Fair Trade Commission: "SPC Chairman and Executives, Including the Chairman, Directly Involved in Toll Fee Transactions... Corporation Prosecuted"

Decision to Impose the Largest Ever Fine of 64.7 Billion KRW for Unfair Support

Providing 41.4 Billion KRW in Benefits to Samlip through Unfair Support over 7 Years
Blocking Flour, Liquid Egg, and Other Raw Material Markets... Undermining Competitive Foundations of Rival SMEs
SPC "Excessive Sanctions... Will Decide Future Response Plans"

Raw Material and Finished Product Excise Tax Transaction Structure. (Source: Korea Fair Trade Commission)

[Sejong=Asia Economy Reporter Joo Sang-don] The Korea Fair Trade Commission (KFTC) announced on the 29th that it has decided to indict SPC Group’s chairman, Heo Young-in, who was directly involved in the toll transaction, along with the management and the corporation, to the prosecution. Along with this, it imposed corrective orders and fines totaling 64.7 billion KRW, the highest ever fine for unfair support activities.

According to the KFTC, the investigation revealed that the SPC conglomerate’s chairman was involved in deciding various support methods for Samlip and that the group executed these at the corporate level. The SPC conglomerate is structured such that, except for some affiliates, the chairman’s family holds all shares in major affiliates. Chairman Heo attended key group meetings such as the weekly management meeting and management meetings of major affiliates including Paris Croissant, Samlip, and BR Korea, where he received reports and made decisions on major affiliate matters. The KFTC judged that Chairman Heo’s decisions were consistently executed by a small number of individuals, including former SPC General Manager Cho Sang-ho and Paris Croissant CEO Hwang Jae-bok, who concurrently held executive positions at major affiliates.

The KFTC viewed the support for Samlip as aimed at maintaining control and succession of management rights. Since SPC controls other affiliates through Paris Croissant, which functions as a holding company with 100% ownership by the chairman’s family, it was necessary to increase the second-generation shares in Paris Croissant. According to internal documents obtained by the KFTC, after increasing Samlip’s stock value, the second generation could increase their shares in Paris Croissant by contributing Samlip shares in kind or exchanging them for Paris Croissant shares. Thus, it was necessary to increase Samlip’s sales to raise its stock value for maintaining the chairman family’s control and succession of management rights.

To this end, in April 2011, Shani transferred intangible assets related to sales and research & development (hereinafter sales network) to Samlip at a discounted price of 2.85 billion KRW, lower than the normal price of 4.06 billion KRW, and provided trademark rights free of charge for eight years (97 million KRW), supporting a total of 1.3 billion KRW.

The KFTC cited as grounds for this act that although Shani held the number one market share and brand awareness in the bread market at the time, the sales network integration was conducted centered on Samlip, and the transaction was deliberately made excluding trademark rights to lower the transfer price. Furthermore, even after the sales network integration, to minimize gift tax on internal transactions favoring the chairman’s family, Shani supplied bread to Samlip at a low operating profit margin of around 0.5%. Through this, Samlip became the top player in the bread market with a 73% market share, and a toll transaction structure was established by promoting horizontal integration between Samlip and Shani along with vertical affiliation. After acquiring the sales network, Samlip sold all bread purchased from Shani externally at high margins, gaining additional economic benefits such as stock price increases due to improved business performance, while Shani acted as a manufacturing plant supplying bread to Samlip at a low operating profit margin of around 0.5%.

Additionally, the KFTC judged that Paris Croissant and Shani supported Samlip by transferring shares of Mildawon at a low price, providing a total of 2 billion KRW in support. In December 2012, Paris Croissant and Shani transferred their Mildawon shares to Samlip at 255 KRW per share, significantly lower than the normal price of 404 KRW. Jung Jin-wook, Director of the KFTC’s Corporate Group Division, stated, "SPC transferred all Mildawon shares to Samlip, which held fewer shares, to evade gift tax on internal transactions implemented in 2012 and maintain the toll transaction structure. Despite expectations of increased production and stock value of Mildawon, Paris Croissant and Shani traded shares at significantly low prices, providing excessive economic benefits to Samlip." The KFTC estimated that Paris Croissant and Shani incurred stock sale losses of 7.6 billion KRW and 3.7 billion KRW, respectively, from the Mildawon share sale.

The KFTC determined that Chairman Heo was directly involved in the toll transactions. Three baking affiliates?Paris Croissant, SPIEL, and BR Korea?purchased baking raw materials and finished products produced by eight production affiliates including Mildawon and Egg Farm through Samlip, which had no functional role, paying a total of 38.1 billion KRW. Through this, the three baking affiliates provided Samlip with a 9% margin on an average of 210 products from production affiliates annually. According to the KFTC, although Samlip did not perform substantial intermediary distribution roles such as production planning, inventory management, pricing, sales, ordering, logistics, or inspection, the baking affiliates were required by group-level instructions to purchase raw materials and finished products sold by Samlip. Director Jung emphasized, "SPC recognized that such toll transactions constituted unfair support but only superficially changed the transaction structure for transactions likely to be exposed externally, effectively continuing the toll transactions. In particular, Chairman Heo concealed and manipulated group-level legal violations through the weekly management meetings he presided over."

As a result, Samlip’s sales and operating profit rapidly increased over a long period of toll transactions, and its stock price rose, but the consumer prices of products sold by the three baking affiliates remained high, significantly harming consumer welfare, according to the KFTC.

The KFTC stated that the total benefits provided to Samlip through a series of support activities sustained over seven years (2011?2018) involving major affiliates of the SPC conglomerate amounted to 41.4 billion KRW. This represents 25% of Samlip’s operating profit and 32% of net profit during the same period, a significant scale. Consequently, the KFTC judged that Samlip’s business foundation and financial status were artificially strengthened.

The KFTC viewed that the support activities impaired fair competition in the market where Samlip operates. Through toll transactions, the baking raw material markets were monopolized without competition by blocking new entrants, especially affecting small and medium-sized enterprises (SMEs) that are the main players in the liquid egg and jam markets, increasing the likelihood of competition base infringement.

Director Jung said, "This action is significant in that it strengthened monitoring of mid-sized conglomerates exhibiting behaviors similar to large business groups such as toll transactions. We expect the openness of the previously closed baking raw material market of the SPC group, which was blocked by the toll transaction structure, to increase and for win-win cooperation with SMEs outside the affiliates to expand."

In response, SPC stated that the sales network and share transfers were objectively conducted after consulting external professional institutions regarding legality, and that inter-affiliate transactions were a vertical integration strategy to improve efficiency. An SPC official said, "Samlip has only 32.9% ownership by the chairman’s family, is a publicly listed company, and cannot be a means of succession. We have sufficiently demonstrated that the chairman was not involved in decision-making at all, but it is regrettable that excessive sanctions were imposed. We will carefully review the decision document upon receipt and decide on response plans."

This content was produced with the assistance of AI translation services.