Lotte Rental Co., South Korea’s No. 1 car rental and leasing company, is facing a backlash from a key minority shareholder over its planned rights offering to Hong Kong-based investment firm Affinity Equity Partners.
VIP Asset Management Co., a Seoul-based fund manager, which owns about 4% of Lotte Rental, said in a public letter on its website on Wednesday that the Lotte-Affinity deal could pave the way for a forced squeeze-out of minority investors.
In the letter, VIP Asset urged the car rental company to scrap its proposed third-party rights issue.
The asset manager claimed that the rights offering, if completed as planned, would unfairly dilute minority holdings while consolidating top shareholders’ control under Affinity Equity Partners, the private equity firm (PEF) that earlier this year signed a deal to acquire Lotte Rental through a rights issue.
Industry watchers said the confrontation could become a landmark test of the country’s recently amended Commercial Act that calls for tougher mandates to protect minority shareholders’ rights.
The Lotte Rental rights offering is expected to be implemented as soon as the Fair Trade Commission completes its review of the Lotte-Affinity deal.
DETAILS OF LOTTE-AFFINITY DEAL
In late February, Affinity Equity signed a deal to acquire a 56.2% stake in Lotte Rental from Lotte Group’s two affiliates, Hotel Lotte Co. and Hotel Lotte Busan Co., for 1.57 trillion won ($1.1 billion), or 77,115 won a share.
The acquisition price included 211.9 billion won that Affinity was required to inject to purchase new shares to be issued by Lotte Rental. The rights issue price was set at 29,180 won apiece.
With the deal, Affinity will control Korea’s two largest car rental firms. In June 2024, the Hong Kong-based PEF bought SK Rent-a-Car Co., Korea’s No. 2 car leasing company, from SK Networks Co.
Once the planned rights offering is completed, it would raise Affinity’s stake in Lotte Rental to 63.5%, and further to 67.7% when shares held by Lotte affiliates are included – enough to unilaterally pass special resolutions under Korean law.
“This capital raise significantly increases the risk of minority shareholder expulsion,” VIP Asset wrote, citing concerns that Affinity and Lotte Group will be capable of passing a special resolution at a shareholder meeting, including on corporate restructuring measures such as delisting or a merger.
With the overwhelming majority, VIP Asset said, Lotte Group and Affinity could proceed with a “cash-out merger” – a method in which minority investors are bought out and the company is delisted, possibly hurting smaller investors’ interests.
LOCK & LOCK’S CASE
“This is not a hypothetical risk,” VIP Asset said, citing Affinity’s previous acquisition of kitchenware maker Lock & Lock Co., which was delisted following a similar move.
VIP claimed that Lock & Lock’s minority shareholders were forcibly bought out at 8,750 won, or 75% of the company’s liquidation value of 11,685 won.
VIP’s claims come as Korea’s revised Commercial Act, approved by the Cabinet this week, formally codifies a director’s fiduciary duty not just to the company but to all shareholders.
The legal change is widely viewed as an attempt to curb the dominance of controlling shareholders and improve protection for retail and institutional investors.
“This will be a test case,” said Peter Kim, chief executive of VIP Asset Management. “If this goes through, it will send the message that even with legal reform, nothing has really changed. Lotte’s independent directors must stand up and fulfil their duty under the new law.”
VIP’S CONCERNS ECHOED
The Korean Corporate Governance Forum echoed VIP’s concerns, calling the deal “one of the most serious cases of conflict of interest between controlling and minority shareholders in recent years.”
In its statement, the governance watchdog criticized the pricing of Lotte Rental’s sale to Affinity.
It noted that Affinity paid 77,115 won per share, a 162% premium over the market price of 29,400 won at the time, but was not required to extend the same offer to other shareholders via a public tender.
“Minority investors were denied any opportunity to benefit from the control premium,” the forum said. “And now they are facing a rights issue that will dilute their holdings, while Affinity receives a large allocation of new shares at a discounted price.”
Lotte Rental and Affinity have not publicly responded to the criticism.
By In-Soo Nam
isnam@hankyung.com
Jennifer Nicholson-Breen edited this article.
