CEO Legal Troubles Stall Major Business Restructuring at Tire Bank and HS Hyosung

The risk of legal issues for company owners and uncertainty surrounding CEOs nearing the end of their terms are hindering merger and acquisition (M&A) decisions, spreading CEO risks across the industry. KT, HS Hyosung, and now Tire Bank are facing setbacks due to owner risks, potentially causing indefinite delays in business restructuring plans aimed at securing future growth engines.

Kim Jeong-kyu, chairman of Tire Bank, who was brought to trial on charges of evading taxes of tens of billions of won by disguising the name of a dealership, was sentenced to prison in the appeal trial and detained in court. On July 23, the 1st Criminal Division of the Daejeon High Court overturned the original verdict and sentenced Kim to 3 years in prison in the appeal trial and detained him in court. The court also sentenced him to a fine of 14.1 billion won. The first trial court sentenced him to 4 years in prison and a fine of 10 billion won. However, in order to protect the defendant’s right to defense, he was not detained in court.

Kim was indicted on charges of evading approximately 3.9 billion won in comprehensive income tax, etc. by disguising some Tire Bank sales outlets as if they were run by store owners and omitting cash sales or underreporting transaction details,

With Chairman Kim sentenced to three years in prison and detained in court, concerns are rising about potential delays in Tire Bank’s acquisition of Air Premia, a hybrid carrier. There are immediate worries about Tire Bank’s ability to pay the remaining 99.4 billion won for a 22% stake in Air Premia, due by the end of September. Although Chairman Kim reportedly instructed the payment of the balance before his detention, observations suggest that raising such a large amount of funds may not be smooth sailing in the absence of a decision-maker. If Tire Bank fails to pay the balance, there is a possibility that Air Premia might be put back on the market. Existing shareholders JC Partners and Sono Hospitality Group have tag-along rights for the 46% stake held by Chairman Kim’s side in Air Premia. They also have the right to forfeit the 20 billion won deposit already received. Air Premia’s plans to establish itself as Korea’s first long-haul hybrid carrier (HSC) after resolving management disputes have hit a snag with the owner’s detention.

KT Corp.’s business restructuring clock has also virtually stopped. This comes as rumors of replacement surface while CEO Kim Young-seop’s term is set to expire in March next year. KT has finalized non-core real estate assets for sale, including Sofitel Ambassador Seoul and Novotel Ambassador Seoul Dongdaemun, estimated at 1 trillion won, but concerns over leadership vacuum have prevented these from even being presented to the board. Despite high interest from foreign investors in Seoul’s prime location hotels due to the spread of K-culture and increasing foreign tourists, the delay in the sale decision is reportedly causing frustration.

M&As for new businesses have also essentially halted. KT’s acquisition of t’order, the leading table ordering company, which was pursued to expand small business services, is also stagnating. An IB industry insider explained, “Typically, KT forms a pool of candidates for the next CEO and begins the verification process between October and November, ahead of the current CEO’s term expiration. Until then, virtually all investment decisions are likely to be on hold.”

HS Hyosung is also reportedly postponing major decisions as Vice Chairman Cho Hyun-sang faces a special investigation on Aug. 1 related to his investment in IMS Mobility, a company set up by Kim Ye-seong, a close associate of former first lady Kim Keon-hee. The sale of HS Hyosung Advanced Materials’ tire cord business division progressed to the main bidding last month. Currently, STIC Investments, JKL Partners, Bain Capital, and Chinese strategic investors are participating.

With the legal risks of the top decision-maker, Vice Chairman Cho, coming to the forefront, the selection of a preferred bidder is being delayed indefinitely. The gap between the seller’s desired price and the prices offered by acquisition candidates is also a burden. While the selling side expected 1.5 trillion won, the potential buyers are reported to have offered up to 1 trillion won. This reflects the assessment that growth potential is limited due to low-price offensives from Chinese companies. HS Hyosung’s growth strategy, which had planned to invest in future businesses with the proceeds from this sale, has inevitably hit a snag.