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A rush to comply with FTC rule

Sept 27,2018

Serveone, an unlisted LG Group company, announced on Wednesday that it was spinning off its maintenance, repair and overhaul (MRO) business into a separate company and seeking outside investors.

LG Corporation, the group’s de facto holding company, currently owns a 100 percent stake in Serveone, which made 6.89 trillion won ($6.18 billion) in revenue and 210 billion won in operating profit last year. Serveone said it was currently looking at various investors, including private equity funds.

The move by LG appears to be a pre-emptive one before the Fair Trade Commission (FTC) takes action against conglomerates that give a majority of work to their own affiliates.

Last month, the antitrust agency announced a revision in the law that allows it to investigate any affiliate in which members of the conglomerate-owning family have more than a 20 percent stake in the affiliate regardless of whether the affiliate is listed or not.

Under the current law, the FTC looks into affiliates where conglomerate-owning family members own more than a 30 percent stake, but that only applies for listed affiliates. For unlisted ones, it is 20 percent. Under this rule, conglomerates have been dodging investigations by raising their stake to just under the limits.

With the new across-the-board 20 percent limit, the number of companies that could face FTC investigation will rise to 607 companies from last year’s 231.

The FTC plans to submit this revision to the National Assembly in November, and if it passes, the new regulation will likely be implemented in 2020.

The FTC has been ramping up its investigations of conglomerates contracting work to their own affiliates ever since Kim Sang-jo, a firebrand critic of Korea’s conglomerates, took office last year.

He has emphasized leveling the playing field for small businesses and argues that conglomerates contracting too much work to their own affiliates is unfair to small businesses.

Kim also believes that the practice has fattened the personal wealth of the families that own the conglomerates. In some cases, they have been used to facilitate inheritance.

In the first half of this year, Hite Jinro, Hyosung and LS Group came under investigation for such practices. The FTC fined Park Tae-young, the eldest son of Hite Jinro’s chairman and a vice president at Hite Jinro Holdings, and Cho Hyun-joon, chairman of Hyosung Group, and referred them to prosecutors for further investigation.

Last month, Kim sent a group of investigators to SK Group’s headquarters in central Seoul to investigate how it acquired the semiconductor wafer developer LG Silton, now SK Siltron, in January 2017. The SK chairman, Chey Tae-won, was a target of that investigation.

In a pre-emptive move, LS Group’s owner family members sold their 37.6 percent stake in Gaon Cable to LS Cable & System earlier this year and created a committee to police its own practice of contracting work to affiliates.

Other conglomerates have been busy trying to avoid the FTC’s wrath.

Last month, Kolon Group Chairman Lee Woong-yeul sold the 49 percent stake worth 21 billion won that he had in IT affiliate Kolon Benit to Kolon in exchange for 560,000 new shares of Kolon also worth 21 billion won.

This allowed him to avoided being investigated by the FTC while further strengthening Kolon as the holding company of Kolon Group. With the 49 percent stake, Kolon now owns 100 percent of Kolon Benit.

Chey Chang-won, vice chairman of SK Discovery and cousin of SK Group Chairman Chey Tae-won, has reportedly reached an agreement with private equity fund Hahn & Company to sell all of his 24 percent stake in real estate affiliate SK D&D at an estimated price of 172 billion won.

Lee Hae-wook, the vice chairman of Daelim Group, gave all of the shares he and his son had in real estate developer A Plus D to another affiliate, Ora Resort, last month. The father owned a 55 percent stake while his son owned 45 percent. The shares combined were worth nearly 4.5 billion won.

In an attempt to avoid a penalty, Hyundai Motor in 2015 lowered its stakes in affiliates including Hyundai Glovis and Innocean to 29.9 percent, just under the FTC’s 30 percent limit. But with the new limit, Hyundai Motor will have to make additional sales.

Other conglomerates follow the same pattern. Samsung Group’s Lee family owns a 20.82 percent stake in Samsung Life Insurance, GS Group’s Huh family has a 25.48 percent stake in GS E&C, and Shinsegae Group’s Chung family has a 28.06 percent stake in Shinsegae Department Store and 28.05 percent in Emart, the company’s discount chain.

For its part, the FTC says lowering stakes should not be the ultimate goal of these family-run conglomerates known as chaebol.

“The essence of this regulation is to prevent the damages inflicted on the foundation of SMEs’ existence due to the profiting of chaebol heads,” said Chung Chang-wook, head of the FTC’s business group bureau. “Selling their stakes is not the solution. The solution is to get rid of all unfair support [of affiliates.]”

Yoon Chang-hyun, a professor of business administration at the University of Seoul, advised the FTC to be careful in its enforcement.

“I agree with the policy direction,” he said, “but the regulation is too uniform and forceful. The unique characteristics of the company and its growth as well as management efficiency have to be taken into account.”

BY LEE SANG-JAI, LEE DONG-HYUN AND LEE HO-JEONG [lee.hojeong@joongang.co.kr]