Shareholders urged to vote against chairman at general meetings

By Park Jae-hyuk

The Seoul Central District Court convicted Hyosung Group Chairman Cho Hyun-joon of unfairly financing a cash-strapped affiliate, Tuesday, providing another reason for investors to vote against him at the forthcoming general meetings of shareholders of the group's affiliates later this week.

He was fined 200 million won ($161,000) for violating the Fair Trade Act, according to the court.

"When Galaxia Electronics started suffering severe financial difficulties, Cho used Hyosung Investment & Development to support the company, which is virtually owned and run by the chairman himself," Judge Yang Hwan-seung said.

Although the court did not accept the prosecutor's demand for a two-year prison term for the chairman, the judge pointed out that the act of using affiliates for the sake of a conglomerate's owner family can weaken transparency in management and harm minority shareholders and creditors.

"This can eventually have a negative impact on the nation's entire economy," Yang said.

The Hyosung chairman was indicted without detention in December 2019, as the Fair Trade Commission referred him to prosecutors in April 2018 for financing Galaxia Electronics in 2014 through a newly established special purpose vehicle (SPV). Cho's attorneys claimed that Hyosung Group transacted only with the SPV without signing a contract with Galaxia Electronics.

However, the court viewed the transaction as unfair, so it also fined Hyosung Corp. 200 million won and Hyosung Investment & Development 50 million won, while slapping a 50-million-won fine each on Hyosung Investment & Development CEO Song Hyung-jin and on a former Hyosung Corp. employee surnamed Lim.

"We explained (the situation) thoroughly during the trial. It is regrettable that some of our claims were not accepted by the court," a Hyosung Group spokesperson said. "We will talk with our attorneys to decide whether or not to lodge an appeal."

Hyosung Group headquarters in Seoul is seen in this file photo. Yonhap

The latest court ruling prompted the Solidarity for Economic Reform, a progressive civic group, to call on the National Pension Service (NPS) and other institutional investors to vote against the Hyosung chairman and his younger brother, Vice Chairman Cho Hyun-sang, during the general meetings of shareholders of the group's three affiliates.

"It is inappropriate to appoint them as directors of Hyosung affiliates," the civic group said in a statement, March 8.

The brothers were recommended as Hyosung Corp.'s inside directors to be reappointed at the holding company's general meeting of shareholders this Friday, as their terms will end this year.

In addition, the older Cho was nominated as a new inside director of Hyosung TNC, while the younger Cho was recommended as a new inside director of Hyosung Advanced Materials. The two subsidiaries will hold the general meetings of their shareholders this Thursday.

The civic group cited a series of convictions against them as the reason for its objection.

The chairman was sentenced to an 18-month prison term, suspended for two years, by the Supreme Court in 2012 for purchasing real estate overseas with his company's money. In 2020, he was sentenced to another 18-month prison term, suspended for three years, for using a corporate credit card for a private purpose. He is also waiting for the Supreme Court's decision on the Seoul High Court's conviction in 2020 for his embezzlement and malpractice.

The vice chairman was fined 10 million won and ordered to pay an additional 2.5 billion won to the government in 2012, as he bought $2.6 million worth of real estate in the U.S. without notifying the Korean government.

When Hyosung Group had sought to appoint the brothers as Hyosung Corp.'s inside directors in 2020, the NPS and the Canada Pension Plan Investment Board (CPPIB) voted against them, although the two institutional investors failed in achieving their goals. The California Public Employees' Retirement System (CalPERS) voted only against the chairman at that time.

Back then, the NPS criticized the Hyosung chairman's family for defaming the company's enterprise value and holding too many positions in the group. Institutional Shareholder Services (ISS), the world's leading proxy adviser, also recommended Hyosung Corp. shareholders to vote against the chairman, citing the trial for his alleged violation of the Fair Trade Act.

Given that the chairman's family members hold a majority stake in the affiliates, institutional investors are expected to have a limited impact again this year. The NPS holds a 9.47 percent stake in Hyosung Corp. while owning a 7.57 percent stake in Hyosung TNC and 8.43 percent stake in Hyosung Advanced Materials.

However, Hyosung Group cannot rule out the possibility of the NPS carrying out more aggressive measures in the future, as the pension fund changed the purpose of its stake ownership in 2020 from "simple investing" to "general investing" that enables intervention in management.

Amid the ongoing criticism against the chairman, the group's affiliates promised to pay handsome dividends this year, in an apparent attempt to convince minority shareholders to vote for him and his brother. Hyosung TNC is set to pay 50,000 won per share in dividends, 10 times larger than the previous year's. Hyosung Advanced Materials, which did not distribute dividends last year, is pushing ahead with the payment of 10,000 won per share in dividends.