The legal battle between STAR SM REIT and the Korea Exchange, which was decided due to embezzlement and breach of trust by management earlier this year, is intensifying. STAR SM REIT argues that it is unacceptable for the exchange to decide on immediate delisting without granting any improvement period. It claims that recovery from damages and management improvement is possible as it is currently in the process of selling its management rights.
According to the financial investment industry on the 24th, a hearing date for STAR SM REIT's injunction against the delisting decision from the exchange was held at the Seoul Western District Court. Ahead of this hearing, both parties sharply opposed each other in the written materials submitted to the court. It is reported that the hearing focused primarily on whether to apply charges of embezzlement and breach of trust against the management of STAR SM REIT, whether to grant an improvement period for delisting, and the possibility of selling management rights.
The exchange decided on the delisting of STAR SM REIT on the 26th of last month. STAR SM REIT was designated as a management item four months after announcing facts of embezzlement and breach of trust in February this year, and it proceeded to delisting without a separate improvement period. The initial amount of embezzlement and breach of trust was reported to be approximately 3.1 billion won, but after further confirmation, it grew to around 7 billion to 8 billion won. According to the exchange's market listing regulations, if the amount of embezzlement and breach of trust by executives exceeds 5% of the equity, a substantive review of listing eligibility will be conducted. The initially announced amount of 3.1 billion won corresponds to 5.07% of STAR SM REIT's equity.
Immediately after the decision to delist, STAR SM REIT filed for an injunction, claiming it was an unjust action. Generally, an improvement period of about one year is granted to companies slated for delisting, but STAR SM REIT claims that such a period was not provided, despite having a plan for management normalization. Furthermore, the company asserts that the allegations of embezzlement and breach of trust have not yet concluded in court, thus necessitating a legal interpretation.
The exchange submitted a statement to the court explaining the background for deciding on the immediate delisting of STAR SM REIT without granting an improvement period, noting, "Plans for new investments, asset sales, and sales of management rights do not appear to lead to actual management improvement, and the feasibility of the plans seems somewhat lacking."
STAR SM REIT stated at the exchange's corporate review committee held last month, "We will ensure an investment fund of 32.5 billion won by next year to achieve management improvements such as promoting new business, increasing rent for existing businesses, and selling assets." However, the exchange judged that the asset sales would lead to a fragile revenue structure and that the rent increase plan would correspond to internal transactions as income from subsidiaries.
Regarding the sale of management rights, STAR SM REIT has stated it would secure funds through a public sale and replace the management involved in embezzlement and breach of trust, but the exchange viewed the sale of management rights itself as difficult. Even if management rights are sold, the exchange believes there is a high likelihood they would be sold to unqualified buyers looking to benefit from the sale of the real estate assets owned by STAR SM REIT rather than resulting in management normalization.
STAR SM REIT acknowledges that the management improvement plan presented at the corporate review committee was somewhat lacking. However, it argues that the prolonged consultation process with the Korea Real Estate Board, which manages the REIT business under the Ministry of Land, Infrastructure and Transport, made it difficult to submit a proper plan to the committee. A representative from STAR SM REIT said, "The process of consulting with the Ministry of Land took a long time as the method of selling management rights changed several times," and added, "We have completed the selection of potential buyers and specific consultations are underway."
Some industry insiders suggest that the situation arose from the structure whereby the exchange and the Korea Real Estate Board each manage the listed REITs. The exchange manages the listings, while the Korea Real Estate Board manages the operations. An individual in the legal field noted, "For listed REITs, asset sales and management rights sales require approval from the Ministry of Land, which leads to extended decision-making times," and warned, "If these characteristics of listed REITs are not reflected in the poor liquidation process and sufficient improvement periods are not granted, the REITs will inevitably face delisting during a downturn in the real estate market."