Controversy Over Shares Awaiting Supreme Court Ruling...The Fate of the 'Nation's First Duty-Free Shop'

Donghwa Duty Free Shop

Supreme Court's Final Judgment Pending on Donghwa Duty-Free Shop Share Sale Lawsuit
'Korea's First Duty-Free Shop'... Fate Likely to Be Decided by Polarization and Industry Downturn

[Asia Economy Reporter Kim Yuri] The lawsuit between Hotel Shilla and Chairman Kim Gibyung of Lotte Tour Development regarding the sale of shares in Donghwa Duty-Free Shop is awaiting a ruling from the Supreme Court. In an unstable duty-free industry due to COVID-19, the industry's attention is focused on the ruling that will determine the future of Donghwa Duty-Free Shop, which holds symbolic significance as the 'first downtown duty-free shop in Korea.'

According to the industry on the 23rd, the stock purchase price claim lawsuit between Hotel Shilla and Chairman Kim, which has been ongoing for over four years since 2017, is awaiting the Supreme Court's judgment. After losing the appeal trial in April against Chairman Kim in the stock purchase price claim lawsuit, Hotel Shilla filed an appeal to the Supreme Court.

In 2013, Hotel Shilla purchased 19.9% of Donghwa Duty-Free Shop shares held by Chairman Kim for 60 billion KRW and signed a stock purchase contract that allowed exercising a put option to sell the shares three years after the contract date. In the same year, a revision to the Customs Act was implemented, dividing the duty-free business operation licenses between large corporations and small to medium-sized enterprises. In 2016, Hotel Shilla notified Chairman Kim to repurchase the shares. Chairman Kim declared default and countered by offering 30.2% of Donghwa Duty-Free Shop shares, which had been provided as collateral at the time of the contract.

Hotel Shilla argues that "since the loan was taken in cash, it should be repaid in cash." They believe Chairman Kim has the capacity to repay, citing his shares in Lotte Tour Development. Chairman Kim is the largest shareholder of the listed company Lotte Tour Development, holding 58.31% of the total shares. On the other hand, Chairman Kim's side claims that since the 30.2% stake in Donghwa Duty-Free Shop was agreed as a penalty clause in the contract and should be attributed to Hotel Shilla, Hotel Shilla cannot exercise any further repayment claims. If this happens, Hotel Shilla would become the largest shareholder (50.1%) of Donghwa Duty-Free Shop by adding the remaining 30.2% shares to the existing 19.9% shares under sale.

In the related case, the first trial partially ruled in favor of the plaintiff (Hotel Shilla), but the second trial reversed the decision. The first trial ordered "Chairman Kim to pay about 78.8 billion KRW to Hotel Shilla," siding with Hotel Shilla. The court pointed out, "Allowing the plaintiff to hold the target shares and remaining shares, whose value has significantly dropped, without receiving the purchase price effectively fails to guarantee the right to request the sale of the target shares."

However, the appellate court overturned the first trial's ruling, stating, "Even if the defendant refuses the plaintiff's sale request and does not repurchase the target shares, the plaintiff can only demand the attribution of the remaining shares as a sanction," and "Since the defendant agreed not to make additional claims such as enforcing the purchase obligation once the remaining shares are attributed to the plaintiff," the penalty clause for the free attribution of the remaining shares (30.2%) was created by Hotel Shilla, indicating an intention to acquire management rights.

Donghwa Duty-Free Shop is the first duty-free shop in Korea, having obtained the first downtown duty-free license in 1979. The industry expects that the final Supreme Court ruling will determine the fate of Donghwa Duty-Free Shop. Regardless of which side loses, the outlook is not optimistic. If Hotel Shilla loses, as a large business group, it is expected to consider selling or other options since it cannot operate Donghwa Duty-Free Shop, which is classified as a small to medium-sized enterprise, but this will be difficult under the current market conditions. The industry also believes that even if Chairman Kim loses, the worsening duty-free industry accelerated by COVID-19 and polarization in the duty-free sector will make survival difficult for small to medium-sized duty-free shops.

An industry official said, "Not only small and medium-sized enterprises like SM Duty-Free Shop but also large corporations such as Doosan and Hanwha have exited the duty-free business, and with the resurgence of COVID-19, even Shinsegae Duty-Free Shop, the third largest in the industry, has closed its Gangnam branch despite the remaining license period," adding, "With the Chinese government's aggressive easing of regulations to stimulate domestic consumption, the crisis in domestic duty-free shops is intensifying, making the future of small and medium-sized duty-free shops bleak."

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