Kyobo Shareholders Disputes

Historical Context: The Origins of Kyobo Life's Shareholding Structure

The issues surrounding Kyobo Life’s shareholding structure trace back to the construction of its Gwanghwamun headquarters in 1980. At the time, late founder Shin Yong-ho provided a portion of his Kyobo Life shares as payment to Daewoo Construction for building costs. As a result, Daewoo Construction (24%) and the late Chairman Kim Woo-choong (11%) collectively acquired a 35% stake in Kyobo Life.

Role of Kim Woo-Joong: From 1980 to the early 2000s, Chairman Kim Woo-Joong played a pivotal role as Kyobo Life’s second-largest shareholder. He supported the company during times of crisis, acting as a "white knight" based on long-term partnership and trust rather than purely financial gains.

Sale of Daewoo International’s Shares: After Daewoo Construction was split, Daewoo International retained the shares. However, in 2012, to fund its Myanmar gas field development, it sold its 24% stake to the Affinity Consortium, marking the beginning of new challenges.

Emergence of the Affinity Consortium and the Nature of Private Equity Funds

When Daewoo International decided to sell its stake, Chairman Shin Chang-Jae saw the emergence of a new second-largest shareholder as a potential threat to management control. Expecting a "white knight" role, he selected the Affinity Consortium as a financial investor (FI).

Nature of Private Equity Funds: Private equity funds (FIs) inherently pool investors' money to generate short-term returns and are obligated to return funds within a set investment period. Therefore, the long-term friendly relationship Shin envisioned was incompatible with the fundamental nature of private equity funds. These funds rigorously pursue profitability and often exercise rights such as the put option outlined in investment contracts.

From White Knight to Black Knight: While the Affinity Consortium initially maintained a collaborative relationship with Chairman Shin, it transformed into a "black knight," demanding high returns and filing lawsuits when the time came to recoup its investment.

Chairman Shin Chang-Jae’s Management Control and Inheritance Tax Challenges

When Chairman Shin inherited the business from the founder in 2003, he faced two major challenges: inheritance tax and defending management control.

Inheritance Tax Payment: Shin paid a record-high inheritance tax of KRW 183 billion, the largest in the National Tax Service’s history. Part of the inherited shares was relinquished to the state, reducing his personal stake.

Limitations of Management Control: After the inheritance, Shin’s shareholding fell to around 40%, far below the 50% threshold for stable management control. Meanwhile, the Affinity Consortium’s 24% stake exacerbated the risks to his control.

IPO Failures and Valuation Disputes

To stabilize management control and repay the Affinity Consortium’s investment, Kyobo Life pursued an IPO, but repeated failures derailed Shin’s plans.

Reasons for IPO Failures:

• Market Conditions: The life insurance industry faced difficulties due to low interest rates and the introduction of IFRS17.

• Strategic Failures: Shin’s initiatives, such as acquiring stakes in Woori Bank, founding an internet bank, and acquiring ING Life, largely failed, negatively affecting IPO outcomes.

• Put Option Price Dispute: The Affinity Consortium demanded a put option price of KRW 409,912 per share, which greatly exceeded the market valuation. As of 2023, Kyobo Life’s PBR (Price-to-Book Ratio) stood at 0.43x, with a market capitalization of approximately KRW 4.93 trillion, implying a per-share value of KRW 240,400—far lower than Affinity’s demand.

Importance of Governance and Changes in the Life Insurance Industry

While Kyobo Life once ranked second in the life insurance industry after Samsung Life, it now faces growing competition from players like Shinhan Life.

Importance of Governance: Governance is a critical factor for corporate stability and sustainability. However, the ongoing conflict with the Affinity Consortium has tarnished Kyobo Life’s corporate image and weakened its operations.

Industry Competition: Competitors like Hanwha Life are implementing aggressive strategies to strengthen their market position, whereas Kyobo Life remains stagnant due to litigation and management risks.

Prolonged Legal Battles and Their Impact

The ongoing disputes at the International Chamber of Commerce (ICC) and domestic courts are proving detrimental to both parties.

Erosion of Corporate Value: Prolonged litigation damages the company’s image, eroding the trust of policyholders and investors.

Weakening of Business Operations: The life insurance business relies on long-term contracts. Although there is no immediate financial strain, litigation-induced reputational damage could gradually harm Kyobo Life’s operations.

Need for Settlement: Even if one side wins the lawsuit, both parties may ultimately lose in the long term. Reaching a reasonable settlement is crucial.

Conclusion and Recommendations

The conflict between Kyobo Life and the Affinity Consortium transcends a mere shareholder dispute. It encapsulates broader issues such as corporate governance, the role of private equity funds, and shifts in the life insurance industry.

Recommendations for Chairman Shin Chang-jae:

• Develop a realistic IPO plan to establish fair market valuation and repay the investment.

• Strengthen governance and devise strategies to secure stable management control.

Recommendations for the Affinity Consortium:

• Reassess the put option price based on realistic corporate valuations.

• Seek to recover the investment through negotiations rather than prolonged litigation.

Kyobo Life remains a financially sound company, generating annual profits of KRW 500-600 billion. However, its future hinges on how this conflict is resolved. The market anticipates a mutually beneficial resolution for both parties.

Seoul Tribune (c)

#SeounTribune #Kyobo #Kyobolife #affinity #PE