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Conglomerates How Major Shareholders Are Navigating Inheritance Taxes

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Conglomerates How Major Shareholders Are Navigating Inheritance Taxes Conglomerates How major shareholders are navigating inheritance taxes I. Inherent tax status of major conglomerate groups Overweight (Maintain) 1. OCI Group: Inheritance taxes on former chairman Lee Soo-young’s 10.9% stake in OCI are estimated to be W174.5bn. His heirs, including Vice Chairman Lee Woo-hyun, have Industry Report raised the funds to pay the taxes by selling some of their shares in April. June 11, 2019 2. LG Group: Inheritance taxes on former chairman Koo Bon-moo’s 11.3% stake in LG Corp. are estimated to be W921.5bn. Of this, Chairman Koo Kwang-mo owes W716.2bn. We believe Chairman Koo will sell some of his shares in LG Corp. after taking steps to enhance the company’s value. Mirae Asset Daewoo Co., Ltd. 3. Doosan Group: Inheritance taxes on former chairman Park Yong-gon’s 1.6% stake in [Conglomerates/Software ] Doosan Corp. are estimated to be W17.9bn. His heirs, including Chairman Park Jeong-won, sold part of their shares in Doosan Corp. in May to pay their tax bill. Dae -ro Jeong +822 -3774 -1634 4. Hanjin Group: Inheritance taxes on former chairman Cho Yang-ho’s 17.8% stake in [email protected] Hanjin KAL are estimated to be W279.7bn. The deadline for reporting the inheritance taxes is October. We believe the taxes will be paid through long-term installments using share pledges, as well as through the sale of stakes in non-core subsidiaries. II. How inheritance taxes are calculated - Inheritance taxes are calculated by applying a 10-50% tax rate to the tax basis, which is the taxable value of the inherited property, minus deductions. - Inheritance taxes on listed shares are based on the average daily closing pric e during the two-month period before and after the assessment date. - When a company’s shares are inherited to its largest shareholder, a 10-30% premium is imposed, depending on the shareholder’s equity stake and size of the company. - If certain condi tions are met, beneficiaries can apply to pay their inheritance taxes in short-term installments, long-term installments, or in kind. III. How inheritance taxes are funded - Inheritance taxes can be funded through stake sales or share pledges. This ul timately incentivizes holding and controlling companies to increase dividend payments. IV. Restrictions on inheritance through the use of public interest corporations - Regulators and lawmakers are currently seeking to limit the voting power of conglomerate- owned public interest corporations in affiliates. V. Samsung Group’s inheritance taxes - Inheritance taxes on Chairman Lee Kun-hee’s stakes in publicly traded Samsung companies, including a 4.2% stake in Samsung Electronics (SEC), are estimated to reach around W9tr. - Given the huge tax bill, we believe a sale of SEC shares is inevitable. But even with the sale, the group’s control in the company will remain essentially unchanged. [Samsung Group] Given the inheritance huge tax bill, we believe a sale of SEC shares is inevitable, but the group’s control in the company will remain essentially unchanged (%) 25 Samsung Life Controlling family & foundation Samsung F&M Samsung C&T 20 Voting power would be maintained at 15% 8.5 even if up to 5.9% of SEC shares were sold 15 Voting power 2.6 restricted to 15% 1.5 1.5 10 20.9% 5.9 15.0% 5.9 5 5 5 0 Stake Voting shares Source: DART, Mirae Asset Daewoo Research June 11, 2019 Conglomerates I. Inherent tax status of major conglomerate groups 1. OCI Group 1) Inheritance tax estimation Former chairman Lee Soo-young passed away in October 2017. Inheritance taxes on the former chairman’s 10.9% stake in OCI are estimated to be W174.5bn. Taxable value and tax basis were filed in April 2018. 