Lotte Holdings' Governance Structure Draws Attention Amid 3rd Generation Succession [Business & Issues]

Owner Family Divided Over Director Position at Japan Lotte Holdings
Complexified Governance in 2nd Generation Succession... Sparks of Dispute
Shin Dong-ju, with 10 Losses, Begins Active Involvement in 3rd Generation Succession Process

A family feud has erupted again within the Lotte Group over the third-generation succession. The conflict between Shin Dong-bin, Chairman of Lotte Group, and Shin Dong-ju, Chairman of SDJ Corporation, over the director position at Japan's Lotte Holdings, the core of the group's governance structure, shows that the battle is far from over. The complex governance structure created in the 1970s for second-generation succession and the festering sibling rivalry remain a source of ongoing management disputes.

Shin Dong-ju, Largest Shareholder of Lotte Holdings' Largest Shareholder... Reasons for Failure to Return to Management

On the 26th, Japan's Lotte Holdings appointed Shin Yu-yeol, eldest son of Chairman Shin Dong-bin and head of Lotte's Future Growth Office (Executive Director), as an inside director through its regular shareholders' meeting. Prior to the meeting, Shin Dong-ju submitted a shareholder proposal opposing Shin Yu-yeol's appointment to the board, but it was rejected.

Shin Dong-ju strongly opposed Shin Yu-yeol's appointment as an inside director of Lotte Holdings. He argued, "At this critical juncture where the management direction of the Korea-Japan Lotte Group is important, it is inappropriate for an unproven individual in terms of management capability to join the highest decision-making body, the board of directors," and claimed, "The deterioration of management in the Korean Lotte Group is severely damaging the corporate value of Lotte Holdings as a whole." However, he was ultimately defeated at the shareholders' meeting.

Lotte Holdings is the holding company at the top of the Lotte Group's governance structure, which extends through Hotel Lotte and Lotte Holdings. Therefore, the appointment of Shin Yu-yeol as an inside director can be interpreted as part of the third-generation succession process. Shin Dong-ju's strong opposition to this appointment is seen as dissatisfaction with the succession process proceeding without his inclusion.

At this shareholders' meeting, Shin Dong-ju, as the CEO and largest shareholder of Kwangyoon Corporation, which holds 28.14% of Lotte Holdings' shares, submitted a shareholder proposal. He owns 50.28% of Kwangyoon Corporation's shares, which alone exceeds Chairman Shin Dong-bin's 38.98%. From Lotte Holdings' perspective, he is effectively the "largest shareholder of the largest shareholder."

However, employee shareholders' association (27.8%) and executive shareholders' association (5.96%), which play the casting vote role in Lotte Holdings, continued to support Chairman Shin Dong-bin, causing Shin Dong-ju to lose in the shareholder vote. In addition to the support from these shareholder associations, Shin Dong-bin holds 2.69% of Lotte Holdings shares in his own name and 17.15% of voting rights exercisable through affiliates other than Kwangyoon Corporation, totaling 53.87% of friendly shares.

Complex Governance Structure Created During 1970s Second-Generation Succession... Remains a Source of Dispute

The headquarters building of Lotte Holdings located in Tokyo, Japan. [Image source=Japan Lotte Holdings]

This dispute is evidence that the management rights conflict within the Lotte Group's owner family has not been fully resolved since 2015. Since Shin Dong-ju was abruptly dismissed from the director position at Lotte Holdings in January 2015, he has submitted shareholder proposals at every shareholders' meeting demanding his own appointment as director and the dismissal of Shin Dong-bin, but all ten attempts, including this latest meeting, have failed.

The main reason the sibling feud has extended to a dispute between uncle and nephew is attributed to the fragile and complex governance structure of Lotte Group at the upper levels. The dispersion of Lotte Holdings shares to entities such as Kwangyoon Corporation and the employee shareholders' association during the transition to a holding company system, initiated by the late Shin Kyuk-ho, Honorary Chairman of Lotte Group, in preparation for second-generation succession since the 1970s, has become the root of the conflict.

According to the Japanese media Diamond, Japan's Lotte Holdings, established in 2007, was created after a 30-year preparation period within Lotte Group starting in 1977. At that time, Shin Kyuk-ho, aged 55, anticipated that inheritance tax on shares and assets of Lotte affiliates in Japan alone would amount to at least 1 trillion yen (approximately 8.625 trillion KRW). To reduce taxes, he pursued a transition to a holding company system, reducing personal shareholdings to an appropriate level and converting them into friendly shares.

Under this plan, the employee shareholders' association was created. Originally a social club for employees, it was reorganized into an employee stock ownership association in 1985. The employee shareholders' association received 20% of shares in Japan's Lotte Corporation (now Lotte Holdings), becoming a major shareholder, and shares were distributed to employees with over ten years of service in the Japanese Lotte Group. The association's voting rights were exercised by a single chairman acting as proxy, and the appointment rights of the chairman were effectively held by the Lotte Group chairman, making it a powerful friendly shareholder. Subsequently, an executive shareholders' association was formed in a similar manner.

However, as the employee shareholders' association (27.8%) and executive shareholders' association (5.96%) came to hold a larger share of Lotte Holdings than Kwangyoon Corporation (28.14%), which was under the sole control of the owner family, they emerged as new variables in the management dispute since 2015. Diamond pointed out, "The driving force behind Shin Dong-bin's ability to dismiss Shin Dong-ju, who held a majority of Kwangyoon Corporation shares, from the Lotte Holdings board in January 2015 was the support of these two shareholder associations."

Despite Ongoing Sibling Conflict, Third-Generation Succession Accelerates

Shin Yu-yeol, the eldest son of Shin Dong-bin, Chairman of Lotte.
[Image source=Yonhap News]

Despite the ongoing conflict among the owner family siblings, the third-generation succession of Lotte Group is expected to accelerate further. With his appointment as an inside director of Lotte Holdings at this shareholders' meeting, Shin Yu-yeol has established his presence in both Korea and Japan, marking his full entry into frontline management after completing his training.

In February, Shin Yu-yeol was appointed as an inside director of Lotte Biologics, becoming the first registered executive among Korean Lotte Group affiliates. He currently also serves as head of the Future Growth Office at Lotte Holdings and head of the Global Strategy Office at Lotte Biologics in Korea. On the 5th, it was disclosed that Shin Yu-yeol purchased 7,541 common shares (0.001%) of Lotte Holdings, placing him on the list of special related parties of Chairman Shin Dong-bin.

As the succession process intensifies, Shin Yu-yeol's acquisition of Korean nationality is also expected soon. Born in London, UK, and raised in Japan, Shin Yu-yeol currently holds Japanese nationality. Upon turning 38 this year and completing his military service obligations in Korea, he is expected to acquire Korean nationality shortly and take a more active role in management.