SEOUL (Reuters) - The head of Hyundai Motor (005380.KS) was sentenced to three years in jail for embezzling funds from the world’s No. 6 auto maker, dealing another blow to a company battling a rising won and restive labor unions.
The surprise ruling — the expectation was that Hyundai Motor Chairman Chung Mong-koo would get a suspended jail sentence — initially sent shares in the country’s top carmaker down over 3 percent on Monday as investors worried about a management vacuum.
Chung, 68, wearing a dark gray suit, appeared shaken after the verdict. He quickly left the courtroom, which was filled to capacity with Hyundai group employees, including Chung’s son, Chung Eui-sun, the president of sister company Kia Motors Corp. (000270.KS).
Chung, who will be appealing the sentence, was arrested last April on allegations that Hyundai and its affiliates set up slush funds to pay for political favors.
“Some people seem to think that Mr. Chung controls the whole company,” said Kim Yung-min, fund manager at SH Asset Management.
“The fact is that the company is not ruled by just one Mr. Chung. The main impact will be on sentiment in the short-term.”
Hyundai shares fell as much as 3.15 percent following the sentencing but recovered to close flat at 69,800 won. The broader market .KS11 ended up 0.3 percent.
The court decided not to revoke Chung’s bail terms immediately, citing the need to protect the national economy and to give him time to prepare his appeal.
“Chairman Chung retains full operational control and decision-making authorities for the long term strategic issues affecting the company and its affiliates,” said Hyundai spokesman Jake Jang.
Some analysts remained worried about the management uncertainty at the auto maker and its affiliate Kia Motors, which account for nearly 7 percent of South Korea’s total exports.
“This could have an impact on the Korean economy,” said Kim Hyun-tae, fund manager at Landmark Investment Management.
“Hyundai is a big employer and there are also parts suppliers and other sectors that depend on the auto sector. Along with semiconductors, autos are a major South Korean export item. So Hyundai’s impact on the Korean economy is huge.”
Prosecutors last month demanded a six-year jail term. Auto analysts had expected the court to hand down a suspended jail term to leave Chung at the helm of Hyundai, given the group’s importance to the South Korean economy.
In 2004, the Seoul high court suspended a three-year jail term for fraud handed to Chey Tae-won, chief executive of SK Corp. 003600.KS, South Korea’s top oil refiner, so he could carry on running the company.
Chung is the eldest surviving son of the late Chung Ju-yung, who founded the Hyundai Group in 1947 and Hyundai Motor in 1967. He took control of Hyundai Motor in 1999 from his uncle Chung Se-yung, who is credited with Hyundai’s rapid growth and was nicknamed “Pony Chung” after its first model.
The chairman admitted last year to having a role in setting up slush funds through affiliates of Hyundai, although he denied knowledge of details on the funds.
Chung, heavily involved in most decisions at the group, was released on $1 million bail in June after two months in jail.
The case has put the spotlight on management shortcomings at South Korea’s powerful “chaebol”. These family-run conglomerates helped rebuild the economy after the 1950-53 Korean War but were partly blamed for the financial crisis of the late 1990s.
Despite reforms brought in after the 1997-98 Asian financial crisis, some conglomerates are still run like family businesses, shifting money among group companies and using complex share ownership networks to control their business.
In 2005, two executives at Samsung Group, the country’s top conglomerate, were found guilty of conspiring in 1996 to help the children of the group’s chairman to buy a majority stake in affiliate Everland at below-market prices.
Additional reporting by Rhee So-eui, Jang Sera and Rafael Nam