Namyang Dairy-Hahn & Co. saga enters new chapter: Legal fight

Namyang Dairy Products Co.'s top shareholder and Chairman Hong Won-sik on Wednesday notified Hahn & Co. of the termination of the 310.7 billion won ($270 million) agreement to sell a majority of his company to the Seoul-based private equity firm. 

Hong's abrupt announcement, made through his legal representative LKB & Partners, indicated his disputes with Hahn & Co. over the sale of the South Korean dairy producer have entered lengthy legal battles. 

On May 27, Hong and his two family members agreed to sell a combined 53.08% stake in the company for 310.7 billion won. The transaction was supposed to be endorsed at Namyang's shareholder meeting on July 30. But the 71-year-old chairman did not appear at the meeting, demanding more time to prepare for the deal closing and unilaterally postponed the gathering to Sept. 14.

On Wednesday, he argued the contract was unfair and one-sided in favor of the buyer, adding that he has not even received a down payment for the sale in a very rare case for M&A transactions.

The eldest son of Namyang's late founder Hong Doo-young also urged the buyout firm to get the injunction filed against him and his wife last month dropped. The Seoul Central District Court on Sept. 1 ordered Hong and his wife not to seek a new buyer of their shares, accepting the request filed by the PE house. Their combined ownership amounts to a 52.5% stake in Namyang as of the end of June.

"I decided not to sell Namyang Dairy, which we have cherished and nurtured since my parents' generation, to a private equity firm which has easily changed its words," Hong said through the law firm. "I will hold the buyer's side legally accountable for the collapse of this deal." 

He also threatened separate legal action against Hahn & Co. in case the PE firm is found to have not reached an honest deal with him, without elaborating further.

In an immediate response, Hahn & Co. repeated its claim that the agreement remained valid and flatly refuted Hong's claims against the firm in relation to the contract. 

Hong blamed the PE firm for failing to implement their agreement and changing its attitude since signing the agreement in May.

But Hahn & Co. argued in a Wednesday statement that after their agreement was made public, Hong "asked for" price renegotiation and made additional requests which it was difficult to accept. Since mid-August, Hong had abruptly brought forward new unreasonable demands as prerequisites for the deal closing, it added.
 
"The truth will be revealed by objective evidence in court," the buyout firm said.

Founded in 2010, Hahn & Co. has grown into one of the country's leading buyout firms with over $8.3 billion in assets under maagement. It is currently in the process of selling Hanon Systems Corp., an automotive parts maker, in what would be this year's largest M&A deal in the country.

The PE firm, headed by ex-Morgan Stanley banker and Harvard graduate Han Sang-won, is also expected to pocket as much as 675 billion won from the upcoming initial public offering of the country's top used car seller. 

WHAT'S BEHIND CHAIRMAN HONG'S CONTRACT TERMINATION

Hong has led the producer of milk and yogurt drinks since 2003 as chairman. He decided to sell a majority of his company just after announcing his resignation from the position on May 4, following a series of scandals at the company.

In particular, its claim in April that its yogurt drink Bulgaris can protect against COVID-19 sparked a public backlash and led to nationwide boycotts of its products. But he has remained as the company chairman. 

Private equity and food industry sources were sympathetic to Hong’s argument that his company was priced too low by Hahn & Co., given its brand awareness and market leading position of around 60 years. Its financial conditions also have been in good shape because the company has refrained from borrowings for business expansion.

M&A industry sources said Hong appeared to have decided to cancel the agreement with Hahn & Co. when he did not show up at the July 30 shareholder meeting.
 
CHANCE OF WINNING LEGAL FIGHT

Legal experts said Hong's termination of the contract might reflect his lack of litigation experience and little knowledge of laws.

There could be disputable matters related to the details of their contract, but they played down the chances of Namyang winning a court case against the PEF. Given that the transaction was already cleared by the antitrust Fair Trade Commission, Hahn & Co. seems to be in an advantageous position against Namyang, they added.

"If the case is brought to court, they will enter lengthy battles," a leading law firm's lawyer told Market Insight, the capital news outlet of The Korea Economic Daily. "But it is highly likely that the court would rule in favor of Hahn & Co., urging Hong to fulfill the agreement." 

Another legal industry source said Chairman Hong was satisfied with the agreement when it was signed, but changed his mind after the company's share price spiked over 80% to their four-year high of 810,000 won on July 1. 

"Our understanding is that Kim & Chang, the legal advisor of the agreement, contained every single detailed terms and conditions in the contract, including compensation for damages in case of the termination of the contract," said another lawyer.

"Hong's legal representative seems to be well aware of their low chances of winning against Hahn & Co," he said. "It may want to extract a higher price from Hahn & Co., or just take time by bringing the case all the way to the Supreme Court o dent Hahn & Co.'s reputation."

Hong noted that he remains determined to sell the management rights and move forward with the sale plan, after the disputes with Hahn & Co. are settled. He added that his last responsibility as the largest shareholder would be to find a buyer of the company's management rights who can further develop Namyang Dairy and respect its employees.
 
While they are entangled in legal battles, Namyang's current executives could face another legal action to be taken by Hahn & Co. after it wins the case against Chairman Hong. They could be held accountable for any possible poor management by working with the incumbent Chairman Hong, the legal industry sources added.

Shares in Namyang closed down 3.19% at 547,000 won, against the steady Kospi market.

Write to Jun-ho Cha and Ji-hye Min at chacha@hankyung.com
Yeonhee Kim edited this article.