A special purpose acquisition company (SPAC) jointly built by South Korea’s major securities firm and leading venture capital firm failed to fully disclose information on its target company, resulting in its overvaluation, documents showed Sunday.

Kyobo-KTB SPAC, a paper company established by Kyobo Securities Co. and KTB Securities Co., released inaccurate information about target company Korea Fueltech Corp., which then allowed the SPAC to overvalue Korea Fueltech.

In a December regulatory filing, Kyobo-KTB SPAC said Korea Fueltech owns an 87.5 percent stake in its Chinese subsidiary Beijing KFTC Co., which made a net profit of 10.2 billion won ($8.7 million) in 2010.

The Chinese subsidiary’s net profit accounted for 80 percent of Korea Fueltech’s total net profit of 12.9 billion won for 2010.

However, the ownership structure of Korea Fueltech’s Chinese subsidiary turned out to be different from what had been made public in the regulatory filing, according to a Chinese government document obtained exclusively by Yonhap News.

The Certificate of Approval for Establishment of Enterprises with Foreign Investment in China, issued in May by the Beijing municipal government, showed that Korea Fueltech holds only a 47.5 percent stake in Beijing KFTC, which was capitalized at $3.8 million.

A 45 percent stake in Beijing KFTC Co. is held by a Chinese firm called Cheerplan Investment Co, the certificate showed.

Under the K-IFRS, South Korea’s locally adjusted version of International Financial Reporting Standards (IFRS), only 50 percent-owned subsidiaries are subject to consolidation accounting, which means Beijng KFTC’s profits cannot be included as part of Korea Fueltech’s profits.

Even if Korea Fueltech is recognized as having de facto control over Beijing KFTC and the Chinese subsidiary’s profits can be counted, Korea Fueltech’s total profit will plunge, as the profit from the Chinese subsidiary will only be calculated in proportion to the stake held by the parent company.

Kyobo-KTB SPAC managers admitted that the two documents stated the ownership structure of Korea Fueltech’s Chinese operation differently.

A high-ranking official from KTB Securities explained Beijing KFTC had earlier agreed to hand over some of its shares to Cheerplan, but the agreement was broken off as Cheerplan did not pay for its acquired shares.

“Korea Fueltech has already filed a lawsuit against Cheerplan with the International Chamber of Commerce (ICC) Court’s Hong Kong office. The reason we did not disclose the fact to our investors is that we did not want to create unnecessary complications since Korea Fueltech surely can win the case,” the official said.

“This is a sensitive issue to us,” he added.

An expert in Chinese business law was doubtful if Korea Fueltech could win back the shares.

“The ICC’s role is to ‘arbitrate.’ It does not have any law enforcement power in China,” said Chueng Mingfai, a licensed Chinese lawyer working for Beijing Yingke Law Firm’s Hong Kong office.

Kyobo-KTB SPAC is scheduled to complete the acquisition in February. Korea Fueltech’s shareholders will receive 0.8032258 share of Kyobo-KTB SPAC for one Korea Fueltech share.

Currently, the number of Korea Fueltech’s shares is 24.2 million. Each share is valued at 2,739 won.

The number of Kyobo-KTB SPAC’s outstanding shares is 6.78 million. The share price rose 0.38 percent to 3,970 won last Friday.

Since late 2009, South Korea has allowed the establishment of SPACs in a move to spur corporate takeovers and restructuring efforts. A shell company created for the purpose of acquisitions is now allowed to list its shares on the Seoul bourse.

SPACs have garnered a lot of interest from retail investors, as they allow public stock market investors to invest in deals that are usually considered to be reserved for private equity firms.

KRX, which should have carefully examined a SPAC acquisition, did not even know that the change in the structure of Beijing KFTC had taken place.

“We know that they had planned on the transfer of shares, but the agreement was not carried out in the final stage,” said an official at KRX’s department for the listing examination. (Yonhap News)