Correlation Between Business Succession and Trademark Royalties
Sharp Increase in Trademark Royalties for LX, HD Hyundai, and Others
This year, LX Group, which joined the large business conglomerates, is expected to receive about 70 billion KRW under the ‘LX’ brand name. Until last year, it was ‘0 KRW’. While the LX brand image has improved, there is an interpretation that the internal structure is related to the succession scheme.
LX Group decided to start collecting trademark usage fees this year, the third year since its launch, which it had not received before. A representative of LX Group said on the 12th, “We have signed trademark usage contracts with six companies: LX International, LX Pantos, LX Hausys, LX Semicon, LX MMA, and LX Pantos Busan New Port Logistics Center,” adding, “The usage fee rate is 0.2% of sales excluding advertising expenses.” LX Group unanimously approved the ‘Approval of LX Trademark Usage Contract’ at the board meeting in May last year.
Based on the sales of the six affiliates last year, a simple calculation shows that LX Holdings will collect 71.8 billion KRW in trademark usage fees. Among these affiliates, only three?LX Hausys, LX International, and LX MMA?paid trademark usage fees during their time under LG Group. The trademark usage fees paid by these three companies to LG Corporation amounted to 9.2 billion KRW as of 2020. The other three affiliates began paying trademark usage fees after being incorporated into LX Group.
The affiliates are in a position where they have to pay trademark usage fees despite poor performance. Among the six affiliates, three companies (LX Hausys, LX Semicon, and LX International) saw their operating profits decrease by between 16% and 79% compared to the previous year. The securities industry estimates that the operating profits of LX Semicon and LX International will decrease by 21% and 36%, respectively, again this year compared to the previous year.
Gu Hyung-mo, eldest son of LX Group Chairman Koo Bon-joon and Vice President and CEO of LX MDIA, is exempt from paying trademark usage fees. An LX Group official explained, “LX MDIA mainly provides management consulting, IT, and business infrastructure innovation services to enhance the competitiveness of affiliates,” adding, “Please understand that there is little or no benefit from trademark usage.”
Chairman Koo promoted CEO Koo, who worked as Executive Director of the Management Planning Division at LX Holdings until March last year, to Vice President within about nine months and simultaneously established a new company called LX MDIA, wholly owned by LX Holdings, appointing him as CEO. The industry widely interprets that the succession process accelerated as the fourth-generation Vice President Koo took the lead in management.
Chairman Koo established LX Group in May 2021 by separating some affiliates from LG Group. He is the third son of the late Honorary Chairman Koo Ja-kyung and the younger brother of the late Chairman Koo Bon-moo. His nephew is Koo Kwang-mo, Chairman of LG Group. As of the end of last year, the LX Holdings shares held by the family members were 20.37% by Chairman Koo, 12.15% by eldest son Vice President Koo Hyung-mo, and 8.78% by eldest daughter Koo Yeon-je.
The situation is similar in HD Hyundai Group, where the third generation of the owner family is at the forefront of management. HD Hyundai changed its group name last year and also changed the group trademark. In this process, the ownership of the trademark changed from joint ownership by six affiliates to sole ownership by HD Hyundai. HD Hyundai’s trademark income this year is estimated to be around 30 billion KRW. When the trademark was jointly owned, the trademark income flowing to the holding company HD Hyundai was 4 billion KRW (as of 2020), but it increased sevenfold after becoming sole owner.
Jung Ki-sun, CEO of HD Group, presenting at the 'CES 2023' HD Hyundai press conference held in Las Vegas, USA, this January. [Photo by HD Hyundai]
The largest shareholder of HD Hyundai is Chung Mong-joon, Chairman of the Asan Foundation, holding 26.6% of shares, and the second-largest shareholder is his eldest son, Chung Ki-sun, CEO, with 5.26%. HD Hyundai Group accelerated the succession process by promoting CEO Chung to President of HD Hyundai and the intermediate holding company Korea Shipbuilding & Offshore Engineering in October 2021. The Hyundai family tends to have a fast promotion pace.
Father Chung was appointed President of Hyundai Heavy Industries at age 31 in 1982 and was promoted to Chairman five years later. CEO Chung will have to pay inheritance tax worth about 700 billion KRW to inherit his father’s shares. Trademark income recorded as holding company performance can be used as one of the channels to prepare for inheritance tax. HD Hyundai is known as a high-dividend representative company, meaning most of the holding company’s income is returned to shareholders as dividends. Last year, the dividend payout ratio reached 147%. HD Hyundai’s dividend payout target announced in March last year is ‘70% or more by 2024.’
Another example is LG Group. LG Corporation is the top domestic earner of trademark usage fees. It earned 365.5 billion KRW last year, a 7% increase from the previous year. As a pure holding company, LG Corporation generates revenue from three sources: dividends from affiliates, trademark usage fees, and rent. Trademark income accounts for 34.2% of total revenue. LG Corporation’s trademark income has increased every year since Koo Kwang-mo, Chairman of LG, began paying inheritance tax in 2018.
Chairman Koo inherited 8.8% (15,122,169 shares) of LG Corporation shares held by the late Chairman Koo Bon-moo of LG Group. The inheritance tax was the largest ever at 720 billion KRW. It has been paid in installments annually since November 2018. He is expected to complete the full payment of inheritance tax by the end of this year. Last month, he filed a lawsuit against the tax authorities, claiming that part of the inheritance tax was excessively imposed.
Trademark income tends to be higher in groups with a controlling family. According to the ‘2022 Internal Transaction Status of Publicly Disclosed Business Groups’ announced by the Fair Trade Commission in December last year, among companies belonging to groups with controlling families, 84 companies receive trademark usage fees from affiliates, and more than half of them?43 companies?have controlling family ownership of 20% or more. Trademark income of companies with controlling family ownership of 20% or more (1.28 trillion KRW) accounts for 84.7% of the total trademark income (1.5 trillion KRW) of groups with controlling families.
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