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How HHIC utilizes treasury stock, spinoffs and investment in kind in holding company transition
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Family ownership of HHIC Holdings nearly triples since 2007
When Hanjin Heavy Industries and Construction (HHIC) adopted a holding company system in 2007, the ruling family’s ownership of HHIC Holdings nearly tripled from 16.9% from 50.1%. This “magic trick” with the sharp rise in the family’s share was made possible through the use of three methods: acquisition of treasury stock (19.6%) just before the transition, the family’s simultaneous ownership of shares of both HHIC Holdings and the newly formed HHIC (operating company) established with the spinoff, and the investment in kind to replace the family’s HHIC shares with new HHIC Holdings shares. HHIC’s ownership of HHIC Holdings also nearly doubled, rising from 19.6% to 36.5%. With this move, the HHIC Group strengthened the control of the chairman’s family through an ownership structure tying to family to HHIC Holdings, and from there to HHIC and other subsidiaries. Like HHIC, ruling families at a number of groups have acquired larger ownership through the holding company transition process and methods including spinoffs and investment in kind – including SK, LG, Hanjin KAL, CJ, Kolon, Hankook Tire Worldwide, Halla Holdings, AmorePacific, HiteJinro Holdings, Hansol Holdings, and Hyundai Heavy Industries Holdings. According to the findings of a report titled “2018 Status of Holding Companies According to the Fair Trade Act” published on Nov. 13 by the Fair Trade Commission (FTC, chairman Kim Sang-jo), the families of chaebol group chairmen roughly doubled their control of the owners and holding companies over the course of their holding company transitions through the use of spinoffs, investment in kind, and treasury stock. While the FTC has noted such examples in its past annual analyses of holding company status, it previously concluded that the risk of holding companies expanding control was generally not high. This year, however, it placed concerns about expanded control front and center for the first time. In its study the FTC found ownership to be heavily concentrated on the chairman’s family, with average shares of 28.2% and 44.8% for the chairman and his family for 22 holding companies associated with 19 groups that have an owner and adopted a holding company system. It also found that 12 of the 19 groups (63%) had engaged in spinoffs and investment in kind a year after the transition to a holding company system. The family’s ownership of the groups’ holding companies more than doubled as a result. Their ownership of the holding companies’ operating companies also doubled. The FTC noted that the disparity between ownership and control is larger for chaebol groups with holding companies than for regular groups. The ownership-control disparity averaged 42.65 percentage points for chaebols with holding companies, compared to 33.08 percentage points for regular groups. The ownership-control disparity refers to the difference between the ruling family’s ownership (shares owned directly by the family) and their share of voting (including ownership by subsidiaries, public interest corporations, and executives along with direct family ownership). FTC’s lukewarm reaction to concerns of chaebols abusing holding company system Concerns have long been raised about chaebols abusing the holding company system as a way of strengthening the control of the chairman’s family. As recently as last year, the FTC only partially acknowledged the issue, stating in its holding company status analysis that there were “issues with treasury stock being used to expand control during the holding company transition process.” Indeed, it offered the opposite analysis, suggesting that the transition “increases transparency in a company’s ownership and investment structure and amply meets the regulatory conditions in terms of debt ratio and subsidiary/sub-subsidiary ownership.” “The concerns about expanding control are not serious,” the report concluded at the time. But an analysis of holding company profit structures and investment published by the FTC last July showed substantial side effects in terms of holding companies being used as means of expanding family control and reaping personal gains through work funneling practices. “Excessive profits besides dividends are being earned, with internal transactions with subsidiaries and sub-subsidiaries accounting for 55.4% of holding company sales, and control is being expanded through a proliferation of sub-subsidiaries and sub-sub-subsidiaries rather than subsidiaries where the holding company bears a direct investment burden,” the FTC said. To make the conditions for holding company adoption more rigorous, the FTC included terms raising the mandatory ownership for subsidiaries and sub-subsidiaries introduced by holding companies from its current 20% (40% for non-listed companies) to 30% (50% for non-listed company) in a full-scale amendment of the Fair Trade Act currently awaiting passage by the regular session of the National Assembly. By Kwack Jung-soo, business correspondent Please direct comments or questions to [english@hani.co.kr]
