Can Kyobo Life chief settle disputes with Affinity, IMM?

Kyobo Life Insurance CEO and Chairman Shin Chang-jae speaks during a seminar at a training center in Cheonan, South Chungcheong Province, Jan. 10. Courtesy of Kyobo Life Insurance

Expectations are mounting over whether Kyobo Life will be able to settle its years-long put option dispute with a consortium led by Affinity, a private equity fund, spurred by the recent conclusion of its seven-year dispute with Affirma Capital over a similar matter, market watchers said Monday.

Central to the issue is whether Affinity will lower the asking price to buy Kyobo shares, dampened by Affirma ceding to only half of what it had sought from the head of the life insurer.

At stake is the life insurer’s much-awaited plan to launch a financial holding firm, certain to advance with an earlier-than-expected breakthrough in the Affinity dispute.

Market watchers say the calculation of the put option price will take an extended turn at the International Chamber of Commerce (ICC) Court of Arbitration since third-party involvement is warranted if the current price impasse continues.

A put option is a contract that gives the buyer the right — but not the obligation — to sell the underlying security at a specified price before or at a predetermined expiration date.

According to the financial market on Monday, Kyobo Life Chairman Shin Chang-jae reached an agreement with Affirma Capital to buy 5.33 percent of Kyobo shares at a per share price of 198,000 won ($137). This is about half the 397,900 won Affirma sought in a put option exercised in November 2018.

The latest development will lead to a withdrawal of the ongoing ICC Court of Arbitration case Shin filed to protest the nearly 400,000 won asking price.

Shin plans to seek a combined funding of 3 trillion won — 1 trillion won from Shinhan Securities and 1 trillion won from Korea Investment & Securities – for the return of Affirma investment funds.

Affirma increased stakes in Kyobo in 2007 and signed a put option whereby Shin would have to buy the shares if the life insurer failed to go public by the end of 2012.

In the case of the Affinity-led consortium encompassing IMM Private Equity, EQT Partners and Singaporean sovereign wealth fund GIC, the 2012 deal had the consortium purchase 24 percent of the Kyobo stake.

The life insurer failed to go public, and the consortium exercised the put option, demanding Shin buy the shares at a per share price of 410,000 won in 2018.

The arbitration court has since ordered Shin to submit a report specifying the appraiser-set put option price.

Shin has selected EY Han Young as the appraiser to comply with the order. But the accounting firm has yet to put forth a new price.

However, industry sources say the difference in the put option price between Kyobo and Affinity will be at least 10 percent, warranting a third-party appraiser.

Kyobo Life headquarters in central Seoul's Gwanghwamun / Courtesy of Kyobo Life

Affinity will be in a bind over whether and by how much the price should be lowered, influenced by the exit of Affirma, a financial industry official said.

“It remains to be seen how this plays out, but the Affirma case is certain to complicate the considerations," the official close to the matter said.

The life insurer planned to launch a financial holding firm by the end of last year, a move seeking to bolster intra-subsidiary synergy and overall funding capabilities to expand its business presence. Included are Kyobo Securities and Kyobo AXA Investment Managers.

However, it has since stalled due to gridlock among shareholders, including Affinity — the second-largest stakeholder in the life insurer.

“EY Hanyoung is in the process of setting the prices. A positive outcome can be expected in the long term,” the official said.

In February 2023, the Seoul High Court upheld a lower court ruling that found for Affinity.

Five officials from Affinity and Deloitte Anjin, an accounting firm, were acquitted of accounting fraud charges involving the alleged manipulation of Kyobo's pre-initial public offering (IPO) price.

Previously, prosecutors had sought prison terms between one year and 18 months for each of the five people, saying that they orchestrated a plan whereby Deloitte Anjin officials wrote a put option-related stock valuation report in a way that strengthened the case for Affinity at the request of the private equity firm's officials.

The appellate court said the most important factor in accountants' valuation is not which party first put forth a recommendation but whether the appraisal underwent a professional review.

"No objective evidence was presented to strengthen the argument that the price was set based solely at the urging of the Affinity consortium without the expert opinion of Anjin,” the court said.