Fair Trade Commission: "Succession of Management Rights by Growing Second-Generation Company... Disruption of Transaction Order"
Jungheung Construction has been sanctioned by the Fair Trade Commission for providing unfair support and engaging in private interest transfer by offering a free guarantee to Jungheung Engineering & Construction, a company owned by the second-generation owner, enabling it to raise trillions of won in funding.
On June 9, the Fair Trade Commission announced that it had issued a corrective order and imposed a total fine of 18,021,000,000 won for violations of the Monopoly Regulation and Fair Trade Act (Fair Trade Act) by the Jungheung Construction business group. The corporation Jungheung Construction, which provided the support, will also be referred to the prosecution.
According to the Fair Trade Commission's investigation, from July 2015 to February of this year, Jungheung Construction provided a total of 3,209,600,000,000 won in credit enhancement, free of charge, for 24 project financing (PF) and securitization loans related to 12 housing construction and general industrial complex development projects implemented and constructed by Jungheung Engineering & Construction.
In this process, Jungheung Engineering & Construction Vice Chairman Jung Wonjoo was able to secure benefits such as an increase in equity value, dividends (65,000,000,000 won), and salary (5,100,000,000 won).
Jungheung Construction is 76.74% owned by Jungheung Group Chairman Jung Changsun, while Jungheung Engineering & Construction is 100% owned by his eldest son, Vice Chairman Jung Wonjoo.
The Fair Trade Commission determined that the unfair support was carried out as part of a succession plan to reorganize the group's governance structure around Jungheung Engineering & Construction, which is 100% owned by Vice Chairman Jung Wonjoo.
When Vice Chairman Jung Wonjoo acquired Jungheung Engineering & Construction in 2007, it was a small construction company valued at only 1,200,000,000 won, and it was impossible to secure large-scale business loans based solely on its own credit.
Credit enhancement, such as joint guarantees or capital supplementation agreements, involves sharing the credit risk of another company. Therefore, construction companies, securities firms, and public institutions typically receive construction shares or fees in exchange for providing credit enhancement.
However, Jungheung Construction provided a credit guarantee, estimated to be worth at least 18,100,000,000 won, free of charge, and helped Jungheung Engineering & Construction easily raise a total of 2,900,000,000,000 won in business funds, according to the investigation.
Through this, Jungheung Engineering & Construction and its affiliates secured total sales of 6,678,000,000,000 won and profits of 1,073,100,000,000 won as of the end of 2023, according to the Fair Trade Commission. Jungheung Engineering & Construction's construction capability ranking also soared from 82nd in 2014 to 16th last year.
In particular, Jungheung Engineering & Construction leaped to become a core company with more than 40 affiliates by acquiring Daewoo Engineering & Construction, which ranked 5th in construction capability in 2021. In 2023, the group's governance structure was reorganized around Jungheung Engineering & Construction through a holding company conversion, completing the succession of management rights to the second generation, according to the Fair Trade Commission.
The Fair Trade Commission also pointed out that Vice Chairman Jung Wonjoo himself acknowledged during the Tax Tribunal process related to the National Tax Service's tax disposition in 2022 that he had planned and reorganized the group's business organization and management structure around Jungheung Engineering & Construction.
The Fair Trade Commission committee did not file a personal complaint against Chairman Jung Changsun, the ultimate owner, because there was no direct evidence that he received a report about the provision of free credit enhancement.
The Fair Trade Commission determined that this case constitutes a violation of Articles 23 and 45 of the Fair Trade Act (private interest transfer and unfair support), and imposed a corrective order and fines totaling 18,021,000,000 won (9,049,000,000 won for Jungheung Construction, 3,551,000,000 won for Jungheung Engineering & Construction, and the remainder for six other affiliates).
Choi Jangkwan, Director General of the Business Group Surveillance Bureau at the Fair Trade Commission, stated, "This is the first case in which a 'capital supplementation agreement,' a credit enhancement measure used in large-scale real estate PF development, has been sanctioned as a private interest transfer and unfair support act by a controlling family."
Jungheung Construction responded to the Fair Trade Commission's decision by stating, "We provided sufficient explanation, but it appears it was not properly accepted," and added, "We plan to prepare a response after receiving the official resolution."
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