Billion-Dollar Baby: LS Group’s Alleged Tax Evasion Scheme

Well-known companies such as Samsung, SK, Hyundai, LG, Lotte, Hanwha, GS, and Shinsegae dominate the domestic conglomerate rankings. However, some companies are less known to us.

One of them is the LS Group, currently ranked 13th in the conglomerate. LS Group is a family-run business that is part of the broader LG family.

LS Group’s main businesses are based on heavy industries such as cables, power facilities, metals, and energy, and due to the nature of its B2B business, it is relatively less known to the public.

Koo Ja Eun, the current leader of the LS Group, is known for his strong affinity and organizational management skills both inside and outside of the conglomerate. Chairman Koo Ja Eun is also famous for being the nephew of Koo In Hwoi, the founder of LG.

Originally, LS Group was formed by separating the electric-related business from LG. However, LS Group was embroiled in controversy last year when it was revealed that they had gifted billions of won worth of stocks to a grandchild who was only six months old.

According to last year’s electronic disclosures by the Financial Supervisory Service, it was confirmed that the eldest grandson of Koo Ja Yeol, Chairman of the Board at LS Corp, had purchased 2,195 shares of E1 in two instances. The shares purchased by the grandson of Chairman Koo Ja Yeol were valued at about $1.12 million at the closing price at that time.

The grandson of Chairman Koo Ja Yeol is the son of Koo Dong Hwi, the CEO and Vice President of LS Electric, who was born in February last year. Therefore, this grandson is known to be the fourth generation of the LS Group’s owner family.

The reason for the controversy over the share inheritance is that this is not the first time. The LS Group’s owner family has previously been involved in controversy for gifting shareholdings to their young children or grandchildren.

For instance, last year, Koo Ja Cheol, Chairman of Yesco Holdings (an LS Group affiliate) and the fourth son of the late Honorary Chairman Koo Tae Hwi, also gifted 11,000 shares of Yesco Holdings to his grandson, who was just six months old at the time.

It was also reported that he pledged 3,220 shares of Yesco Holdings to the Central Tax Office to pay the gift tax for the shares he received from Chairman Koo Ja Cheol.

Also, it was pointed out as a problem that the late Koo Ja Myung, the third son of the honorary chairman Gu Tae Hoe and chairman of LS MNM, gifted 8,650 shares of LS each to the two daughters of his son, Koo Bon Hyuk, the president of Yesco Holdings, in 2011, and has steadily increased his stake since then.

Considering that he received a loan of approximately $1.85 million by pledging some of the gifted shares to Daishin Securities, it is speculated that the move to secure a stake will not stop.

It is noteworthy that a large-scale stock gift was carried out even when the stock price of LS Group fell significantly due to the impact of COVID-19. The fact that the gift was made when the stock price fell significantly means that the gift tax was also significantly reduced. This has led to criticism in the industry that they used a trick to reduce the gift tax.

According to the gift of a total of 959,000 shares of LS stocks to children and relatives by the owner family of LS Group in 2020, it is speculated that the dividends taken by the owner family will reach hundreds of millions of won.

Just by looking at the fact that Chairman Koo Ja Yeol of LS Group gifted 100,000 shares to his two daughters, Chairman Koo Ja Hong gifted 60,000 shares to his nephew, Chairman Koo Ja Yup gifted 127,000 shares to his son, and relatives, Chairman Koo Ja Eun gifted 100,000 shares to his two children, and Chairman Koo Ja Kyun gifted 50,000 shares to his two children, it is judged that the family management will not stop.

An industry insider interprets the behavior of the owner family of LS Group as “taking advantage of the stock price drop caused by COVID-19 to gift during that period” because the gift tax for publicly traded stocks is determined based on the average price over a total of four months surrounding the date of the gift.

However, some argue that there will be no problem as it is not tax evasion or illegal gifting.

The argument is that even if LS Group proceeded with the gift to reduce the gift tax, it is impossible to predict whether the stock price will skyrocket or plummet over the next two months.

As various speculations were raised, LS Group stated, “We do not specifically know about the gifts happening to the owner’s family.” They clarified their position that they simply decided it was time to gift, not because the stock price had fallen.

The fact that the owner family of LS Group is gifting shares to young children or grandchildren who have only been born for a few months means that the second-generation management system of LS Group is coming to an end.

It is analyzed that the third-generation owner management system will proceed after Chairman Koo Ja Eun of LS Group completes his term in 2030.

Also, as LS Group sticks to cousin management, Koo Dong Hwi, the vice president, is mentioned as a strong candidate for the next chairman, excluding Koo Bon Woong, the representative of Mind Communication, who has been away from the group.

The reason LS Group sticks to cousin management seems to minimize conflicts over management rights due to complex governance structures and maintain a stable governance structure.

Meanwhile, as Chairman Koo Ja Eun is establishing himself at the center of LS Group, there are views that cousin management will come to an end.

This is because if the third-generation owner continues the cousin management system, it may have to go beyond cousin management and manage the eighth cousin.

If it transitions to an eighth cousin management system, not only will the number of candidates for the chairman increase but there is a high possibility of ending the cousin management system to prevent potential conflicts within LS Group, which has maintained a stable governance structure. Thus, the future of third-generation management and who will take the lead is being closely watched.