Penny stocks. [Getty Images Bank]
Penny stocks. [Getty Images Bank]

The first delisting grounds under a penny-stock rule have been triggered, with five Kosdaq-listed companies set to face removal proceedings for failing to meet the minimum share price requirement. The development comes as a court has already moved to halt delisting procedures tied to a separate market-capitalization rule, raising questions about whether the penny-stock cases will spark similar legal battles.

Korea Exchange announced Thursday that it was suspending trading in five Kosdaq-listed companies — TKG Aikang, Hyungji Global, Newintech, i-Scream Edu and Barunson Entertainment & Arts — after delisting grounds arose at each firm.

The five companies were placed on the watchlist Aug. 13 after their share prices fell below 1,000 won. Having failed to recover above that threshold for 45 consecutive trading days since then, they now qualify for delisting. The cases are the first to proceed under a tightened delisting framework that took effect July 1.

Under Korea Exchange listing rules, a company whose share price stays below 1,000 won for 30 consecutive trading days is designated a watchlist stock. If the price fails to recover above 1,000 won for 45 consecutive trading days within the following 90 trading days, the company becomes subject to delisting.

Earlier this month, Korea Exchange issued a disclosure warning of potential delisting for eight Kosdaq-listed companies: TKG Aikang, Hyungji Global, Inno Instrument, Newintech, Jeongmoon Information, i-Scream Edu, Barunson Entertainment & Arts and E8. Of those, three — Inno Instrument, E8 and Jeongmoon Information — have since decided to carry out reverse stock splits and have had their trading suspended.

The financial investment industry is watching closely to see whether the penny-stock delistings will escalate into legal disputes. The concern stems from a court ruling that halted delisting proceedings under the tightened market-capitalization standard, which observers say could influence how courts treat the penny-stock cases as well.

On Oct. 2, the 51st Civil Division of the Seoul Southern District Court granted injunctions filed by Jooyontech and Kmpharmaceutical — both facing delisting for falling short of the market-capitalization threshold — against Korea Exchange. The court found the delisting rules unlawful, citing the companies' lack of opportunity to present their case and the absence of an appeals process. In response, Korea Exchange suspended all delisting proceedings based on the market-capitalization shortfall pending a final ruling on the merits.

Some observers believe the companies now facing penny-stock delisting are likely to seek their own injunctions, citing the absence of an appeals process and what they argue are excessively demanding price-recovery requirements. However, the penny-stock cases differ from the market-capitalization cases in one key respect: companies have concrete tools available to push their share prices above the threshold, including reverse stock splits, capital reductions without compensation and buybacks.

Legal experts say the 45-consecutive-trading-day recovery requirement is likely to become a central point of contention in any litigation. Courts have previously flagged concerns about both the stringency of that requirement and the accelerated timeline under which the tightened delisting standards were introduced.

"The 45-consecutive-trading-day price recovery requirement imposes an excessive burden on companies and could be found by a court to violate the principle of proportionality," said a lawyer specializing in capital markets. "If an injunction is filed on those grounds, there is a real possibility that a court could move to halt the delisting process."

More companies are expected to trigger penny-stock delisting grounds in the months ahead. As of Thursday, a total of 113 listed companies — 26 on the Kospi and 87 on Kosdaq — had share prices below 1,000 won, excluding preferred shares and special-purpose acquisition companies.


moon@heraldcorp.com