[Governance] SGC Energy Completes Third-Generation Succession Without Gift Tax Through Three-Party Merger①

Samkwang Glass - E-Tech Construction - Gunjang Energy Establish SGC Energy Holding Company through Spin-off Merger
Largest Shareholder of SGC Energy Holding Company is Chairman Lee Bok-young's Eldest Son, Vice President Lee Woo-sung

SGC Energy (formerly Samkwang Glass) transformed into a holding company system last year through a three-party merger. In the process, Lee Bok-young, chairman of SGC Energy and second-generation of the OCI Group, made his two sons the largest shareholders without spending a single penny. How was this possible, and who ultimately bore the costs associated with the succession?

[Asia Economy Reporter Jang Hyowon] SGC Energy is a holding company formed last year when Samkwang Glass absorbed the investment division of E-Tech Construction and Gunjang Energy through a merger. When it was Samkwang Glass, Chairman Lee Bok-young was the largest shareholder, but by splitting and merging the company, his eldest son, Lee Woosung, Vice President of SGC Energy (43), became the largest shareholder. The second son, Lee Wonjun, Executive Director of SGC Solution (formerly Samkwang Glass Glass Business Division) (38), also became the second-largest shareholder, laying the foundation for third-generation management.

SGC Energy Governance Structure Chart. [Graphic·Analysis] = Im Hee-jin

Split and Merge... Eldest Son Becomes Largest Shareholder

On March 18 last year, Samkwang Glass and E-Tech Construction announced that they would split and merge their companies.

At that time, the ownership structure was such that Samkwang Glass held 30.71% of E-Tech Construction’s shares and 25.04% of Gunjang Energy’s shares, while E-Tech Construction held 47.67% of Gunjang Energy’s shares. The largest shareholder of Samkwang Glass was Chairman Lee Bok-young, holding 22.18% of the shares.

This represented a vertical structure of Chairman Lee → Samkwang Glass → E-Tech Construction → Gunjang Energy. The plan was to make Samkwang Glass a holding company and have subsidiaries including E-Tech Construction, Gunjang Energy, and the Samkwang Glass business division.

The method was as follows: first, Samkwang Glass became a holding company and spun off its business company through a physical division (establishing a subsidiary). Then, E-Tech Construction split its business company and investment company through a personal division. Afterward, Samkwang Glass holding company, E-Tech Construction investment company, and Gunjang Energy were all merged.

After restructuring the ownership in this way, the largest shareholder of Samkwang Glass changed to Vice President Lee Woosung, who secured 19.23% of the shares. The second son, Executive Director Lee Wonjun, also held 17.71%, becoming the second-largest shareholder. Chairman Lee’s original stake dropped to 10.13%.

After the merger, Samkwang Glass changed its name to ‘SGC Energy’ and became a holding company with subsidiaries such as SGC Solution (glass business division), SGC E-Tech Construction (construction division), and SGC Green Power (biomass power generation division).

The Secret to Increased Shareholding: ‘Merger Ratio’

The reason the two sons could become the largest shareholders after the split and merger was the merger ratio. Looking at the stock holdings of Vice President Lee and Executive Director Lee at the time, they held relatively small shares in Samkwang Glass but large shares in E-Tech Construction and Gunjang Energy.

As of the end of 2019, before the merger, the shareholder composition of Samkwang Glass showed Chairman Lee as the largest shareholder with 22.18%, Executive Director Lee with 8.84%, and Vice President Lee with 6.1%. Meanwhile, E-Tech Construction had similar share ratios with Chairman Lee at 5.7% and Vice President Lee at 5.14%, and in Gunjang Energy, Vice President Lee held 12.15%, Executive Director Lee 12.23%, while Chairman Lee had no shares.

If the stock value of Samkwang Glass was evaluated low and the stock values of Gunjang Energy and E-Tech Construction were evaluated high, more shares of the merged Samkwang Glass could be allocated to the two sons.

Initially, Samkwang Glass proposed merger ratios of 1 to 2.54 for Samkwang Glass to Gunjang Energy and 1 to 3.88 for Samkwang Glass to E-Tech Construction’s investment division. This meant that as Samkwang Glass absorbed these companies and issued new shares, Gunjang Energy shareholders would receive 2.54 shares and E-Tech Construction shareholders 3.88 shares.

However, Samkwang Glass shareholders opposed this merger ratio, arguing that Samkwang Glass was undervalued. At the time, Samkwang Glass’s asset value was evaluated at 36,451 KRW per share, and market value at 26,460 KRW per share, but the merger price was based on the relatively low market value.

Samkwang Glass shareholders demanded that the merger price be set based on asset value, and after two adjustments, the merger price was finally decided based on asset value. The final merger ratios were lowered to 1 to 1.7 for Samkwang Glass to Gunjang Energy and 1 to 2.58 for Samkwang Glass to E-Tech Construction’s investment division.

Despite shareholder opposition leading to adjustments in the merger ratio, the succession was successfully completed. According to the initial merger ratio, Vice President Lee would have secured about 21% of SGC Energy shares, but the final figure was slightly lowered to the 19% range. Nevertheless, combined with Executive Director Lee’s shares, they secured about 37% of the shares, completing the succession.

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