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[Herald Interview] ‘Chaebol need sincere communication to fend off takeover attempts’

Yoon & Yang Managing Partner Jeong Jin-su speaks during an interview with The Korea Herald. (Park Hyun-koo/The Korea Herald)
Yoon & Yang Managing Partner Jeong Jin-su speaks during an interview with The Korea Herald. (Park Hyun-koo/The Korea Herald)
South Korean chaebol have been facing growing legal challenges from shareholders questioning the opaque influence exercised by members of their controlling families.

With the market pressure to improve transparency in governance and management, the chaebol families need to communicate with the public with sincerity and take concrete actions, a seasoned lawyer said.

“A majority shareholder who is not willing to communicate will inevitably be exposed to risks in management and will be constantly contested by the offenders,” Jeong Jin-su, managing partner at law firm Yoon & Yang, told The Korea Herald in a recent interview. “That’s how a typical ‘owner risk’ arises in Korea.”

The weakness in chaebol governance has acted as an invitation to activist investors, who publicly pose as anticorruption fighters, but often intend to take over management.

This partly stems from Korean business groups’ move to adopt holding company structures in the face of pressure and legal steps to limit circular cross-shareholding structures.

The holding company structure, however, is susceptible to money games where a proposed activist investor pumps money into buying the holding company’s shares, whereas subsidiaries of the holding company are not allowed to take part in the warfare. From chaebol families’ perspective, a loss of a single proxy vote improves the dissident investor’s chance of taking control of the conglomerate.

Against this backdrop, controlling families have come under growing pressure to defend their control of the boardroom and to solicit shareholders in proxy fights with hostile investors.

Jeong argued that there are prerequisites for a certain side to win such proxy battles. They have to show they are more capable of management, are poised to promote stability and are willing to pursue transparency in governance.

“Each side of a proxy fight must make a convincing case for all three pillars,” Jeong said. “Shareholders will eventually be on the same side with those who are prepared.”

Activist investors and estranged family members have used management reforms as a pretext to solicit public support in management disputes, especially in light of increased calls for better governance in corporate Korea.

So far, such offenses against chaebol families have not succeeded, including at two corporations whose chairmen were advised by Jeong’s firm -- Hanjin Group and Kumho Petrochemical. 

Yoon & Yang Managing Partner Jeong Jin-su speaks during an interview with The Korea Herald. (Park Hyun-koo/The Korea Herald)
Yoon & Yang Managing Partner Jeong Jin-su speaks during an interview with The Korea Herald. (Park Hyun-koo/The Korea Herald)
For example, private equity fund Korea Corporate Governance Improvement’s high-profile bid to take over Hanjin has fallen by the wayside.

Building a coalition with a more than 40 percent stake in the group’s holding company Hanjin KAL, the activist fund conceded defeat to the group’s Chairman Cho Won-tae in a tight vote in March 2020, a year after the death of his father Cho Yang-ho, who was ousted from Hanjin boardroom by the activist fund‘s campaign.

Later in December 2020, Cho clinched another victory when a court rejected KCGI’s application for an injunction against a third-party rights offering of Hanjin KAL to the state-run Korea Development Bank. The offering was made as a part of its flag carrier arm Korean Air’s proposed tie-up with rival Asiana Airlines. The ruling was regarded as extraordinary, given the precedents that the Korean court put a brake on the issuance of new shares to a third party by companies engaged in disputes of management rights.

KCGI’s lack of consistency in its proclaimed pursuit of improved corporate governance -- by joining forces with disgraced family member Cho Hyun-ah and property developer Bando Construction -- discouraged other shareholders from building trust with them and raised doubts about the stability in management as they gain control.

“(The dissident shareholders led by KCGI) were destined to lose credibility,” Jeong said. “They were entirely inconsistent with what they had promised to change and what the market had expected them to change.”

The same issue of “stability” was also raised for Kumho Petrochemical. Early this year, Chairman Park Chan-koo was contested by his nephew Park Chul-whan. The nephew -- the largest individual shareholder with some 10 percent stake in Kumho Petrochemical -- lost his bid to increase shareholder dividends and introduce new board members, including himself.

The nephew also put forth the issue of enhancing shareholder value and improvement of governance, but fell short of persuading shareholders that he could provide stability in management. 

“If an estranged family member starts a proxy fight against the incumbent management team, and proclaims that it wants to improve corporate governance, his or her argument will ultimately lose ground,” Jeong said.

Alongside, the law firm also represented Doosan Infracore in a yearslong shareholder dispute against minority investors including Mirae Asset Group regarding a Chinese affiliate. Yoon & Yang succeeded in proving at the Supreme Court that Doosan Infracore’s stalled process to repurchase minority investors’ shares or find a third-party investor could not be construed as obstruction. This led to a recent settlement in which Doosan Infracore agreed with the minority shareholders to repurchase the Chinese unit’s shares at a lower price than the investors’ initial purchase price.

In recognition of such achievements. Yoon & Yang won asialaw Client Service Excellence 2021 in five practice areas including dispute resolution and corporate and M&A.

The latest dispute resolutions illustrate that, in order to gain an upper hand, the controlling families should take steps to demonstrate their ability to manage, provide stability and offer transparency in governance.

This is where a legal service comes into play, Jeong said, adding that communications start by nudging its clients into taking concrete action.

For example, Yoon & Yang advised Hanjin Chairman Cho to rule out candidates who have a conflict of interest with the incumbent chairman, or who have an acquaintance with a family member, Jeong said. This, he added, is to make sure that Hanjin’s nonexecutive board members are given autonomy for the sake of the checks and balances in the boardroom.

The strategy in March 2020 gave Hanjin Chairman an upper case in arguing its sincerity to improve governance in a court battle in December 2020.

“There is no going back if you lose, so you must go all-out in a very short period of time,” Jeong said. “No mistakes are allowed through the whole legal process of an injunction.”

Jeong is now serving his second three-year term as Yoon & Yang’s managing partner starting this year. He studied law in Seoul National University and passed Korea’s bar exam in 1990. The career judge joined Yoon & Yang in 2007.



By Son Ji-hyoung (consnow@heraldcorp.com)
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