Family Squabbles
Revived strife over management control between the two sons of the founder of the Lotte Group has affected the group’s bid for an IPO expected to hit 20 trillion won (US$17 billion). “As the Employee Stock Ownership Association does not have voting rights, Kohjinsha’s equity in Lotte Holdings stands at 55.8 percent,” claimed Shin Dong-ju, former vice chairman of Lotte Holdings on Oct. 8. Lotte Holdings directly holds a 19.07 percent equity in Hotel Lotte and 72.7 percent by way of L Investment Co.
In a corporate governance structure where Lotte Hotel is owned by Lotte Holdings and Lotte Holdings is controlled by Kohjinsha, Shin Dong-ju is the largest shareholder of Hotel Lotte, since he has 50 percent equity in Kohjinsha, according to Shin Dong-ju.
At the same time, the Shin Dong-ju side filed a lawsuit in a Japanese court to nullify the dismissal of Shin Kyuk-ho as the chairman of the Lotte Group. “The concept of the economic value of equity itself is quibbling in the Act of Commerce,” the Lotte Group said. “The managerial rights to the group will stay solid and stable. The group has clarified its position that a Hotel Lotte IPO slated for the first half of next year will not be influenced by it.”
But the market has a different view. First of all, friction over the managerial rights can be a problem, even from reviews, for listing the company on the stock market. The Korea Exchange is strict about feuds over management control, as it regards them as an element that may undermine managerial stability in the future. This is because such feuds hinder normal corporate activities and may give rise to bring loss to investors.
Industrial experts say that the Korea Exchange will review the company more thoroughly, since Hotel Lotte’s IPO is expected to hit 6 trillion won (US$5.2 billion). The Korea Exchange checks not only current but future lawsuits if they are related to management and corporate governance. In the case of Lotte, the conflict may expand further. Accordingly, it can play a negative part in reviews for an IPO.
In addition to simple corporate governance, they review a possibility of change in management control.
Even if Hotel Lotte passes the review, that’s not the end of the IPO process. If the Shin Dong-ju side wins the lawsuit so that changes are made in the largest shareholder and executives, the approved review can be canceled.
“A company en route to its IPO should pay heed to practical management control in order to maintain a stable business environment,” explained a representative at the Korea Exchange. With reference to this, the Lotte Group is reportedly preparing to stabilize its management control after being listed as well.
Moreover, as the lawsuit was filed, the Lotte Group is expected to turn over a law firm’s opinions about the current state to the Korea Exchange. “Although there is a feud over managerial rights, the Korea Exchange can approve the company by taking into consideration the possibility of winning the case and effects on the management control,” an IB specialist said. “But it will be a burden on the Korea Exchange to allow Lotte, a big company, to be listed on the stock market. Thus, the feud can delay Lotte Hotel’s IPO.”
On the other hand, the conflict over managerial rights is forcing the Lotte Group to pay more attention to its corporate value, since the feud is expected to have a negative impact on the government selection of duty-free shop business operators. The duty-free shop business accounts for 86 percent of Hotel Lotte’s sales, and plays an absolute role in the hotel’s business value of about 12 trillion won (US$10.4 billion). If one of the duty-free shops in Sogong-dong and Jamsil in Seoul loses its business license, it will deal a fatal blow to the hotel’s IPO. At the same time, Doosana and Shinsegae have thrown their hats into the ring for duty-free shop business licenses.
“Controversies over the nationalities of the owner family of Lotte and the dispute over management control were calming down after a parliamentary inspection of the administration,” said a representative at a company which applied for the duty free shop license. “But this feud will be able to fuel the controversies again.