The Korea Fair Trade Commission has decided to file a complaint with prosecutors against DB Group Chairman Kim Jun-ki on suspicion of operating a ‘disguised affiliate’ for more than 10 years and submitting false materials to conceal it. DB is also accused of deliberately using foundation companies to pursue the private interests of the owner family. This is the first case of a corporate owner being reported under Chair Joo Byung-gi of the Korea Fair Trade Commission.

The Korea Fair Trade Commission announced on the 9th that it will refer Chairman Kim to prosecutors on charges of submitting false materials for the designation of business groups subject to public disclosure, etc. Kim is accused of omitting from affiliation disclosures the Donggok Social Welfare Foundation and 15 companies under it since November 1999.

According to the Korea Fair Trade Commission’s investigation, DB began in earnest at least as early as 2010 to use the Donggok Foundation and its affiliated companies to maintain the owner family’s control and private interests. In particular, in 2016 it created positions to manage the foundation companies, thereby exercising control in earnest.

In 2012, using the foundation companies, DB took out large loans to purchase unnecessary real estate of its core affiliate DB HiTek. DB HiTek has a relatively low ‘same person’ stake (23.9%), making it vulnerable to attacks on management control. In effect, to maintain the owner’s control, the foundation companies were saddled with financial risks.

In 2013, when DB acquired Daewoo Electronics, the foundation companies joined the consortium by taking on excessive loans from another affiliate, DB Capital. They also provided financial support by participating in paid-in capital increases of affiliates such as DB World and DB Metal. Chairman Kim Jun-ki also entered into direct transactions, such as borrowing 22 billion won from a foundation company in 2021 and repaying it a year later.

There were also indications that the foundation companies were intentionally used to pursue the owner family’s private interests. DB assessed that ‘because Chairman Kim is not a related party of SD (the foundation company ‘Samdong Hongsan’), transactions between them could appear to be free from legal regulations.’

The Korea Fair Trade Commission concluded that the management practices of the foundation companies could not be viewed as the rational management of independent firms. The foundation companies relied on DB-affiliated companies for most of their sales. They also installed the auditor of the DB Kim Jun-ki Cultural Foundation, a close aide to the owner, as the chairman of a partner company of the foundation.

DB also sought to conceal the affiliates externally while managing them internally. In DB Group’s organization chart, only the affiliates on the Donggok Foundation side were connected with dotted lines. The chart carried the instruction, ‘It is preferable to distribute the materials only to the group head, and when distributing to related companies, delete the ‘Donggok Foundation’ portion.’

The Korea Fair Trade Commission determined that, to hide the ‘disguised affiliates’, DB Group submitted false materials to the Commission for the designation of disclosure groups, etc. It also judged that the degree of violation was serious in that affiliates were unfairly used for the benefit of the owner family, and therefore decided to file a complaint against the chairman personally.

Eum Jandi, head of the Business Group Management Division at the Korea Fair Trade Commission, said, “This is the first case in which the exercise of dominant influence by the same person’s side has been sufficiently proven by comprehensively considering numerous objective pieces of evidence, transactional relationships, and specific circumstances.”

This is the first case of an owner being accused under Chair Joo Byung-gi. It comes about six months after Chairman Shin Dong-won of Nongshim was accused on charges of submitting false materials under then-Chair Han Ki-jeong last August. Separately from this sanction, the Korea Fair Trade Commission is reviewing whether it can apply charges of unfair support and private-interest appropriation to Chairman Kim.

Eum said, “Considering that Chairman Kim even created and kept separate documents, it would have been impossible for him not to know (whether there were disguised affiliates). However, for it to constitute unfair support, requirements such as ‘considerably favorable terms’ must be met, so further verification is needed.”