.

KDB said on Monday that it will provide a total of 800 billion won in equity and mezzanine investments to Hanjin KAL, which will use the proceeds to acquire Asiana Airlines through Korean Air. This could be followed by the merger of the two airlines. (Reporting by Ik-hwan Choi)

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