- Provision of Approximately ₩3.2 Trillion in Free Credit Enhancement to Second-Generation Company Over 10 Years -
- Corrective Order, Administrative Fine (₩18 Billion), and Criminal Referral (Jungheung Construction) -
The Korea Fair Trade Commission (KFTC, Chairperson Han Ki-jeong) has announced that it will impose a corrective order, an administrative fine, and refer Jungheung Construction Co., Ltd. (hereinafter "Jungheung Construction"), an affiliate of the Jungheung Construction corporate group subject to cross-shareholding restrictions, for criminal prosecution. This decision comes after Jungheung Construction was found to have provided free credit enhancement for project financing (PF) and securitized loans for housing construction and industrial complex development projects. These projects were undertaken by Jungheung Togun Co., Ltd. (hereinafter "Jungheung Togun"), wholly owned by the group's owner's second generation, and its six affiliates (hereinafter "6 affiliates"), with Jungheung Togun as the sole constructor.
Background of the Companies Involved
- Jungheung Construction is 76.74% owned by the group's owner, Jeong Chang-seon.
- Jungheung Togun is 100% owned by the owner's second generation, Jeong Won-ju.
- The 6 affiliates are: ① Jungheung S-Class, ② Cheongwon Development, ③ Jungbong Industrial Development, ④ Brain City Project Financial Investment, ⑤ Moin Park, and ⑥ Songjeong Park. (①-③ are Jungheung Togun's subsidiaries/grand-subsidiaries, while ④-⑥ are SPCs established as joint ventures by Jungheung Togun).
- Both Jungheung Construction and Jungheung Togun primarily engage in real estate construction (building) and sales (development), and both own apartments under the "Jungheung S-Class" brand.
- Jungheung Construction is a core affiliate of the Jungheung Construction corporate group, with the owner Jeong Chang-seon as its largest shareholder. At the time the unfair support began in 2015, it was the only company in the group with a credit rating.
- In contrast, Jungheung Togun, when acquired by the second-generation owner Jeong Won-ju in 2007, was a small regional construction company valued at only ₩1.2 billion. It subsequently grew through nearly 100% internal transactions for the purpose of management succession. However, at that time, it was difficult for Jungheung Togun to secure loans for large-scale housing construction projects solely based on its own credit.
Details of the Unfair Support
From July 2015 to February 2025, for a period of 10 years, Jungheung Construction provided ₩3.2096 trillion in free credit enhancement (including joint guarantees and capital replenishment agreements) to facilitate 24 PF or securitized loans for 12 housing construction and general industrial complex development projects. These projects were undertaken by Jungheung Togun and its 6 affiliates, with Jungheung Togun as the sole constructor.
While it is common industry practice for a constructor to provide credit enhancement in exchange for securing construction contracts and associated profits from the developer, Jungheung Construction provided this credit enhancement without any involvement in the construction (as Jungheung Togun was the constructor).
Outcomes of the Unfair Support
As a result of this support, Jungheung Togun and its 6 affiliates easily secured funding crucial for the success of their development projects, gaining a significant competitive advantage over other market players. This significantly strengthened their position in the housing construction and general industrial complex development markets, thereby harming fair trade order.
Jungheung Togun and its 6 affiliates used the easily secured large-scale funds (₩2.9 trillion) to carry out these projects, generating ₩6.678 trillion in sales and ₩1.0731 trillion in profit (as of end of 2023). Jungheung Togun's construction capability ranking also soared from 82nd in 2014 to 16th in 2024.
Notably, Jungheung Togun's success in large-scale projects, such as Gwanggyo C2, generated massive sales and profits, which enabled it to acquire Daewoo E&C in 2021, instantly becoming a core company within the group with over 40 affiliates. In 2023, the corporate group's governance structure was reorganized around Jungheung Togun, including a conversion to a holding company, completing the management succession to the second-generation owner.
Furthermore, the direct benefits accrued to Jungheung Togun from this support, such as increased equity value, dividends (₩65 billion), and salaries (₩5.1 billion), were all attributed to the second-generation owner Jeong Won-ju, who is the largest and sole shareholder.
Significance of the KFTC's Action
This measure is significant as it detected and sanctioned acts that harm fair trade order, specifically through unfair support, such as providing free credit enhancement, to grow a second-generation owner's company and thereby complete management succession. This process also hindered market entry and competition possibilities for small and medium-sized businesses.
Moreover, this case is the first instance where a "capital replenishment agreement," a credit enhancement method commonly used in large-scale real estate PF development, has been sanctioned as an act of private interest seeking and unfair support by the owner's family. This confirms that any credit enhancement activity, regardless of its form or name, can be deemed a violation of the law if it deviates from normal trade practices and is misused as a means to unfairly support a specific affiliate.