CHA Biotech ordered to pay 1.2 billion won to shareholders over stock price collapse

The Supreme Court has upheld a lower court's decision, ordering CHA Biotech to compensate shareholders for damages incurred due to the company's accounting irregularities. The ruling, confirmed on June 5, stems from a lawsuit filed by 12 shareholders who claimed the company's misleading financial reports led to significant investment losses.

CHA Biotech, a subsidiary of the CHA Medical Group specializing in cell therapy development, initially classified certain new drug research and development expenses as intangible assets in its 2017 business report. This accounting treatment resulted in a reported operating profit of 1.29 billion won for 2017. However, an audit by an accounting firm found that these expenses did not meet the criteria for capitalization, as R&D costs can only be recognized as assets once a new drug project receives government approval. CHA Biotech had incorrectly treated them as assets from the clinical trial stage.

Following the auditor's findings, CHA Biotech revised its 2017 financial statement in March 2018, disclosing an operating loss of 881.79 million won instead of a profit. The Korea Exchange designated the company as a 'management item' the following day, and its stock price plummeted from 33,850 won to 23,700 won, further dropping to 19,700 won on the next trading day.

The shareholders sued in 2019, arguing they invested based on the company's false reports. The initial ruling awarded them approximately 1.97 billion won, which the appellate court reduced to about 1.19 billion won by adjusting the compensation to 30% of the investment loss. The Supreme Court found no legal errors in the appellate court's decision, stating that CHA Biotech had overstated intangible assets beyond the reasonable and objective scope allowed by accounting standards, thus making false disclosures about its operating profit and loss.

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CHA Biotech overstated intangible assets beyond the reasonable and objective scope allowed by accounting standards, thereby making false disclosures about its operating profit/loss.