Law firm Hankyul is pursuing a lawsuit against Kolon Life Science and Kolon TissueGene on behalf of minority shareholders who claim that they made losses due to the two companies’ unfaithful public disclosure about now-suspended drug Invossa-K.

The law firm is receiving applications for damage compensation by June 15 from investors who bought shares of Kolon Life Science from Aug. 12, 2017, to March 31, 2019, and suffered losses. Investors -- who bought shares of Kolon TissueGene on Oct. 26, 2017, when the company raised capital through new stock issues or purchased stocks from the initial public offering on Nov. 6, 2017, to March 31, 2019 – can also join the lawsuit.

To date, 355 investors have joined the lawsuit. In the wake of the suspension of Invossa sales, the lost value of minority stakes at both companies is estimated to exceed 400 billion won ($336.2 million).

Korea Biomedical Review met with Kim Kwang-joong, an attorney at Hankyul, and heard about the critical issues of the lawsuit. Kim has been specializing in minority shareholders’ compensation lawsuits.

Question: You are receiving applications not only from Kolon Life Science investors but Kolon TissueGene investors. Do you get many phone calls?

Answer: I get scores of them daily. At first, we were proceeding with Kolon Life Science case only, but many investors simultaneously invested in Kolon TissueGene. To meet their requests, we decided to go ahead with the suit against Kolon TissueGene, too.

Q: What is the chance of your winning the lawsuit against Kolon?

A: The starting point of the shareholders’ suit is the company’s posting of a false business report or omission of a business report. If the company paid attention but was not able to know that the statement was wrong, it can avoid responsibility. However, if it could have been aware of it if it paid significant attention, the company should take responsibility.

Depending on there was a false report or an omission of it, whether the company was in a situation that it could not be aware of it, and on which level it did, the degree of the wrongdoing will be determined.

Kolon Life Science publicly disclosed on May 3 that Kolon TissueGene was aware of the mislabeling of the cell ingredient in March 2017, but it did not notify it in a public disclosure at the time. Due to this omission, we are highly likely to win the lawsuit.

Q: Kolon claimed that a researcher at TissueGene did not understand the meaning of a test notified by Lonza, checked the phrase “no problem in manufacturing” only, and failed to report it to seniors. That is why Kolon Life Science was unaware of the problem, it said. What do you think about their assertion?

A: We cannot rule out such possibility completely but failing to spot the critical issue means the company did not fulfill its duties. If the notification was accurate, we could assume that the company was aware of it. Lee Woo-sok is CEO at both TissueGene and Life Science. When the CEO is the same, it is common sense to say there could be no chance that TissueGene knew, but Life Science didn’t.

Q: Why did you set the starting date of purchasing Kolon Life Science shares as of August 12, 2017, for investors to join the lawsuit?

A: Kolon said it knew the cell ingredient was changed in March 2017 and received local approval for Invossa in July. So, we assume that business reports filed after that are false. The company released the half-year report on Aug. 11. Thus, the suit is for those who invested after that day.

Q: Can’t we assume that business reports released after March 2017 can be false because the company did not disclose the changed cell ingredient at the time?

A: We can, but it is difficult to prove the causal relationship clearly that the change of the ingredient an essential factor in the investment decision because it was in the development stage, before the approval. However, we have a different story after the approval. Drug approval is a very significant factor for an investment decision. The company should have disclosed clearly about the mislabeling of the cell ingredient.

Q: The Ministry of Food and Drug Safety is inspecting Kolon, and the prosecution's probe is on the way, too. How will the results of the inspection the prosecution's investigation affect the case?

A: If the investigations reveal that the company intentionally omitted a disclosure, our winning is almost guaranteed. If they knew the cell ingredient was changed after submitting an approval application, they should have corrected the report and not pursue approval. Experts at the ministry will find out whether the company intentionally concealed the cell ingredient to win approval for Invossa.

The prosecutors’ probe is significant in that a raid can decide whether the company was intentional or not. Although Kolon TissueGene is in the U.S., giving investigators some limitations, their management is in Korea. So, the prosecutors can spot the company’s intention by going through e-mails and documents. The prosecutors should raid the company as soon as possible because the company might attempt to destroy evidence.

Q: Critics said the food and drug safety ministry was also responsible for hastily approving the drug. Can you include the ministry in the accused in the Kolon case?

A: It is difficult to demand the ministry compensate for the losses because the ministry is a little off in terms of causality. It is likely that Kolon could have deceived the ministry. If the ministry had its own mistake, it could be held accountable. However, if the company tried to lie from the first place, it would have been difficult for ministry officials to detect it. It is unlikely that the ministry had bad intentions. Even if it had some wrongdoing, it is very difficult to prove it.

Q: When do you plan to take the issue into court?

A: There have been some news articles that some shareholders started a lawsuit. However, we’re in no hurry. We will see the results of the investigations by the food and drug ministry and the prosecution. If the ministry nullifies the Invossa license, we will win the suit. But there can be an unexpected issue. It is essential to winning the lawsuit by seizing the right timing. It’s not always the best to do things quickly.