Harim's Unfair Support Including 'Overpriced Purchases and Passage Fees' for Management Succession... Fair Trade Commission Imposes 4.9 Billion Won Fine

Harim Affiliates, Unfair Support and Profit Provision to 'Olpoom'
Changed to Integrated Purchase of Veterinary Drugs and Feed Additives Only Through Olpoom

Affiliates Purchased Veterinary Drugs at Prices Higher Than Market Prices... Provided High Sales Margins to Olpoom
Olpoom, with No Role, Collected 3% Toll Fee on Feed Additive Payments

Fair Trade Commission: "Unfair Support of 7 Billion KRW During Management Succession Process"

[Sejong=Asia Economy Reporter Joo Sang-don] It has been revealed that Harim unfairly supported Olpoom, controlled by the second generation of the family, through high-priced purchases of goods, collection of toll fees, and low-priced stock sales to facilitate the succession of management rights by the controlling family. The scale of unfair support Olpoom received from Harim Group affiliates alone amounts to 7 billion KRW.

On the 27th, the Fair Trade Commission announced that it decided to impose corrective orders and a total fine of 4.888 billion KRW on Harim Group affiliates for unfairly supporting Olpoom and providing unfair profits.

According to the Fair Trade Commission, Harim, at the group level, began considering a plan to transfer the corporation to the eldest son, Kim Jun-young, by Chairman Kim Hong-guk, the controlling person, around August 2010 as a management succession plan. Accordingly, around January of the following year, during the transition to a holding company system, Harim placed Korea Somevet Sales (now Olpoom) and Korea Somevet (now Korea Investment) outside the holding company system, positioning these companies at the top of the corporate group’s governance structure.

In January 2012, Chairman Kim gifted 100% of Korea Somevet Sales shares to his eldest son, making Kim the largest shareholder of Jeil Holdings (now Harim Holdings) among natural persons. As Korea Somevet Sales became the key company for group management succession, the Fair Trade Commission judged that an incentive structure was formed within Harim Group to prepare inheritance funds and maintain and strengthen group management rights through support for Korea Somevet Sales.

Subsequently, Harim Group affiliates, under the intervention of the controlling person and the group headquarters, provided excessive economic benefits to Olpoom through three actions, as revealed by the investigation.

First, the group’s pig farming affiliates, the largest domestic demanders of veterinary drugs for pig farming (Farmsco, Farmsco Bio Inti, Porkland, Seonjin Hanmaeul, Daesung Livestock, and five others), changed their veterinary drug purchasing method from individual purchases by each affiliate farm to integrated purchases only through Olpoom. From January 2012 to February 2017, they purchased veterinary drugs from Olpoom at higher prices. Although the original purpose of integrated purchasing was cost reduction through bulk buying, Olpoom set affiliate farm sales prices higher than market prices to provide high sales margins to dealers who met their sales targets. The Fair Trade Commission viewed this as unfair support amounting to 3.2 billion KRW to Olpoom.

Additionally, Harim unfairly supported Olpoom (about 1.1 billion KRW) through toll fee transactions related to feed additives. Affiliate feed companies that manufacture compound feed previously purchased feed additives directly from manufacturers, but from early 2012, they changed the purchasing method to integrated purchases through Olpoom. A Fair Trade Commission official said, "Affiliate feed companies expressed negative views, citing delayed market information and weakened price competition if Somevet was added as a transaction step. However, under the instructions and intervention of the controlling person and group headquarters, they had no choice but to accept this."

Affiliate feed companies demanded feed additive manufacturers, with whom they previously transacted directly, to supply Olpoom at about 3% lower prices than the existing direct purchase prices, and the manufacturers accepted this. The price difference from the 3% reduction all went to Olpoom as an intermediary margin. Since affiliate feed companies purchased through Olpoom at the same price as before, no cost reduction effect from integrated purchasing occurred.

Support through low-priced sales of former Olpoom stock was also confirmed. Jeil Holdings (renamed Harim Holdings in July 2018) sold 100% of its Olpoom shares to Korea Somevet Sales at a low price in January 2013. Earlier, during Harim’s transition to a holding company system in January 2011, Olpoom’s 3.1% stake in NS Shopping was deemed a violation of subsidiary conduct restrictions, obliging Harim Group to resolve this by January 2013. Harim Group resolved this by having Jeil Holdings sell 100% of its Olpoom shares to Korea Somevet Sales (now Olpoom) in January 2013. According to the Fair Trade Commission, NS Shopping transaction prices around the time of the Olpoom stock sale ranged from a minimum of 53,000 KRW to a maximum of 150,000 KRW. This was 6.7 to 19.1 times higher than the acquisition cost per share of 7,850 KRW evaluated by Harim Group. The Fair Trade Commission judged that Jeil Holdings sold Olpoom shares at a low price by significantly undervaluing NS Shopping shares held by Olpoom, resulting in a low-priced sale of Olpoom shares to Korea Somevet Sales. The Commission estimated this profit difference at 2.7 billion KRW.

Yook Sung-kwon, Director of the Corporate Group Division at the Fair Trade Commission, said, "We uncovered a series of support acts by affiliates carried out after an incentive structure was established to prepare succession funds and maintain and strengthen group control through support to the controlling person’s second-generation controlled company." He added, "Going forward, the Fair Trade Commission will thoroughly monitor unfair support acts involving affiliates mobilized to assist the controlling family’s management succession and will strictly handle violations."