[Business & Issues] SK Governance Shaken by 'Six Promissory Notes'... Will Financial Burden Increase?

300 Billion Won Promissory Note Delivered from Roh Tae-woo's Slush Fund
Emergency Securing of 1.38 Trillion Won Ahead of Final Appeal
Stock Price Volatility Intensifies... "Financial Burden Already Increased"

[Image source=Yonhap News]

In the appeal trial of the divorce lawsuit between Chey Tae-won, chairman of SK Group, and Noh So-young, director of Art Center Nabi, a record-breaking property division ruling has been issued, drawing attention to a promissory note worth 30 billion won from the past Seonkyung Construction. The note originated from the slush fund of former President Roh Tae-woo, and the court judged that the funds served as the foundation for the growth of Seonkyung Group, the predecessor of SK Group.

As controversy arises over whether a politician's slush fund can be considered inheritable private property, concerns about future management disputes have increased, causing volatility in SK's stock price. Given that this is an exceptionally large-scale property division trial in Korea, the final verdict is expected to be decided in the third trial, and SK's stock price is anticipated to continue fluctuating until the final judgment is confirmed.

The 30 Billion Won Promissory Note Emerging as a Key Issue... Was It Used for the Acquisition of Taepyeongyang Securities?

Former President Roh Tae-woo. [Image source=Yonhap News]

The Family Division 2 of the Seoul High Court (Chief Judge Kim Si-cheol) recognized six promissory notes worth 5 billion won each, dated December 16, 1992, from Seonkyung Construction (now SK Ecoplant), which were kept by Kim Ok-sook, wife of former President Roh, as key evidence in the appeal trial of the divorce lawsuit between Chairman Chey and Director Noh last month on the 30th. The court determined that the promissory notes, originating from former President Roh's slush fund, were transferred to Seonkyung Group, the predecessor of SK Group, and that these funds laid the groundwork for the formation of today's SK Group.

Director Noh's side claimed that the promissory notes were used in 1992 for Seonkyung Group's acquisition of Taepyeongyang Securities. Although the second trial court did not specifically identify the use of the funds, it effectively accepted Director Noh's claim by stating, "The source of funds for the acquisition of Taepyeongyang Securities is unclear." The court cited as evidence that Kim Ok-sook had kept the six promissory notes in a small envelope labeled 'Seonkyung 300' along with detailed memos recording the slush fund details of former President Roh in April 1998 and February 1999.

Taepyeongyang Securities was a securities firm ranked around 10th in the industry at the time, acquired by Seonkyung Group from Taepyeongyang Chemical Group in 1992. Seonkyung Group was attempting to enter the telecommunications business sector and sought funding by venturing into the securities industry. At the time of acquisition, 2.83 million shares of Taepyeongyang Securities were purchased off-market at 20,200 won per share, totaling 57.1 billion won, but the source of funds was not clearly disclosed, leading to controversy. The acquisition contract was made under the name of then Chairman Choi Jong-hyun of Seonkyung Group, not the group itself, raising suspicions that financial support came from former President Roh's side, who was related by marriage.

Chairman Chey's side argued, "Accepting Director Noh's claim that former President Roh entrusted 30 billion won of slush funds received as bribes would mean condoning the daughter reclaiming profits obtained through her father's antisocial criminal acts," adding, "This contradicts Article 746 of the Civil Act, which prohibits the return of wages from illegal causes." However, this argument was rejected. The court ruled, "The 30 billion won financial support in 1991 did not constitute any criminal offense and was not subject to criminal punishment thereafter," siding with Director Noh.

Accordingly, in the first trial of the divorce lawsuit, assets worth about 4 trillion won, including SK and its affiliates' shares previously recognized as Chairman Chey's exclusive property, were all acknowledged as subject to division. Chairman Chey was ordered to pay Director Noh 1.3808 trillion won in property division and 2 billion won in alimony.

Emergency Fundraising for Property Division... Chairman Chey's Significant Shares Pledged as Collateral

SK Chairman Chey Tae-won's SK shares contract details. [Image source=Financial Supervisory Service Electronic Disclosure System]

If the property division ruling from the second trial is confirmed or not significantly reduced in the third trial, Chairman Chey's side is expected to face great difficulties securing the funds to pay Director Noh. This is because a substantial portion of Chairman Chey's SK shares are already under collateral loan contracts, making it difficult to obtain additional loans or sell shares of other affiliates.

According to the Financial Supervisory Service's electronic disclosure, of the 17.73% SK shares held by Chairman Chey, 10.24% are under contracts such as collateral loans and pledge settings. Even if the remaining approximately 7% of shares were sold entirely, considering SK's current market capitalization of around 12 trillion won, the proceeds would amount to only about 840 billion won.

Along with SK shares, selling shares of SK Siltron, an unlisted affiliate known as one of Chairman Chey's major assets, is also expected to be difficult. Chairman Chey participated in acquiring a 29.4% stake in SK Siltron through a total return swap (TRS) when SK acquired SK Siltron from LG in 2017. The current value of this stake is estimated to be between 600 billion and 800 billion won.

TRS is an investment method where a securities company purchases assets on behalf of investors who cannot directly buy the assets, with investors earning profits based on asset price fluctuations while paying fees to the securities company or a special purpose company (SPC). At the time of the TRS contract, Chairman Chey pledged 4.33% of SK shares held by the SPC, and the SPC used these shares as collateral to purchase SK Siltron shares on behalf of Chairman Chey. To sell these shares and use the proceeds for property division payments, the pledge must first be released.

Even after the sale, capital gains tax on stock transfer profits must be paid. Under current law, major shareholders must pay 27.5% tax on stock transfer gains exceeding 300 million won. If the shares were sold for 800 billion won, more than 220 billion won would have to be paid in taxes.

SK's Financial Burden Already Increased... Stock Price Volatility Intensifies

As the possibility of changes in SK's governance structure arises following Chairman Chey's property division, SK's stock price has been fluctuating. Around the second trial verdict on the 30th of last month, SK's stock price rose sharply from 144,700 won to 178,800 won on the 3rd of this month, a 23.56% increase in a short period, before falling back to the 160,000 won range.

Some securities firms have not directly identified the property division issue as a risk but have lowered SK's target price. Since SK Group has expanded into various fields such as semiconductors, batteries, and bio industries until last year, increasing the number of affiliates and borrowing, the financial burden has grown, leading to expectations of continued stock price volatility.

DS Investment & Securities recently lowered SK's target stock price from 260,000 won to 200,000 won in a report. Researcher Kim Soo-hyun of DS Investment & Securities pointed out, "There are many concerns in the market about SK's investment performance," and "The group's financial burden is increasing."

BNK Investment & Securities also lowered SK's target price from 230,000 won to 210,000 won. Researcher Kim Jang-won of BNK Investment & Securities evaluated, "SK Group seems to feel the need for restructuring in the secondary battery and bio businesses, but significant changes are difficult due to the unusually large number of intermediate holding companies," adding, "The financial burden on the holding company and the dispersion of corporate value weaken the upward momentum."