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"Unfair Support for Merged Company": Legal Battle Between Former Hoban Construction Chairman Kim Sang-yul and Siblings Intensifies

[비즈한국] As former Hoban Group Chairman Kim Sang-yul engages in a legal battle with his siblings over their mother's inheritance, a new front has opened with lawsuits for damages related to the merger of Hoban Construction (Related article: [Exclusive] Former Hoban Group Chairman Kim Sang-yul in legal battle with siblings over mother's inheritance).

Former Chairman Kim's siblings argue that the company owned by his son, President Kim Dae-heon, grew in size through unfair support from Hoban Construction—a practice previously flagged by the Korea Fair Trade Commission (KFTC) as unfair internal trading—and then merged with Hoban Construction, diluting the equity value of existing shareholders. They are demanding compensation from those involved in the support activities.

According to legal sources, former Chairman Kim Sang-yul’s older brother (A) and younger sister (B) filed a damages lawsuit on the 28th of last month against Hoban Construction, former Chairman Kim, President Kim Dae-heon, and three former and current CEOs of Hoban Construction. Their claim is that because Hoban Construction, controlled by former Chairman Kim, unfairly supported Hoban Construction Housing (owned by his eldest son, Kim Dae-heon) before the two companies merged, the stake held by their mother, the late Baek Chae-nam, was diluted, necessitating compensation from those responsible for the support. Previously, the younger brother (C), who was also a shareholder alongside his mother, filed a similar lawsuit in June last year, claiming damages for the dilution of both his and his mother's stakes.

The sibling conflict originated from unfair support activities by Hoban Construction, which the KFTC identified as unfair internal trading. In June 2023, the KFTC determined that Hoban Construction had unfairly supported companies owned by the group's second-generation owner family to facilitate management succession. Consequently, it issued a corrective order and imposed 60.8 billion KRW in fines for violating the 'Monopoly Regulation and Fair Trade Act.' The KFTC concluded that Hoban Construction, controlled by former Chairman Kim, had engaged in unfair internal trading between 2013 and 2015 by supporting Hoban Construction Housing (owned by eldest son Kim Dae-heon) and Hoban Industrial (owned by second son Kim Min-sung).

The KFTC pointed to four main areas of unfair internal trading: Hoban Construction provided free bidding deposits for public land 414 times to companies owned by the second generation, resold 23 public land plots acquired by subsidiaries, provided free payment guarantees for project financing (PF) loans in 40 public land projects, and canceled and transferred existing construction contracts. The KFTC determined that these support activities allowed second-generation companies like Hoban Construction Housing and Hoban Industrial to grow rapidly, significantly strengthening their market position in residential real estate development and construction, thereby undermining fair trade.

Hoban Construction Housing, controlled by President Kim Dae-heon, grew in size during the period of unfair support identified by the KFTC before merging with Hoban Construction. According to the KFTC, Hoban Construction Housing's revenue from presales rose from approximately 155.9 billion KRW in 2014 to 2.579 trillion KRW in 2017, and its construction capability assessment value jumped from 50.6 billion KRW in 2014 to 2.1619 trillion KRW in 2018, making it the 13th largest construction firm in Korea. In December 2018, Hoban Construction absorbed the grown Hoban Construction Housing. The merger ratio was 1:5.89, which allowed President Kim Dae-heon to secure a 54.73% stake in the group’s flagship company, Hoban Construction, effectively completing the management succession.

Former Chairman Kim's siblings filed the damages lawsuit, arguing that the unfair internal trading diminished the value of Hoban Construction shares. They contend that the breach of trust—where Hoban Construction and its management unfairly supported Hoban Construction Housing—inflated the capital and net profit of the merger partner, resulting in a relative decrease in the share value held by their mother, the late Baek Chae-nam, and their brother (C). They argue that without the unfair internal trading, the merger ratio would have been 1:1, and that those involved are liable to compensate for the lost share value (0.37% and 0.53%, respectively).

Former Chairman Kim Sang-yul is the second of six siblings born to the late parents Baek Chae-nam and Kim Gap-hwan. His siblings include an older brother (A), a younger brother (C), an older sister, a younger sister (B), and a youngest brother. Their mother, Baek, passed away in February last year at a hospital in Buk-gu, Gwangju. As direct descendants, the siblings became joint heirs to one-sixth of her estate each. Before the merger, Baek and C held 0.91% and 1.3% stakes in Hoban Construction, respectively; these were diluted to 0.33% (182,000 shares) and 0.47% (260,000 shares) after the absorption merger.

The total damages sought by the siblings in this lawsuit amount to approximately 36.7 billion KRW. They estimate the loss to their mother, Baek Chae-nam, due to the decrease in Hoban Construction equity at approximately 19 billion KRW, claiming each joint heir is entitled to roughly 3.2 billion KRW. Additionally, C claims he should be compensated 27.2 billion KRW for the loss related to his own stake, plus his share of the inheritance from his mother’s loss. However, the initial filing only seeks partial amounts: 101 million KRW each for A and B, and 501 million KRW for C.

Meanwhile, on the 27th, the Seoul High Court partially ruled in favor of Hoban Construction in its lawsuit to cancel the KFTC's corrective order and fines. The court canceled 36.461 billion KRW of the 60.8 billion KRW fine, specifically regarding the free bidding deposits and the resale of public land. Hoban Construction had filed the lawsuit challenging the administrative order.

Regarding the court's decision, a Hoban Construction official stated, "The charges that were not dismissed—specifically the free payment guarantees for PF loans—are industry practice, and the transfer of construction projects provided no tangible or intangible benefits to related parties; it is unfair not to recognize this." The official added, "We plan to review the Seoul High Court’s written verdict and appeal to the Supreme Court." Hoban Construction did not provide a comment regarding the lawsuit filed by the former chairman's siblings.