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Hanwha announces restructuring

New governance plan follows accusations of internal transactions
June 02,2018
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Hanwha Group will merge two affiliates and adopt a new governance plan in an apparent response to accusations that internal transactions are designed to benefit the chairman’s sons.

The company announced that the organizational shift would reduce Hanwha Chairman Kim Seung-youn’s three son’s share in Hanwha S&C, an affiliate that offers IT services and software mainly to clients within the group.

According to the plan, Hanwha S&C will merge with Hanwha Systems, a defense company that develops electronic weapons and solutions, in August. Part of the merged entity’s shares that belonged to the three sons will then be sold off to an external investor, reducing their combined stake from 55.3 percent to 14.5 percent.

The plan to merge the IT service and defense affiliates was approved at a board of directors meeting held by each company on Thursday.

According to valuations by an external accounting firm, the merger ration was set at 1:0.89, with Hanwha S&C valued lower. After the merger shareholders of Hanwha Systems will receive an equal number of stocks in the new company, which will still be called Hanwha Systems. Shareholders in Hanwha S&C will receive two stocks of the new Hanwha Systems for every one they currently own in Hanwha S&C.

Currently, 55.3 percent of Hanwha S&C is owned by H-Solution, a company that is solely owned by Kim’s three sons. After the merger, H-Solutions’ share of the new Hanwha Systems will fall to 26.1 percent. An additional 11.6 percent will then be sold to an external financial investor, STIC Investments, leaving H-Solution with a smaller 14.5 percent share in Hanwha Systems.

“The fair trade law’s regulation for internal transactions applies to unlisted companies in which a conglomerate’s owner family holds more than a 20 percent share,” said a Hanwha Group spokesman. “The governance reform will reduce the share to the 10 percent range.”

The Fair Trade Commission (FTC) has been clamping down on conglomerate affiliates purchasing products or services within the group since last year. These transactions often unfairly profit the owner family members that hold huge stakes in smaller, unlisted group subsidiaries.

In January 2017, the FTC announced that it planned to investigate Hanwha for internal transactions.

In an attempt to avoid the scrutiny, Hanwha S&C divided into two entities in October 2017, Hanwha S&C, the business unit that provides IT services, and H-Solution, the holding unit that is solely controlled by the Kim brothers. H-Solution then sold off 44.6 percent of Hanwha S&C shares to an external financial investor, STIC Investments.

The preemptive measures didn’t placate the FTC. In March this year, it conducted a field investigation targeted on six Hanwha affiliates at the Hanwha Building in central Seoul.

Thursday’s reform plan will also see the group’s Management & Planning Headquarters scrapped - a move intended to enforce the control of stakeholders. It used to be a core strategy planning office that made major management decisions for the entire group. The role will be taken on by Hanwha Corporation, an affiliate with businesses in explosives and machinery that acts as the de facto holding company of the group.

The Management & Planning Headquarters used to be composed of core executives from multiple Hanwha affiliates. There has been criticism over its role as a core decision maker despite having zero shares in Hanwha Group.

“The case is an example of a private company answering to the current government’s policy drive for conglomerate reform,” said Choi June-sun, a professor of law at Sungkyunkwan University Law School. “However, there may be side effects of disbanding the strategy office that used to control the whole conglomerate.”

Hanwha Group plans to create an external director position in charge of protecting shareholders’ rights and install a committee of external directors to monitor insider transactions.


BY KIM DO-NYUN, SONG KYOUNG-SON [song.kyoungson@joongang.co.kr]