VIP Asset Management Urges Lotte Rental Board to Fulfill Duty of Loyalty to Shareholders

Open Shareholder Letter: "Forcing Through Paid-in Capital Increase Could Result in Liability Under the Commercial Act"
"Sale Price 2.6 Times Higher Than Capital Increase Price... Significant Losses for Company and Shareholders"
Minority Shareholder Ownership to Drop from 38.8% to 32.3% After Capital Increase
"High Risk of Delisting Following the LocknLock Precedent"

VIP Asset Management has sent an open letter to the board of directors of Lotte Rental, warning that "if the paid-in capital increase is pushed through, it could violate the revised Commercial Act’s 'duty of loyalty to the company and shareholders,' exposing directors to civil and criminal liability." VIP Asset Management argues that issuing new shares at a price much lower than the price per share at which the private equity fund acquiring Lotte Rental will purchase the company could cause significant losses to both the company and its shareholders. This public pressure on Lotte Rental’s directors comes amid the withdrawal of Taekwang Industrial’s treasury share exchangeable bond issuance and the cancellation of Pharmaresearch’s spin-off plans.

Earlier this year, in February, the Lotte Rental board resolved to conduct a paid-in capital increase through a third-party allotment on the same day as the sale of the major shareholder’s stake. Hotel Lotte and others agreed to sell their 56% stake in Lotte Rental to private equity fund Affinity Equity Partners (hereafter Affinity) at 77,115 won per share, which is 2.6 times the then-market price of 29,400 won. At the same time, the board decided to issue new shares to Affinity through a third-party allotment at 29,180 won per share. The paid-in capital increase was scheduled to proceed after the Fair Trade Commission’s business combination review. In response, VIP Asset Management (hereafter VIP) publicly demanded, twice since June, that the paid-in capital increase be withdrawn or carried out at a price no lower than the public offering price (59,000 won).

"Decision on Paid-in Capital Increase Could Expose Directors to Civil and Criminal Liability"

Lotte Rental has so far maintained that "the major shareholders’ stake sale by Hotel Lotte and others and the board’s planned third-party allotment paid-in capital increase are separate matters," and that "the paid-in capital increase was an unavoidable decision to respond to early redemption demands on bonds triggered by the change in major shareholders." In response, VIP countered by citing the recent oversubscription of over 6.6 trillion won for a 100 billion won corporate bond issuance, arguing that "the necessary funds could be raised through debt (corporate bond issuance)," and that "the paid-in capital increase can be seen as a package deal linked to the sale of management rights."

In the open letter sent to Lotte Rental’s directors demanding the "immediate withdrawal of the paid-in capital increase," VIP cited Supreme Court precedents to argue that the directors knowingly decided to issue new shares to Affinity, amounting to a 20% stake, at a much lower price, even while being aware that Affinity was acquiring the major shareholder’s stake. VIP claims that the paid-in capital increase constitutes "a serious breach of trust causing significant losses to the company, as it is a case where directors have abandoned efforts to secure objectively attainable economic benefits for the company," and therefore, the directors should be held civilly and criminally liable.

Regarding the company’s claim that "a 10% discount was permissible when issuing new shares, but there was no problem because the shares were issued at market price," VIP countered that "the board could have issued shares at a reasonable price above market value, thereby providing greater benefits to both the company and shareholders." VIP argued that if approximately 7.26 million new shares had been purchased on the open market, the share price would have been set at a higher level.

VIP also asserted that minority shareholders not only cannot sell their shares to Affinity at 77,115 won per share, but also suffer from dilution of their ownership. VIP stated, "The minority shareholders’ stake will fall from 38.8% before the capital increase (excluding the remaining Lotte Group stake) to 32.3% after the increase, resulting in the forced loss of controlling power and the ability to block special resolutions at the shareholders’ meeting."

"Not Only the Decision, But Also the Process of Paid-in Capital Increase Is Subject to the Commercial Act"

The Lotte Rental board’s decision on the paid-in capital increase was made in February, before the revision of the Commercial Act. However, VIP argued that "if the CEO, in the process of executing the paid-in capital increase, intentionally or negligently overlooks circumstances that could be deemed illegal under the revised Commercial Act, directors will be liable for damages for violating their 'duty of oversight.'" VIP further asserted that even in the subsequent process of the paid-in capital increase, the directors’ 'duty of due care' applies regardless of the Commercial Act revision, and that negligence in this context could constitute a breach of that duty.

VIP also stated that if the Fair Trade Commission approves the business combination review and the CEO proceeds with the paid-in capital increase, under the revised Commercial Act, "the CEO must carry out the paid-in capital increase under the 'duty of loyalty to shareholders,' meaning the obligation to protect the interests of all shareholders and to treat all shareholders’ interests fairly." VIP added, "Even if the CEO does not request a review, the board is obligated to monitor and supervise whether the CEO’s execution of duties aligns with the duty of loyalty to shareholders and whether the CEO has made the best effort to protect the interests of all shareholders."

Kim Minkook, CEO of VIP Asset Management, said, "We have tried to seek a reasonable solution through direct discussions with outside directors, but the company has refused even to accept requests for meetings with outside directors." He added, "If the paid-in capital increase is forced through, each director will not be free from legal responsibility and will find it difficult to avoid criticism from shareholders and the market."

"Concerns Over a Repeat of the LocknLock 'Forced Minority Shareholder Exit' Incident"

Meanwhile, if the paid-in capital increase is completed, Affinity will secure a 63.5% stake, and when combined with the remaining shares held by Lotte Group affiliates, the total will reach 67.7%, allowing them to freely pass special resolutions at shareholders’ meetings (which require the attendance of more than two-thirds of shares present and at least one-third of total issued shares). Given that minority shareholder attendance at general meetings is usually low, it is likely that Affinity alone could pass special resolutions. VIP Asset Management argued, "The 'cash-out comprehensive share swap' method used by Affinity to forcibly oust minority shareholders after acquiring LocknLock could be repeated at Lotte Rental."

Last year, after failing to delist LocknLock through a public tender offer, Affinity forcibly bought back minority shareholders’ stakes at 8,750 won per share?below the liquidation value of 11,685 won?through a special resolution at the shareholders’ meeting, paying cash. This was done by transferring shares to a domestic special purpose company (SPC) set up as the parent company, then using a provision of the Commercial Act that allows a parent company to pay cash, not shares, to remaining subsidiary shareholders to achieve 100% ownership. LocknLock was delisted in December last year.

VIP stated, "It is highly likely that Affinity paid a management premium of over 1 trillion won with an eye on securing the requirements for special resolutions at the shareholders’ meeting during the Lotte Rental acquisition process," adding, "Lotte Group effectively sold special resolution rights it did not even hold to Affinity at a high price."