Stock Drop Triggered by False Disclosure... Supreme Court Rules "CHA Biotech Must Compensate Investors"

"Overstatement of Intangible Assets"

CHA Biotech

The Supreme Court has ruled that CHA Biotech must compensate investors who suffered losses due to a drop in share price caused by an inaccurate business report disclosure.

According to legal sources on July 31, the Supreme Court's Second Division (presiding judge: Eom Sang-pil) recently upheld a lower court decision that partially sided with 12 shareholders of CHA Biotech, including Mr. A, in their lawsuit against the company, former management, and the employees who prepared the business report.

In its 2017 business report, CHA Biotech classified certain R&D expenses for new drugs as intangible assets.

Subsequently, the accounting firm responsible for the audit released an audit report pointing out that the company had capitalized "recurring R&D expenses incurred for projects still under development," which did not meet the recognition requirements for intangible assets.

The company also disclosed that if results for 2017 were recalculated to reflect this issue, the figures would show an operating loss, not an operating profit, and the company would have recorded operating losses for four consecutive business years prior to that point.

The day after this disclosure, CHA Biotech was designated as an administrative issue, and the share price plummeted from 33,850 won to 19,700 won in just two days. CHA Biotech later issued a corrected disclosure reflecting the operating loss.

The investors filed a damages claim, stating they relied on the false business report provided by the company and incurred losses as a result. CHA Biotech argued it could not be definitively concluded that the report was a false disclosure and denied liability for compensation.

The court of first instance ruled in favor of the plaintiffs, stating the business report was falsely prepared without complying with accounting standards set by the Financial Supervisory Service. The appellate court also recognized liability for damages, ruling, "By excessively recognizing intangible assets beyond the reasonable and objective range permitted under K-IFRS corporate accounting standards, the business report contained false statements regarding critical matters such as operating profit and loss." However, it limited compensation to 30% of actual investment losses, noting it was difficult to conclude the plaintiffs invested based solely on the business report.

The Supreme Court found no error in the appellate court's decision and affirmed the judgment as is.

This content was produced with the assistance of AI translation services.