Lotte Rental feud in spotlight as potential test case for fiduciary duty
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A feud over Lotte Rental’s controversial rights offering is drawing attention in Korea’s business community, as it might become the first case of minority shareholders suing majority shareholders by invoking the country’s revised Commercial Act, which stipulates that board members have a fiduciary duty to all shareholders.
According to industry officials, a group of minority shareholders of Lotte Rental submitted a petition to the presidential office and the Fair Trade Commission on Monday, claiming that their shareholder rights were infringed upon by Lotte Rental’s “unfair rights offering.”
Along with the group, VIP Research & Management, an asset management firm that holds an approximately 4 percent stake in Lotte Rental, sent a letter to the company’s board on July 16, urging it to withdraw the rights offering plan.
“The revised Commercial Act, which stipulates that directors owe a fiduciary duty to all shareholders, is set to take effect following the Cabinet’s approval on July 15,” the letter reads.
“Several companies that understand the meaning of the revision have already withdrawn previous business decisions that run counter to it … The proposed rights offering is a clear violation of the Commercial Act from the perspective of directors’ fiduciary duty … We urge directors to cancel the offering so that minority shareholders are not forced to suffer unilateral losses.”
A Lotte Rent-a-Car branch at Seoul Station / Courtesy of Lotte Rental
On Feb. 28, a number of Lotte Group companies announced a deal to sell their 56.2 percent stake in Lotte Rental to private equity Affinity Equity Partners for 1.6 trillion won ($1.15 billion). The deal priced each share at approximately 77,000 won, about 2.6 times higher than the market price of 29,400 won at the time, in recognition of the managing rights of the company.
The feud started as Lotte Rental on the same day announced that it would issue new rights worth 219.9 billion won to Affinity, pricing each share at approximately 29,000 won.
VIP Management noted that the rights offering enabled Affinity to lower its average acquisition price from 77,000 won to 64,000 won per share, while increasing its ownership stake from 56.2 percent to 63.5 percent. Lotte Group, meanwhile, earned a 1 trillion won premium by selling its stake for 1.6 trillion won, even though it was worth only around 600 billion won based on the market price.
The asset management firm claimed that minority shareholders, however, suffered losses because they could not sell their Lotte Rental shares for 77,000 won per share, while their ownership stakes were diluted to 80 percent of their original holdings.
“The combined shareholding of all minority investors declined from 38.8 percent to 32.3 percent after the rights offering,” VIP said. “Most importantly, they were also stripped of their rights to block special resolutions at shareholders’ meeting.”
A special resolution is required for major corporate decisions and must be approved by at least two-thirds of the voting rights of shareholders present and by more than one-third of the total issued shares.
When Affinity’s 63.5 percent stake is combined with the remaining stakes held by Lotte Group companies, the total rises to approximately 67.7 percent, effectively leaving minority shareholders without the power to block decisions at shareholder meetings, VIP said.
“We believe this case is not just about Lotte Rental, but a crucial test of whether the recent revision to the Commercial Act can be effectively enforced,” VIP Research & Management CEO Kim Min-guk said.
Lotte Rental said it decided to offer new rights as it is required to repay up to 720 billion won in corporate bonds earlier than initially scheduled, as its largest shareholder has changed. To avoid a potential stock price decline caused by a general rights offering, the company opted for a third-party allotment and did not apply any discount to the new share price.
If VIP and other minority shareholders take legal action against Lotte Rental board members, it will be the first case of a lawsuit invoking the fiduciary duty stipulated in the revised Commercial Act.
The political realm is also paying keen attention to Lotte Rental. On June 23, ruling Democratic Party of Korea Rep. Oh Gi-hyoung cited Lotte Rental’s case as one of the reasons the party sought to revise the Commercial Act.
The main opposition People Power Party (PPP), which had initially opposed the revision, changed its stance in light of the Lotte Rental case. On June 30, PPP floor leader Rep. Song Eon-seog said the party had taken into account “changes in market conditions, including shareholder rights violations during the rights offering process at certain companies,” implicitly referring to Lotte Rental.
Lotte Rental is one of three companies that the Korean Corporate Governance Forum openly criticized as a case of harming minority shareholder interests. The other two are Taekwang Industrial, which withdrew its plan to issue exchangeable bonds, and PharmaResearch, which abandoned its attempt to transition into a holding company upon minor shareholders’ opposition.