Hanjin Group is expected to face difficulties in the process of transferring the management control from the late chairman Cho Yang-ho to Cho Won-tae, his son and president of Korean Air. The junior Cho has only a 2.34 percent stake in Hanjin KAL Corp., the holding company of the group, and it will be not easy for him to raise money to pay inheritance taxes, which are estimated at 170 billion won (US$148.47 million). Moreover, there are some other challenges to solve, such as the vulnerable corporate governance structure and attempts by activist private equity funds to seize management control of Korean Air.
The abrupt death of the Hanjin Group chairman is forecast to accelerate the transfer of management control to his son. Industry watchers believe that there will be no problem with the management of the group’s affiliates for now despite the chairman’s absence.
The late Cho’s close confidante Hanjin KAL CEO Suk Tae-soo succeeded in being reappointed as a director at the company’s shareholder meeting last month despite opposition from the local activist hedge fund Korea Corporate Governance Improvement (KCGI), the second largest shareholder of Hanjin KAL. There will be no confusion in business management since the presidents of the group’s affiliates have a professional management ability.
Korea Air is expected to be led by the younger Cho, who was appointed as CEO and executive vice president in March 2016. He has become CEO and president a year later and has led the firm with the late Cho. He also serves as CEO of Hajin KAL.
An official from the business community said, “Korea Air will maintain three inside directors and the junior Cho is highly likely to be appointed as CEO and chairman of the national flag carrier.”
Some say that the group will seek to transfer the management control to the younger Cho but the chairman’s sudden death will put the succession of his stake and management control in chaos. The late Cho’s ownership of stocks in Hanjin Group’s listed affiliates, such as Hanjin KAL, Korean Air and Hanjin Corp., are worth about 357.90 billion won (US$312.58 million). Therefore, the inheritance tax will reach at least 170 billion won (US$148.47 million) when the 50 percent inheritance tax rate is applied.
The late Cho is the largest individual shareholder of Hanjin KAL with a 17.84 percent stake, according to data from the Financial Supervisory Service. The aggregate shareholdings of affiliated parties of Hanjin Group, excluding the late Cho, reach 28.95 percent, including 2.34 percent owned by Cho Won-tae, 2.31 percent of Cho Hyun-ah, the eldest daughter of the late Cho and former vice president of Korean Air, and 2.30 percent of Cho Hyun-min, the youngest daughter and former Korean Air executive director.
Assuming that the inheritance tax rate is 50 percent, however, the percentage of shareholdings by Hanjin KAL’s largest shareholder and affiliated persons will be 20.03 percent, while the combined stake of KCGI and the National Pension Service totals 20.81 percent. Accordingly, there is a chance that the younger Cho’s position as the largest shareholder could be under threat.
As a result, how large a stake the younger Cho can secure in Hanjin KAL has become a paramount concern now.
Hanjin KAL controls the group’s second-tier subsidiaries via Korean Air and Hanjin Corp. Hanjin KAL owns 48.27 percent in Jungseok Enterprise Co., 29.62 percent in Korean Air, 22.19 percent in Hanjin and 60 percent in Jin Air Co.
The problem is that the younger Cho holds only a 2.34 percent stake in Hanjin KAL and he needs to pay hundreds of billions of won in inheritance taxes alone if he wants to inherit the late Cho’s stakes. Park Kwang-rae, an analyst at Shinhan Investment Corp., said, “The Cho’s family has to pay 172.70 billion won (US$150.83 million) in inheritance taxes and the figure is based on the value of marketable securities owned by the late Cho, which is worth about 345.40 billion won (US$301.66 million). It can change when including his real estate assets.”
An heir to a business group can raise money to pay inheritance taxes by selling off some of his stakes in subsidiaries. However, this is not the case in Hajin Group as the younger Cho has no stake in subsidiaries to sell, including Korean Air.
The investment banking industry presented two scenarios to raise funds for inheritance taxes – loans collateralized with shares and payment of dividends. The younger Cho will be able to raise up to 60.90 billion won (US$53.19 million) from loans collateralized with shares. He is more likely to scrape up the remaining 110 billion won (US$96.07 million) from the increase in dividends. The total amount of dividends paid to the Cho’s family from the group’s affiliates is estimated at 1.20 billion won (US$1.05 million) as of 2018.
Park said, “The inheritance taxes can be paid in installment over five years. The younger Cho can pay 35 billion won (US$30.57 million) every year but there is a big gap between payable funds and the shortfall now. Therefore, there is a strong likelihood that the group will increase the payment of dividends for Hanjin KAL and Hanjin whose stakes are owned by the Cho’s family.”
Even when the junior Cho successfully takes the helm of the group, he can face challenges from KCGI, the second largest shareholder of Hanjin KAL with a 13.47 percent stake. KCGI recently raised its stake in Hanjin KAL to 13.47 percent from 12.68 percent at the end of last year through the acquisition of additional stakes. The NPS has a 6.64 percent stake in the firm.
The difficulties in the succession process cannot exclude the scenario that the younger Cho will give up on the succession. When he gives up on the inheritance, he is likely to hand over the management rights to a professional manager while maintaining his positions as a board member.