LG 그룹 지주회사 전환과정과 소유구조 변화 사례연구

The number of holding companies has been increasing since the beginning of the IMF bailout period in 1997. The Korean government decided to allow the holding company structure as an effort to improve the transparency of corporate governance of Chaebols. However, there have been heated debates on the benefits and the costs of allowing the holding company ownership structure. In particular, the holding company system was introduced in order to mitigate the negative effect of circular ownership structure, expediate corporate restructuring, and improve monitoring by stakeholders among Chaebols. In order to prevent the possible side effects of holding company structure, several regulations have been applied to holding companies. The regulations require holding companies to maintain the debt ratio below a certain level and have a certain ownership percentage for their subsidiary companies. These regulations were introduced in order to prevent economic concentration among a few large business conglomerates in Korea. This study analyze the transformation process of LG Group to a holding company structure in order to learn how the transformation affected ownership structure. Holding company system was introduced in an attempt to improve the effectiveness of corporate governance after the foreign currency crisis in the late 1990s in Korea. There are conflicting views on holding company system. Holding company system may improve transparency of management and ensure democratic and reasonable decision making among chaebols. Primary shareholders of chaebols in Korea have been criticized because of their dominant influence over management decisions. In addition, some of chaebols have experienced financial crises during recessionary periods primarily because of their primary shareholders’ pragmatical and arbitrary management decisions. Korean government encouraged chaebols to improve the transparency of ownership structure, which will eventually solve the problems arisen from complex ownership structure within chaebls. On the other hand, holding company system may simly a means to enhance controlling power of primary shareholders. This study provides insights to regulators, financial analysts, investors, creditors, and firms that may consider tranforming their structure to a holding company. According to the Fair Trade Act of Korea, the definition of holding company is a firm whose primary purpose is to control other companies via stock ownership. Their asset size must be 100 billion Korean won. The transformation of the LG group to a holding company structure was the first successful case in Korea. After observing the successful transformation, many Chaebols decided to transform their ownership structures into holding company systems. Understanding the process of transforming to a holding company within the LG group provides regulators, managers and investors with useful insights in making their decisions. The LG group started to reform their ownership structure in 2001. First, it focused the process on LGCI and LGEI and formed a combined holding company, LG. The rest of the 12 affiliated firms that were not included in the LG system was separated as another Chaebol, LS group. In 2004, the holding company, LG, was divided into two holding companies, LG Holdings and GS Holdings. This case also examines how the transformation of the LG group to a holding company structure affected the difference between control and cash flow rights known as the wedge ratio. We find that the wedge ratios have increased overtime, which were not originally intended by regulators. While the wedge ratio in 2000 was 30.61 percent, the ratio was 39.39 percent in 2003 and 43.08 percent in 2013. This result suggests that primary owners’ influence over Chaebols can in fact increase after the transformation to the holding company structure.