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Korean Chaebols Move to Circumvent Related-party Transaction Regulations before Implementation of New Law
Clever Evasions
Korean Chaebols Move to Circumvent Related-party Transaction Regulations before Implementation of New Law
  • By matthew
  • January 21, 2014, 06:38
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It has been found that as many as 20 key subsidiaries of major conglomerates are moving to evade the regulations on related-party transactions until about 20 days before the implementation of the prohibition act.

Chaebul.com examined the business status of the 122 companies subject to the regulations between October last year and this month, and reported on January 20 that 20 of them have evaded the act so far by means of mergers or reduced shareholding on the part of the owners and their family members. The revised enforcement ordinance of the Fair Trade Law was announced in October 2013 to ban the intra-company transactions of big businesses. 

For example, the Samsung Group merged Samsung SNS, where Samsung Electronics Vice Chairman Lee Jae-yong is the largest shareholder with a 45.69% share, with Samsung SDS in December last year. Samsung SNS was pegged as a typical example of related-party transactions with the ratio accounting for 55.62% of its total sales as of 2012. The amount reached 283.4 billion won (US$266 million) that year. 

Samsung Everland, where Samsung Group Chairman Lee Kun-hee and his family members own 46.04% of the shares, acquired the fashion business unit of Cheil Industries in December 2013 while spinning off the food material supply unit to Samsung Welstory, so as to reduce the internal transaction ratio. 

In the meantime, Hyundai AMCO is expected to be able to avoid the law through a merger with Hyundai Engineering. At present, Hyundai Motor Group Chairman Chung Mong-koo and Vice Chairman Chung Eui-seon own 35.06% of shares each in Hyundai AMCO. The intra-company transaction amounted to 1.7588 trillion won (US$1.6510 billion) in 2012, which is equivalent to 61.19% of the gross sales. However, after the acquisition of Hyundai AMCO by Hyundai Engineering, their shareholding ratios fell to 4.68% and 11.72%, which are below the 20% limit. 

Likewise, STS Logistics and Sungsan Leisure, in which a relative of GS Group chairman Heo Chang-soo was the largest shareholder, circumvented the regulations through an inter-subsidiary merger. TCS and TRM employed the same method to decrease the shareholding ratio of former Taekwang Group Chairman Lee Ho-jin and his family. 

Not a few of the 20 companies wiggled out of the restriction by reducing the shares of the owners and their families, too. For instance, Dongkuk Steel Group Chairman Jang Se-joo and his brother and Union Steel President Jang Se-wook sold all of their 15% of shares in system integration company DK UNC to Union Steel at a price of 8.1 billion won (US$7.6 million) in November last year. 

Dongbu C&I, owned mainly by Dongbu Group Chairman Kim Joon-ki and his family, is planning to sell its shares in Dongbu Metal and Dongbu HiTek for financial restructuring. Also, Tong Yang Leisure of Tong Yang Group Chairman Hyeon Jae-hyeon has been excluded from the category of conglomerates to avoid the restriction. 

Under the circumstances, many of the other subsidiaries subject to the prohibition act are predicted to merge themselves or reduce the owners’ shareholding ratios ahead of the implementation of the revised enforcement ordinance, which is scheduled for next month.