Hyosung Group which used its affiliates to provide an unfair profit in order to save a financially-distressed firm controlled by a son of the business group's founder is to be bought under the law. South Korea’s trade watchdog fined Hyosung Group 3 billion won (US$2.84 million) and recommended that the prosecution investigate Chairman Cho Hyun-joon and two other executives for illegally financing the ailing affiliate.
According to the Fair Trade Commission (FTC) on April 3, it has found that Hyosung's investment division inappropriately helped financially-troubled Galaxia Electronics Co. which is a de facto private company owned by Chairman Cho. It said it will file a complaint with prosecutors against Chairman Cho and two Hyosung officials – Song Hyung-jin, chief executive officer of Hyosung Investment & Development Corp., and Im Seok-joo, executive director of Hyosung Corp. – for violating the Fair Trade Act. The antitrust watchdog will also slap fines of 1.72 billion won (US$1.63 million) on Hyosung, of 1.23 billion won (US$1.16 million) on Cho's company Galaxia Electronics, and of 40 million won (US$37,879) on Hyosung Investment and Development.
The FTC said Galaxia Electronics, which is privately owned by Hyosung Group Chairman Cho as the dominant stockholder, has been in a financial and management crisis since 2012 and was about to be liquidated at the end of 2014.
Galaxia Electronics is an unlisted company that produces and sells light-emitting diode (LED) lights and displays. The firm has suffered from a lack of funds since 2012. The company’s debt-to-capital ratio reached 1,829 percent in 2014.
With Galaxia Electronics falling into the state of complete capital impairment, Hyosung’s financial unit sought ways to provide funds to the company through several affiliates. It orchestrated a plan in November 2014 to help Galaxia Electronics improve its financial status through Hyosung Investment & Development Co., a real estate development firm under Hyosung's wing.
The FTC said Hyosung Investment & Development was forced by the business group to take over credit risks for the sale of 25 billion won (US$23.67 million) worth of convertible bonds by Galaxia Electronics. The convertible bonds, which was issued on two separate occasions, was acquired by four financial companies. In the process, Hyosung Investment & Development signed a gross profit swap deal with a special purpose company established by the four financial firms to take over credit risks for the convertible bonds.
Hyosung Investment & Development invested about 30 billion won (US$28.41 million) worth of land and buildings as collateral, which was higher than the total amount of convertible bonds issued, and agreed to seek a prior approval of the four financial companies when it sells assets, pay a dividend or take out loans. As a result, Galaxia Electronics was able to raise funds seven times higher than its capital by issuing convertible bonds with low interest rates, though it was impossible to raise any money.
This also helped Chairman Cho maintain his investments and management rights. The FTC said Cho and Galaxia Electronics are the only ones that have enjoyed financial gains from the sale of convertible bonds. In fact, Hyosung Investment & Development has not received any benefits from the arrangement, though it took over a considerable amount of credit risks.
At a plenary session to decide on penalties, Hyosung argued that it was a rational business decision for Hyosung Investment & Development to sign the gross profit swap deal with four financial firms. However, the FTC found out that Hyosung Investment & Development belatedly requested to outside experts for review as a formality even after it already decided to sign the agreement.
The FTC also said Cho personally directed and be reported illegal financial support so it will file a complaint with prosecutors against him. Shin Bong-sam, head of the conglomerate investigation bureau at the FTC, said, “Chairman Cho was director of Hyosung Investment & Development and the largest shareholder and director of Galaxia Electronics. He was also president and director of strategy at Hyosung. Cho was reported the whole process of the deal and engaged in the deal.”
After the announcement was made by the FTC, Hyosung Group said it was the rational business decision for investment. An official from Hyosung also said, “Chairman Cho focused all his attention on the group’s main business as head of strategy division at that time and there is no specific proof of management directing and engaging in the deal.”