Legal Disputes Mounting... Hong Won-sik, Former Namyang Chairman, Also Loses 2nd Trial in 'Excessive Compensation Lawsuit'

Hong Won-sik, former chairman of Namyang Dairy Products (74), was once again ruled by the court to have acted illegally by voting in favor of increasing his own 'director remuneration limit' at a past regular shareholders' meeting. After a legal battle with private equity firm Hahn & Company (Hahn & Co), Hong, who transferred management rights of Namyang Dairy Products last year, has been facing a series of unfavorable civil and criminal lawsuits.

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According to investment banking (IB) and legal circles on the 23rd, the Seoul High Court Civil Division 12-1 (Presiding Judge Jang Seok-jo) ruled in the appeal trial of a lawsuit filed by Shim Hye-seop, auditor of Namyang Dairy Products, to cancel the shareholders' meeting resolution, that the problematic 2023 regular shareholders' meeting resolution of Namyang Dairy Products was invalid, just as in the first trial.

Previously, when Hong was the largest shareholder of Namyang Dairy Products in 2023, he voted in favor of increasing his director remuneration limit at the regular shareholders' meeting. Through this, Hong's salary limit was raised to a maximum of 5 billion KRW. Auditor Shim judged this as a violation of the Commercial Act and filed a lawsuit against Namyang Dairy Products to cancel the shareholders' meeting resolution at that time. He was appointed auditor upon recommendation from activist fund Cha Partners Asset Management, which held a 3% stake in Namyang Dairy Products.

In May last year, the first trial ruled that the director remuneration limit resolution should be canceled. In particular, it pointed out that Hong, as the largest shareholder, was a stakeholder who could not exercise voting rights but still cast a favorable vote. Separately, in the Namyang Dairy Products stock transfer lawsuit, a loss was confirmed in January of that year, and Hong, who transferred his shares to Hahn & Co, participated in this trial through an independent party intervention application and appealed. Independent party intervention is a system under the Civil Procedure Act that allows a third party to participate as a party in a lawsuit between others.

The appellate court dismissed Hong's appeal. As a result, the first trial ruling was upheld, once again confirming that the shareholders' meeting resolution in which Hong exercised voting rights violated the Commercial Act and was invalid. If the ruling is finalized, the retirement pay will be significantly reduced from 17 billion KRW, so Hong is expected to consider taking the case to the Supreme Court.

The problem is that Hong's side must also respond to other civil and criminal lawsuits surrounding Namyang Dairy Products. Hahn & Co, which acquired Namyang Dairy Products, stated, "We are thoroughly investigating the facts through legal procedures regarding issues that occurred during the previous management period and are clarifying responsibility for related matters."

First, Hahn & Co has filed a 50 billion KRW damages claim against Hong's side. In 2021, both parties agreed on a merger and acquisition (M&A) of Namyang Dairy Products worth around 300 billion KRW and began negotiations for the stock purchase agreement. However, when Hong's side declared contract termination, Hahn & Co filed a stock transfer lawsuit based on the contract terms and won a final ruling from the Supreme Court after 864 days. This ended the 60-year owner system. Hahn & Co stated through the damages claim that they intend to seek additional compensation for damages caused by the delayed stock transfer to Namyang Dairy Products and others. This case is still under first trial review.

Hong and his family were also criminally prosecuted for allegedly embezzling Namyang Dairy Products funds for personal use. At the end of last year, prosecutors indicted Hong on charges including violation of the Specific Economic Crimes Act and detained him. He is accused of embezzling and breaching trust of about 20 billion KRW by inserting a pipe supplier to secure living expenses for relatives and privately using corporate-owned luxury villas and vehicles. Recently, his wife Lee Un-gyeong, former advisor, and two sons were also indicted on charges of embezzling approximately 3.7 billion KRW of company funds. It is reported that they used company funds for luxury brand products, moving personal residences, overseas travel expenses, purchasing home appliances and furniture, family hotel fitness club membership fees, stationery, bakery items, and small payments for delivery food.

A Namyang Dairy Products official said, "Since the new management system was established in April last year, we have taken measures such as improving and strengthening internal control systems and enhancing compliance and ethical management to prevent past mistakes from recurring," adding, "We will do our best to restore consumer trust and improve corporate image." Efforts to enhance shareholder value and responsible management continue after the change of the largest shareholder. Following the cancellation of 23.1 billion KRW worth of treasury shares and a stock split in September last year, the company announced on the 17th of this month a decision to cancel treasury shares worth 20.1 billion KRW.

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