[Bandogroup's Affair]③ 'Differential Dividends' Used as a Means for 2nd Generation Succession

[Asia Economy Reporter Hyunseok Yoo] Kwon Hong-sa, chairman of Bando Construction, is known to have a deep affection for his daughter to the extent that he created an apartment brand called 'Bando Yubora' by incorporating his daughter’s name 'Bora.' However, the succession process is centered on the eldest son, as only his son Kwon Jaehyun, executive director of Bando Development, inherited shares of the group’s holding company, Bando Holdings. In this process, Bando Holdings implemented differential dividends, enabling Executive Director Kwon to secure a large amount of succession funds. Criticism has been raised that differential dividends, originally allowed to protect minority shareholders’ rights, were misused for the purpose of gifting within the major shareholder family.

◆ Kwon Jaehyun became the second-largest shareholder of Bando Holdings in 2015

The Bando Group is a construction company established in March 1980. Starting with Bando Construction, it grew into a comprehensive construction and leisure group. In 2009, it spun off its construction business to establish Bando Holdings. As of 2018, it ranked 13th in the Ministry of Land, Infrastructure and Transport’s civil engineering and architecture construction capability evaluation, with an evaluation amount of 2.5928 trillion KRW.

Kwon Jaehyun first appeared in the audit report in 2006, two years before Bando Holdings was established. At that time, Bando Construction lent 3.9 billion KRW to Executive Director Kwon. It is interpreted that this was necessary funding for acquiring and gifting shares of the affiliate Bando Development.

Later, in 2015, Executive Director Kwon appeared again. By acquiring 30.06% (700,000 shares) of Bando Holdings, he quickly became the second-largest shareholder after Chairman Kwon Hong-sa, who held 69.31% (1,621,395 shares). In the previous year, 2014, Chairman Kwon held 93.01% (2,166,275 shares), Kwon Hyuk-woon, Chairman Kwon’s younger brother and chairman of IS Dongseo, held 6.44% (150,000 shares), and other shareholders held 0.55% (12,750 shares) of Bando Holdings shares.

◆ Raising succession funds through differential dividends... Bando Holdings’ dividend income reached 47.6 billion KRW over three years

In 2015, when Executive Director Kwon became the second-largest shareholder, Bando Holdings conducted a large-scale interim dividend. The dividend per share was 58,000 KRW, totaling 40.6 billion KRW. If Bando Holdings had distributed dividends equally among all 2,329,025 issued shares in 2015, the total dividend would have reached 135.1 billion KRW. However, through differential dividends, Executive Director Kwon was able to receive most of the dividends with a relatively smaller total dividend amount.

The 2015 audit report specified that "the interim dividend was a differential dividend for 700,000 shares." Differential dividends mean that dividends vary according to the number of shares owned by the company. It is a case where major shareholders concede or forgo some dividend rights to minority shareholders so that minority shareholders receive more dividends. Especially in differential dividends, there can be tax-saving effects during business succession or inheritance and gifting. The 40.6 billion KRW dividend was concentrated solely on Executive Director Kwon (700,000 shares) under the name of differential dividends.

Bando Holdings continued to pay dividends afterward. In 2016, it paid 6,000 KRW per share, totaling 13.97415 billion KRW, and in 2017, 4,000 KRW per share, totaling 9.3161 billion KRW. No dividends were paid in 2018. During this period, the dividends Executive Director Kwon received amounted to approximately 47.6 billion KRW over three years: 40.6 billion KRW in 2015, 4.2 billion KRW in 2016, and 2.8 billion KRW in 2017.

Some critics argue that differential dividends, a system intended for minority shareholders, were misused for gifting by the major shareholder. An investment banking (IB) industry official said, "In the case of Bando Holdings, since Chairman Kwon and his family own 100% of the shares, even if differential dividends are paid, no money goes to minority shareholders other than the owner family," adding, "It is reasonable to see that differential dividends were misused as a means to prepare funds for second-generation succession."

◆ Another funding channel: 'Bando Development'

Bando Development also actively paid dividends around the time Executive Director Kwon became the largest shareholder. Bando Development was established in 1989 with the main business of installing and operating golf courses and other sports facilities.

According to the 2006 audit report, Chairman Kwon held 35% (140,000 shares) of Bando Development. Executive Director Kwon held 30% (120,000 shares), Chairman Kwon’s wife Yoo Seong-ae held 20% (120,000 shares), and other shareholders held 15% (60,000 shares). In the following year, 2007, Executive Director Kwon increased his stake to 65% (260,000 shares), becoming the largest shareholder. Chairman Kwon and his wife Yoo’s shares decreased to 10% (40,000 shares) each, while other shareholders maintained 15%. From 2013 onward, the shares of Executive Director Kwon and related parties rose to 100%, making it Executive Director Kwon’s personal company.

Bando Development began paying dividends in earnest after Executive Director Kwon’s stake increased. In 2010, it paid 5,000 KRW per share, totaling 2 billion KRW, and in 2011, 2,500 KRW per share, totaling 1 billion KRW. In 2015, coincidentally like Bando Holdings, it paid a large dividend of 16,250 KRW per share, totaling 6 billion KRW. It is estimated that Executive Director Kwon received dividends exceeding 6 billion KRW at that time.

An expert in governance at an asset management firm analyzed, "The total dividends Executive Director Kwon received through the holding company Bando Holdings and his personal company Bando Development exceed 50 billion KRW," adding, "It seems that most of it was used as succession funds."