A Scheme to Circumvent Internal Transaction Rules Backfires... Innocean Share Swap by Hyundai Third-Generation Heir

Jeongsung Lee’s Preemptive Share Swap with Lotte Cultureworks to Avoid Internal Transaction Regulations
Expected Gains from IPO Dashed as Cinema Business Hit by COVID-19
Plunging Share Value Leaves Stake Disposal in Limbo

Jeongsung Lee, the largest shareholder and advisor at Innocean, an advertising agency under Hyundai Motor Group, is experiencing setbacks from a share swap deal made six years ago with Lotte Cultureworks.

The value of the shares has plummeted as the initial public offering (IPO) of Lotte Cultureworks has stalled, while tens of billions of won in dividends are being paid annually to Lotte affiliates. The move, initially intended to circumvent regulations on unfair internal transactions benefiting the owner family, is now seen as having backfired. Jeongsung Lee, the eldest daughter of honorary chairman Chung Mongkoo of Hyundai Motor Group, is listed as an inside director at Innocean.

Jeongsung Lee, Advisor at Innocean / Photo by The Asia Business Daily DB

According to the Financial Supervisory Service’s electronic disclosure system as of the third quarter of this year, the owner family’s stake in Innocean stands at 19.69%. Jeongsung Lee holds 17.69% as the largest shareholder, while her younger brother, Chung Euisun, chairman of Hyundai Motor Group, owns 2%. These ownership ratios have remained unchanged since May 2019. At that time, Jeongsung Lee held a 27.99% stake in Innocean, of which she contributed 10.3% as an in-kind investment and, in return, acquired new shares (a 13.6% stake) issued by Lotte Cultureworks through a swap deal.

The Fair Trade Commission was in the process of revising regulations by the end of that year, lowering the ownership threshold for major shareholders subject to restrictions on unfair internal transactions in listed companies from 30% to 20%. This swap was a preemptive move to avoid the new regulation. The agreement also included a seven-year business cooperation and partnership contract, stipulating collaboration in four areas: content business, global expansion, space marketing, and advertising. Through this, Lotte Cultureworks acquired 2.06 million shares of Innocean.

Innocean’s decision to proceed with the share swap was also influenced by expectations that Lotte Cultureworks’ corporate value would rise, as its IPO prospects were being discussed at the time. If the IPO had materialized, Jeongsung Lee could have sold her stake at a high price and liquidated her holdings. However, as the COVID-19 pandemic severely impacted the cinema business, IPO discussions disappeared. Meanwhile, the value of Jeongsung Lee’s shares in Lotte Cultureworks dropped by nearly 60%, from 110.7 billion won in 2019 to 44.4 billion won last year. With the IPO agreement deadline indefinitely postponed, it is reported that Jeongsung Lee and Lotte Cultureworks have been extending the related contract on a yearly basis.

In contrast, the dividends paid by Innocean to Lotte have been increasing every year. Lotte Cultureworks received 3.09 billion won in dividends from Innocean in 2019, and despite the peak of the COVID-19 pandemic, it received 3.708 billion won each in 2020 and 2021. In July 2022, Lotte Holdings and Lotte Shopping each received 1.03 million shares of Innocean previously held by Lotte Cultureworks. That year, both companies received 2.2145 billion won each in dividends, totaling 4.429 billion won. The following year, after Innocean conducted a 100% bonus issue, the number of Innocean shares held by Lotte Shopping and Lotte Holdings doubled to 2.06 million shares each. In both 2023 and 2024, these companies received 4.841 billion won in dividends.

The business partnership period with Lotte Cultureworks is set to expire next year. In last year’s audit report, Lotte Cultureworks specified, “If the IPO is not completed within a certain period, the new share subscriber (Innocean) may demand that all acquired shares be repurchased for cash in accordance with applicable laws,” classifying the related item as a current liability.