By Yoon Sung-won
CJ HelloVision (CJH) has been under investigation for allegedly evading taxes, according to the police, Wednesday.
The police said the nation’s largest provider of cable broadcasting and budget mobile services has been suspected not only of tax evasion but also of fraudulent accounting, as the company’s regional branches are alleged to have falsified reports to exaggerate expenses.
As CJH is accused of dodging 10 billion won to 20 billion won in taxes, the company faces serious damage to its reputation.
Meanwhile, the allegations against CGH are expected to have an adverse impact on the government’s ongoing review of SK Telecom’s merger proposal with CJH, as authorities look into the fairness and financial capabilities of the merged companies.
Last November, SK submitted its proposal to the government to obtain approval of a merger of CJH with its unit SK Broadband. The proposal, however, is still pending and is being reviewed by the Fair Trade Commission (FTC), with the next steps in the process including Korea Communication Commission’s review and final approval by the Ministry of Science, ICT and Future Planning.
Should the tax evasion allegations turn out to be true, CJH’s corporate value will go down, escalating financial risk for SK and undermining the credibility of SK’s merger proposal.
The antitrust agency’s review process, which has already been ongoing for the last six months, may last longer if the FTC decides to wait for the police investigation to be concluded.
SK Telecom said it became aware of irregularities when it reached the agreement for the merger deal with CJH.
“When we were discussing the merger last year, we heard from CJH that there were questionable acts by some employees such as exaggeration of achievements but that the company had taken action to stop that,” the telecom company said. “As CJH dealt with this it internally, we understood that it was not a grave issue so we went ahead and pushed for the contract based on that understanding.”
On the contrary, those who oppose the merger between SK and CJH argued that the government should reject the plan because the numbers on paper don’t add up.
The alleged irregularities are also likely to fuel the case for CJH’s minority shareholders who have claimed for financial damages and filed a lawsuit to nullify the merger.
The small shareholders have argued that the price of the merger has been set unfairly. Following the results of the police investigation, the shareholders of SK Telecom may also request a resetting of the merger price after a reevaluation of CJH, as the company has been suspected of inflating its value for favorable conditions for the merger.
As the police push ahead with the investigation of CJH, SK Telecom has also been pressed to reconsider the merger to protect its shareholders.
“Following the police investigation, SK may cancel the merger deal with CJH,” an industry source said. “If SK does not take action, its shareholders may question the integrity of its executives and accuse them of dereliction of duty for the damages SK Broadband could incur because of this scandal.”
SK Telecom holds 100 percent of SK Broadband shares as its holding company.