The arrest of Shin Dong-bin, chairman of Lotte Group, is unleashing a strong firestorm. Lotte Holdings Japan whose largest shareholder is Kwang Yoon Sa (Koiyunsya) at the top of the corporate governance structure of Lotte Korea and Lotte Japan is expressing concern about the arrest of chairman Shin and a managerial vacuum left by his apprehension. Moreover, as Shin Dong-ju, former vice chairman of Lotte Holdings Japan, demanded Shin Dong-bin's resignation as chief of Lotte Holdings Japan, management disputes are being re-ignited. Some are raising concern that the current situation may destabilize the corporate governance structure of the Lotte Groups in Korea and Japan centered on chairman Shin Dong-bin.
Reigniting Dispute over Management Right
On February 14, according to Korean business circles and others, former chairman Shin Dong-ju called for chairman Shin Dong-bin’s resignation and his dismissal as head of Lotte Holdings Japan with respect to a two-year-and-a-half sentence to him and his imprisonment directly after the ruling on a bribery charge in the first trial germane to the Choi Soon-sil scandal on February 13 with a press release entitled “Regarding Guilty Verdict on Chairman Shin Dong-bin and Execution of Imprisonment Sentence.”
Kwang Yun Sa is the single largest shareholder of Lotte Holdings, which holds a 99% stake in Hotel Lotte, an intermediate holding company of Lotte Korea and is at the top of the corporate governance structures of Lotte Korea and Japan. "The person who is a representative of Lotte Korea and Japan was convicted of crimes such as embezzlement, breach of trust and bribery, and put into prison. This is unprecedented in the Lotte Group's 70-year-long history," former chairman Shin Dong-ju said. "It is clearly imperative and important that Shin Dong-bin should immediately resign and be dismissed and the Lotte Group should undergo fundamental renewal."
Major shareholders of Lotte Holdings Japan are Kwang Yun Sa with a 28.1 percent stake, the Employee Stock Ownership Plan (27.8 percent), affiliated companies (20.1 percent) and executives (6 percent). Chairman Shin Dong-bin has a mere 1.4-percent stake. Chairman Shin jointly heads up Lotte Holdings Japan with president Tsukuda Takayuki.
In particular, it is common for a company executive to bear responsibility and step down when the executive is given a prison sentence in Japan. This is because Japan is stricter about executives’ wrongdoings than Korea. Therefore, it cannot be ruled out that Lotte Holdings Japan will decide to dislodge chairman Shin Dong-bin who put behind bars from his office by convening a meeting of the board of directors or a general shareholders meeting in the near future.
However, as president Tsukuda is a confidant of chairman Shin Dong-bin and chairman Shin Dong-bin has amassed friendly stakes, Lotte Holdings Japan is highly likely to put off making a judgment about chairman Shin Dong-bin until the Supreme Court of Korea will make the final verdict. Therefore, chairman Shin Dong-bin is expected not to lose control of the management of the Lotte Group.
However, nobody can be sure that former chairman Shin Dong-ju will secure control of the Lotte Group again, making good use of the jailing of chairman Shin Dong-bin. "Due to the arrest of Shin Dong-bin, the top head of the Lotte Group will be absent, which could adversely affect the group’s long-term strategies, besmirch its corporate image and the listing of Lotte Holdings Japan in Japan," a newspaper in Japan said. “Shin Dong-bin may make a move to normalize management."
"At the moment, it is a real challenge to predict what decision Lotte Holdings Japan will make," a Lotte official said in reference to the story.
Triggering Emergency Management System
The Lotte Group began to suffer from the absence of its chairman as a result of the arrest of chairman Shin Dong-bin initiated an emergency management system with Hwang Kang-kyu, vice chairman of Lotte Holdings taking the helm of group management. Lotte held an emergency management meeting presided over by vice chairman Hwang, a co-chairman of Lotte Holdings and formed an emergency management committee led by vice chairman Hwang, Min Hyung-ki, chairman of the Compliance Committee and vice chairmen of the four business units (BUs). The four BU vice presidents are Lee Won-joon, head of the Distribution BU, Lee Jae-hyeok, head of the Food BU, Heo Soo-young, head of the Chemical BU and Song Yong-deok, head of the Hotel & Service BU.
Lotte is planning to address major business issues via the Emergency Management Committee led by professional managers in the future. In the first place, Lotte Holdings was optimistic about the results of the trial of chairman Shin Dong-bin in the and decided to take off February 14 the day before lunar New Year Holidays. But as chairman Shin Dong-bin was unexpectedly given a prison sentence and put into prison, key executives and employees went to work and entered the emergency management system.
Meanwhile, the future of the duty-free business, one of Lotte's core business areas, has become uncertain due to the arrest of chairman Shin Dong-bin. The court ruled that the Lotte Group paid 7 billion won for the construction of the K Foundation's Hanam Sports Facility and the money corresponds to a bribe to a third party.
As a result, the Korea Customs Service has begun examining whether to cancel a duty-free patent on Lotte Duty Free World Tower. "We will decide whether or not to cancel Lotte’s duty-free patent through a sufficient judicial review," said an official of the Korea Customs Service. “In order to judge whether or not to call off the patent, we should examine whether or not the illegal act which is a reason for the conviction in the first trial of chairman Shin Dong-bin satisfies conditions for patent cancellation under the customs tax law." As a consequence, Lotte World Tower Duty-Free Shop may close down in the worst-case scenario.