February 14, 2018 7:38 am JST

Lotte's long-term strategy endangered by chief's jail term

Scandal raises hurdle for stock listing and sale of Chinese operations

Nikkei staff writers

Lotte group leader Shin Dong-bin arrives for trial at a court in Seoul. © Reuters

TOKYO/SEOUL -- The Lotte group's leader was sentenced Tuesday to 30 months in prison for bribery, leaving a vacuum at the top of the Japanese-South Korean conglomerate that could hinder its ability to plan for the future.

Lotte Group Chairman Shin Dong-bin was found to have paid roughly 7 billion won ($6.45 million at current rates) to a foundation controlled by Choi Soon-sil, a close friend of then-South Korean President Park Geun-hye, in exchange for Park using her influence to help Lotte secure a license to operate duty-free stores. The Seoul Central District Court rejected Shin's argument that he was coerced into making the payment. Shin was taken into custody at the court.

The case was just one part of a sweeping bribery scandal that forced Park from office in March 2017. Choi was sentenced Tuesday to 20 years in prison for her role, with Park, who is standing trial, named as a co-conspirator. Samsung Electronics Vice Chairman Lee Jae-yong, de facto head of the Samsung conglomerate, received a five-year sentence in relation to the scandal, but this term was reduced and suspended on appeal.

Shin had received a 20-month suspended sentence in December for a separate case involving embezzlement by his father, Lotte founder Shin Kyuk-ho. 

Lotte's South Korean arm expressed dismay at what it called an "unexpected" outcome. Tuesday's ruling also surprised Shin Dong-bin, who had been in Pyeongchang for the Winter Olympics and planned to return there afterward. The Lotte head serves as president of the Korea Ski Association.

Lotte's Japanese side has taken steps in recent years to improve governance with an eye toward a future initial public offering of a core subsidiary. Lotte Holdings, which Shin Dong-bin effectively controls as vice chairman, brought in an outside director for the first time in January 2015 and announced plans just last month to consolidate three confectionery units to accelerate decision-making. Shin's imprisonment could tarnish the conglomerate's image and throw a wrench into the listing plans.

The sentence also could reignite a pitched succession battle between Shin and his older brother, Shin Dong-joo. The elder brother was ousted as vice chairman in January 2015 and sought to retaliate in court, suing to demand his reinstatement as well as compensation from Lotte management.

Shin Dong-joo controls roughly 30% of the unlisted Lotte Holdings through asset management company Kojunsha. With his younger brother behind bars, he may look to regain control of the holding company in the name of normalizing its management.

Shin Dong-bin has spearheaded reforms on the South Korean side as well, including restructuring the group around a holding company in October to clarify its opaque structure. In his absence, the group will be steered by Vice Chairman Hwang Kag-gyu, the right-hand man responsible for carrying out the strategies devised by Shin.

Though this contingency plan should keep Lotte from foundering in the short term, Shin Dong-bin's absence could hamper efforts to resolve long-standing issues such as the planned IPO of core unit Hotel Lotte. The conglomerate's Japanese side owns a majority in this South Korean subsidiary, meaning that Shin Dong-bin will need to reduce Lotte Holdings' stake in Hotel Lotte through the stock listing in order to further cement his control over the group as a whole.

The vacuum at the top also could affect plans to sell the Chinese operations of Lotte Mart, which have been hit hard by apparent retaliation from Beijing for South Korea's decision to host an advanced U.S. missile defense system. Decisions about possible new business investments in markets such as the U.S. and Southeast Asia could be delayed as well, a senior Lotte executive said Tuesday.

Correction: This story initially reported incorrectly that "Tuesday's sentence canceled the suspension, leaving Shin Dong-bin with a jail term totaling four years and two months."

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