2) How inheritance taxes are funded - The former chairman’s heirs, including Vice Chairman Lee Woo-hyun, have raised the funds to pay the taxes by selling some of their shares in April 2018. To make the remaining inheritance tax payment, Vice Chairman Lee Woo-hyun has applied for payment in long- term installments and made share pledges. Table 1. Inheritance tax status of the OCI Group (No. of shares, %, Wbn) Before inheritance After inheritance Current Shareholder No. of No. of Change in Inheritanc No. of Stake Stake Stake Stakes sold shares shares stake e tax (E) shares Lee Soo-young 2,604,921 10.9 0 0.0 -10.9 - - - Lee Woo-hyun 120,251 0.5 1,459,925 6.1 +5.6 90.0 1,202,459 5.0 1.2% stake (257,466) sold Lee Ji-hyun 0 0.0 781,476 3.3 +3.3 52.3 451,084 1.9 1.4% stake (330,392) sold Kim Kyung-ja 5,007 0.0 488,778 2.0 +2.0 32.2 198,123 0.8 1.2% stake (290,655) sold 3.7% stake (878,513) Subtotal (1) 2,730,179 11.4 2,730,179 11.4 0.0 174.5 1,851,666 7.8 decrease Other affiliates (2) 4,117,442 17.3 4,117,442 17.3 0.0 3,481,001 14.6 Controlling family+ other 6,847,621 28.7 6,847,621 28.7 0.0 5,332,667 22.4 affiliates (1)+(2) Note: Previous chairman Lee Soo-young passed away in Note: Inheritance tax estimates do not reflect deductions October 21, 2017 Source: D ART , Mirae Asset Daewoo Research Figure 1. OCI Group’s governance structure Source: DART, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 June 11, 2019 Conglomerates 2. LG Group 1) Inheritance tax estimation Former chairman Koo Bon-moo passed away in May 2018. Inheritance taxes on the former chairman’s 11.3% stake in LG Corp. are estimated to be W921.5bn. Taxable value and tax basis were filed in November 2018. The first payment (W153.6bn) of the inheritance taxes has been made. 2) How inheritance taxes are funded Of the total inheritance taxes, Chairman Koo Kwang-mo owes W716.2bn. He has applied for payment in long-term installments. Of note, he has sold a 7.5% stake in Pantos and made share pledges to make the first installment payment of inheritance taxes. Currently, the controlling family has stable control of LG Corp., with their combined stake standing at 46.6%. As such, we expect Chairman Koo Kwang-mo to sell some of its stake in LG Corp. (15%) to fund the remaining inheritance taxes. Before the stake sale, we believe that he will need to boost the enterprise value of LG Corp. In addition, LG Corp. could gradually increase dividend payouts. Table 2. Inheritance tax status of the LG Group (No. of shares, %, Wbn) Before inheritance After inheritance Current Shareholder No. of No. of Change in Inheritanc No. of Stake Stake Stake No. of share pledged (%) shares shares stakes e tax (E) shares Koo Bon-moo 19,458,169 11.3 0 0.0 -11.3 - - - Koo Kwang-mo 10,759,715 6.2 25,881,884 15.0 8.8 716.2 25,881,884 15.0 12,909,200 (49.9%) Koo Yeon-gyeong 1,566,279 0.9 5,030,279 2.9 2.0 164.0 5,030,279 2.9 3,632,934 (72.2%) Koo Yeon-su 265,064 0.2 1,137,064 0.7 0.5 41.3 1,137,064 0.7 916,000 (80.6%) Subtotal (1) 32,049,227 18.6 32,049,227 18.6 0.0 921.5 32,049,227 18.6 Other affiliates (2) 48,498,213 28.1 48,280,019 28.0 -0.1 - 48,280,019 28.0 Controlling family+ other 80,547,440 46.7 80,329,246 46.6 -0.1 - 80,329,246 46.6 affiliates (1)+(2) Note: Previous chairman Koo Bon-moo passed away in Note: Inheritance tax estimates do not reflect deductions May 20, 2018 Source: DART , Mirae Asset Daewoo Research Figure 2. LG Group’s governance structure Source: DART, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 June 11, 2019 Conglomerates Table 3. Major shareholders: Total of 46.6% (No. of shares, Wbn) 1st generation 2nd generation 3rd generation 4th generation No. of No. of No. of Name Name Stake Value Name Stake Value Name Stake Value shares shares shares Koo In -hoe Koo Ja -gyeong 1,648,887 1.0% 129 Koo Bon -moo Koo Kwang -mo 25,881,884 15.0% 2,032 (1907.8~1969.12) (1925.4) (1945.2~2018.5) (1978.1) LG Group Previous LG LG Chairman President Chairman Kim Young -sik 7,253,100 4.2% 569 Koo Yeon -gyeong 5,030,279 2.9% 395 (1952.1) (1978.2) Koo Yeon -su 1,137,064 0.7% 89 (1996.2) Koo Hwon -mi 477,533 0.3% 37 Kim Seon -hye 1,299,851 0.8% 102 (1947.6) (1971.8) Osung Logis Kim Seonjeong 175,587 0.1% 14 Chairman (1974.10) Kim Ju -young 2,300 0.0% 0 (1992.8) Koo Bon -neung 5,955,032 3.5% 467 Koo Yeon -seo (1949.3) (1999) Heesung Group Chairman Koo Bon -jun 13,317,448 7.7% 1,045 Koo Hyeong -mo 1,041,857 0.6% 82 (1951.12) (1987.12) LG Vice -Chairman LGE manager Koo Yeon -je 450,386 0.3% 35 (1990.2) Koo Mi -jeong 1,359,600 0.8% 107 Choi Hyun -soo 3,932 0.0% 0 (1955.5) Choi Yeon -soo Choi Jeong -gyu Koo Bon -sik 7,728,603 4.5% 607 Koo Yeon -seoung (1958.6) Koo Yeon -jin LT Group Chairman Koo Ung -mo Sourc e: D ART , Mirae Asset Daewoo Research Table 4.
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