[Business & Issues] The Will That Marked the Starting Point of the Hanmi Pharm Dispute

Divided According to Legal Inheritance Shares, a Source of Dispute
Stock Prices Shaken by Owner Family Management Rights Conflict
Concerns Over 'Overhang' Due to Inheritance Tax and Stock-Backed Loans

Im Jong-hoon, CEO of Hanmi Science (left), and Song Young-sook, Chairwoman of Hanmi Pharmaceutical Group (right).

The ownership dispute within the Hanmi Group's founding family shows no signs of settling. As conflicts persist over the sale of shares to raise funds for inheritance tax and repayment of stock-backed loans, the stock price has also been highly volatile. It is evaluated that the root of the management dispute was the equal division of holding company shares according to statutory inheritance shares without a will at the time of the late Chairman Lim Seong-gi's death in 2020. If the dispute within the founding family prolongs, investors who intended to purchase shares may give up, or the stock price could plummet, raising the risk of forced sale of the founder family's shares pledged as collateral for loans.

Share Division According to Statutory Inheritance Without a Will... The Spark of Mother-Son Conflict

The origin of the Hanmi Group's management dispute began with Chairman Lim's death in August 2020. Until then, the Hanmi Group had a solid governance structure, with the founder family holding 66.45% of the shares in the holding company Hanmi Science, far from any management disputes. According to the Financial Supervisory Service's electronic disclosure, Chairman Lim was the largest shareholder with an overwhelming 23,076,985 shares (34.29%), while his wife, children, and relatives each held only about 3%, leaving little room for internal family disputes.

However, after Chairman Lim passed away without a separate will, the Hanmi Science shares were divided according to statutory inheritance shares, and the shares were evenly distributed among his wife, Chairwoman Song Young-sook, and their three children, rather than concentrated in a specific heir, igniting the spark of a management dispute. In South Korea, statutory inheritance shares apply a ratio of 1.5 to the spouse and 1 to each child when dividing inheritance property.

Immediately after inheritance, Chairwoman Song held 11.65%, eldest son Lim Jong-yoon, CEO of Hanmi Pharm, held 8.92%, second son Lim Ju-hyun, Vice Chairman, held 8.82%, and youngest son Lim Jong-hoon, CEO of Hanmi Science, held 8.41%. Because the share differences between Chairwoman Song and her children were not large from the outset, the structure was prone to disputes when disagreements over management rights arose within the founding family.

Moreover, the sudden inheritance without preparation was compounded by a massive inheritance tax burden, making it difficult to reorganize shares to concentrate ownership in a specific person even after inheritance. The value of Chairman Lim's shares was estimated at around 1 trillion KRW, subject to the highest inheritance tax rate, plus a surcharge applied to the largest shareholder succession, resulting in an inheritance tax rate of 60%. This led to inheritance taxes exceeding 540 billion KRW, forcing Chairwoman Song and her children to raise funds through stock-backed loans. The absence of a single largest shareholder with overwhelming shares has continued for four years.

Stock Price Volatility Amid Intensifying Ownership Dispute... Repeated Sharp Fluctuations

Since the beginning of the year, as the ownership dispute within the founding family has continued, the stock price of Hanmi Science, the holding company, has also been highly volatile. The stock price, which was 39,200 KRW per share at the start of the year, rose to 43,850 KRW on the 25th of last month when brothers Lim Jong-yoon and Jong-hoon were dismissed from their CEO positions. After the two brothers won at the shareholders' meeting, Chairwoman Song was dismissed as CEO of Hanmi Science on the 14th of this month, causing the price to fall to 34,050 KRW.

The stock price of Hanmi Pharm, a core affiliate of Hanmi Science, has also been unstable. Hanmi Pharm's stock price fell from 358,000 KRW per share at the start of the year to 297,500 KRW on the 17th of last month, then slightly rebounded to 316,500 KRW on the 14th of this month. This partial rebound was supported by expectations following a first-quarter consolidated revenue increase of 11.8% year-on-year to 403.7 billion KRW and an operating profit increase of 19% to 76.6 billion KRW.

With signs of the ownership dispute reigniting, stock price stability is expected to be difficult for some time. Hanmi Science announced on the 14th that it held an extraordinary board meeting and dismissed Chairwoman Song from her CEO position, signaling the resumption of mother-son conflict. On the 4th of last month, Hanmi Science had announced that Chairwoman Song and CEO Lim Jong-hoon would serve as co-CEOs, raising hopes for reconciliation, but only 40 days later, Chairwoman Song was dismissed, raising concerns that the management dispute will flare up again. Although Chairwoman Song was dismissed as CEO, she remains a director, and the mother-son conflict is expected to continue at the shareholders' meeting scheduled for the 18th of next month.

Key to Raising Funds for Inheritance Tax and Stock-Backed Loan Repayment... 'Overhang' Concerns Amid Dispute Reignition

[Image source=Hanmi Pharm website]

If the founding family's dispute ultimately fails to reach an agreement, the worst-case scenario is non-payment of inheritance tax and stock-backed loans. The unpaid inheritance tax owed by the Hanmi Group's founding family amounts to 264.4 billion KRW, and stock-backed loans taken to pay the inheritance tax total 537.9 billion KRW. Without an injection of over 800 billion KRW by any means, there is a risk of an 'overhang' where shares pledged as collateral are forcibly sold, flooding the market with sell orders.

Above all, neither Chairwoman Song nor the brothers Lim Jong-yoon and Jong-hoon hold a majority stake, making it difficult to swiftly decide on share sales in any direction. Currently, the brothers' side holds about 38.4% including friendly shares, while Chairwoman Song's side is estimated to hold about 32.95%. The movement of shareholders such as the National Pension Service, which holds 6.6% and could act as a casting vote, could overturn decisions at the shareholders' meeting.

Currently, both sides of the founding family are seeking investors who can guarantee management rights and provide liquidity, but since they have not reconciled to unify the share sale method in one direction, decisions can be reversed at any time, making it difficult for private equity funds and other investors to step forward.

Ultimately, concerns are rising that the longer the dispute drags on, the more it could negatively impact Hanmi Pharm's management. Kiwoom Securities analyst Heo Hye-min pointed out, "Although the management dispute was temporarily resolved with the brothers' victory, concerns remain in the market about internal conflicts and future business strategies and directions. The corporate value of Hanmi Science may continue to decline, making it difficult to raise funds for inheritance tax, among other issues."