[Why&Next] Lotte Corporation Faces Deepening Treasury Share Dilemma

Recently Sold 5% of Treasury Shares to Lotte Property & Development
Currently Holds 27.4% Treasury Shares... Urgent Need to Improve Financial Structure
Directors' Duty of Loyalty to Shareholders Now in Effect This Month
Push for Mandatory Treasury Share Cancellation Amendment Adds Pressure

Lotte Group is facing increasing concerns over the handling of treasury shares held by its holding company, Lotte Corporation. As most affiliates have seen their performance worsen due to sluggish business conditions, they have moved to secure liquidity by selling Lotte Corporation’s treasury shares. However, the full implementation of the revised Commercial Act, which significantly strengthens shareholder rights, has raised the likelihood of obstacles to these efforts. In addition, the political sector is pushing for an even stronger amendment to the Commercial Act that would mandate the cancellation of treasury shares, leaving the group in a dilemma.

According to the business community on July 21, the revised Commercial Act, which passed the National Assembly earlier this month, was officially promulgated on July 15. The main points of the amendment include: ▲ specifying the duty of loyalty of directors to shareholders; ▲ changing outside directors of listed companies to independent directors; ▲ limiting the voting rights of major shareholders and related parties to 3% when electing audit committee members; and ▲ mandating the introduction of electronic general meetings for large listed companies.

The revised Commercial Act will take effect one year after promulgation, following a grace period, but Article 382-3, Paragraph 1, which stipulates directors' duty of loyalty to shareholders, took effect immediately upon promulgation on July 15. From now on, if the board of directors makes decisions that go against the interests of shareholders, minority shareholders can file lawsuits based on this provision. This is why additional resolutions by Lotte Corporation’s board to sell treasury shares are now a burden.

Lotte World Tower Mall. Provided by Lotte Corporation

Lotte Corporation Sells 5% of Treasury Shares: "Financial Improvement·New Businesses"

Previously, on June 30, Lotte Corporation sold 5% of its treasury shares to Lotte Property & Development. The transaction was worth approximately 147.6 billion KRW. Lotte Corporation acquired up to 32% of its own shares during its transition to a holding company structure in 2017. In its business report submitted in March, Lotte Corporation stated in its 'Treasury Stock Report' that it was considering selling about 15% of its total issued shares for the purposes of 'improving its financial structure and investing in new businesses,' and has partially carried out this plan.

However, criticism is mounting in the stock market. The Korea Corporate Governance Forum recently commented, "The Lotte Corporation board resolution approving the sale of treasury shares to Lotte Property & Development is likely to violate the revised Commercial Act, which expands the duty of loyalty from the company to shareholders." The forum also pointed out, "While the global standard is to deduct treasury shares from capital under accounting standards, in Korea, treasury shares are often mistakenly recognized as assets and sold to friendly parties or affiliates to revive voting rights."

However, a Lotte Corporation representative countered, "During the process of launching as a general holding company in 2017, the proportion of treasury shares increased as Lotte Confectionery, Lotte Shopping, Lotte Chilsung Beverage, and Lotte Food underwent spin-offs and mergers," adding, "Even before selling some treasury shares to Lotte Property & Development, the ownership ratio and governance structure of the owner family were stable, so it is difficult to see this as an infringement on the rights of general shareholders."

Highest Proportion of Treasury Shares... Even Stricter Commercial Act Amendments on the Way

Lotte Corporation holds an overwhelmingly high proportion of treasury shares among major business groups. As of this date, Lotte Corporation’s treasury shares account for 27.37%, the second highest among the core affiliates of the top 50 groups, following TY Holdings of Taeyoung Group at 29.8%. In the retail sector, the proportion of treasury shares is mostly below 10%, with E-Mart at 2.93%, Shinsegae at 9.1%, and Hyundai Department Store at 3.42%.

In the political sector, amendments to the Commercial Act that would mandate the cancellation of treasury shares are flooding in. Proposals are being discussed to require the cancellation of all treasury shares if a company holds more than 10%, or to set a cancellation deadline for listed companies holding more than 5%.

Kim Namgeun, a member of the KOSPI 5000 Special Committee of the Democratic Party of Korea, proposed an amendment to the Commercial Act on July 9 that would require the disposal of treasury shares within one year of acquisition. The amendment allows for the retention of treasury shares only for legitimate reasons such as employee compensation, and only with approval at the regular general meeting of shareholders.

On July 14, Cha Kyugeun, a lawmaker from the Rebuilding Korea Party, proposed an amendment to the Commercial Act that would mandate the cancellation of treasury shares within six months of acquisition. On July 16, Kim Hyunjung, a lawmaker from the Democratic Party, submitted a bill setting a three-year deadline for treasury share cancellation. Related legislative proposals continue to be introduced. The business community predicts that, given the strong legislative intent of the government and the ruling party, there is a high possibility these measures will be addressed at the regular National Assembly session in September.

Politicians are pushing for mandatory cancellation of treasury shares on the grounds that treasury shares are often used as a means for owner families to strengthen control or as a source of shares for realizing capital gains, which can infringe on the rights of general shareholders. They argue that canceling treasury shares reduces the total number of shares outstanding, thereby increasing earnings per share (EPS) and raising existing shareholders’ ownership ratios, which can serve as a form of shareholder return similar to dividends.

Heir Shin Yooyeol Faces Higher Costs to Acquire Shares

In fact, Lotte Corporation’s share price fell below 20,000 KRW per share in the stock market in February this year, but surged to 36,000 KRW in early July on expectations of treasury share cancellation following the presidential election and the resulting Commercial Act amendments.

However, this rise in share price is a burden for Shin Yooyeol, Senior Executive Vice President and Head of Future Growth at Lotte Group, who is the eldest son of Chairman Shin Dongbin, as he seeks to acquire Lotte Corporation shares. Preparing for succession, Shin purchased a total of 16,416 Lotte Corporation shares last year in three separate transactions (June, September, and December). On June 4, he bought an additional 9,507 shares, bringing his current ownership to 0.02% (25,923 shares).

Lotte Corporation has announced that, in line with its corporate value enhancement plan released in November last year, it aims to achieve a shareholder return rate of at least 35% by next year. The company also stated that it will consider additional measures if the mandatory treasury share cancellation law is enacted. A Lotte Corporation representative said, "We expect that improving financial soundness and strengthening business fundamentals will ultimately enhance shareholder value," adding, "We plan to faithfully implement shareholder return policies, such as targeting a shareholder return rate of at least 35% through both cash dividends and treasury share cancellation."

Shin Dongbin, chairman of Lotte Group, strongly urged the chief executive officers (CEOs) of each affiliate to take on their duties with a heavy sense of responsibility and called for a strong reform during the "2025 Second Half Lotte VCM (Value Creation Meeting, formerly the Presidents' Meeting)" held over two days starting from the 16th. Provided by Lotte