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Flare-up in brothers' feud catches Lotte Group off guard

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The ongoing dispute between the sons of Lotte founder Shin Kyuk-ho has taken a dramatic turn.   © Reuters

SEOUL/TOKYO -- Lotte Group is reeling from the latest turn in a very public family feud over who will helm the South Korean-Japanese conglomerate after its aging founder steps down.

     Hiroyuki Shigemitsu, also known as Shin Dong-joo, was relieved of his post as Lotte Holdings' vice chairman in January. But on Monday, he took a chartered flight from South Korea to Japan. He arrived at the company's headquarters in Tokyo that afternoon accompanied by his father and Lotte Group founder Takeo Shigemitsu, whose Korean name is Shin Kyuk-ho, his sister and three other relatives.

     Gathering the company's employees, Hiroyuki announced that a decision had been made to remove all directors at Lotte Holdings, except for Takeo, the company's chairman. Sitting in a wheelchair next to his son, the 92-year-old Takeo did not say a word during the announcement.

     "This is totally unacceptable," one outraged Lotte executive said. "The removal of directors must be put to a vote at a general shareholders meeting."

Broken balance

Takeo, a first-generation Korean-Japanese resident, founded Lotte in Tokyo in 1948. The company expanded into South Korea in 1967, and has since become a sprawling conglomerate straddling the two countries.

     Starting in the 1990s, control was divided between Hiroyuki, the founder's eldest son, who is now 61, and Akio, or Dong-bin, the second son, now 60. Hiroyuki managed Japanese operations, while Akio handled businesses in South Korea.

     The balance between the two started breaking down when Hiroyuki began purchasing shares in Lotte Confectionery, a publicly listed company in South Korea, in 2013. As he continued to increase his holdings, Akio responded by also buying shares in the company, giving outsiders their first clue that a feud was brewing.

     In January this year, Hiroyuki was fired from his position as vice chairman of Lotte Holdings. Speculation was that Takeo himself made the decision, indicating that Akio had solidified his position as his father's successor.

     The dramatic scene at Lotte's Japanese headquarters on Monday came just seven months later, leaving many to wonder what had happened.

     "Hiroyuki probably got relatives involved and talked Takeo into it," one Lotte executive said.

     Takeo turns 93 this autumn. "He is still very well, but his power of judgment seems to have diminished somewhat," said one senior executive.

Fight back

Lotte Holdings President Takayuki Tsukuda and other directors did not take the announcement of their dismissal lying down. They called a board meeting the next morning and confirmed that the declaration was invalid, since it did not follow the proper legal proceedings.

     They also voted to take away Takeo's right to represent the company and change his position from that of chairman to honorary chairman. Five out of the company's seven directors approved these moves. Takeo was absent, and Akio abstained.

     Because the post of honorary chairman does not exist, Takeo's change of position will become official only after the articles of incorporation are revised, likely at the next general shareholders meeting.

     The board decisions in Japan have incensed Lotte Korea executives.

     "From a corporate governance standpoint, what happened cannot be ignored," one of them said.

     The Lotte Group in South Korea released a statement to local media the same day emphasizing that what happened in Japan was an independent decision by Lotte Holdings and has no direct relations to Lotte's South Korean operations.

     The statement said Takeo will remain general chairman of Lotte Group in South Korea and will continue to be briefed on important matters concerning operations there and in Japan. Akio will represent Lotte Group in South Korea and Japan as chairman. From now on, the group will focus on generating new growth by creating synergies between operations in the two countries, the statement added.

     Meanwhile, Akio issued a statement apologizing for the disturbance.

     "I am sorry that what started out as a family problem has caused trouble for our business partners, employees and other associates," he said.

     "My brother and other relatives took my elderly father all the way to Japan and forced him to endure a taxing schedule. My mother's request to see him was refused, and I am worried about him," Akio continued, adding that he hoped this would "never happen again."

     Hiroyuki has not issued any comment so far.

Showdown soon?

The focus is now on Lotte Holdings' next general shareholders meeting. An asset management company headed by Takeo has a roughly 27% stake in the privately held holding company. In addition, Takeo, Hiroyuki, Akio and other relatives hold shares under their own names. Some shares are also believed to be owned by employee shareholding companies.

     The timing of the next meeting is still uncertain, but Hiroyuki may hit back against the Tuesday board decision. Since his sister, who is believed to be on his side, will likely attend the meeting, it is bound to be a stormy gathering.

     "If we ask shareholders to consider, on the basis of past performance, who the better manager is, they will surely agree with us," a Lotte executive close to Akio said.

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