Management Struggle
Samsung C&T and Elliott Associates have started a legal fight over the proposed merger between the Samsung Group’s construction arm and Samsung's de facto holding firm Cheil Industries.
The high-profile court battle came as Elliott, the third biggest shareholder in Samsung C&T with a 7.1 percent stake, applied for two court injunctions to stop Samsung C&T from holding a shareholder meeting for the merger plan voting slated for July 17, and to prevent Samsung C&T from selling its 5.76 percent stake to its long-time ally KCC for restricting KCC's voting rights.
In the first hearing on two injunctions held at the Seoul Central District Court on June 19, lawyers representing Elliott claimed that the proposed merger between the two Samsung affiliates is unlawful and goes against shareholder interest.
“There is no reason for Samsung C&T to merge with Cheil Industries, as the main purpose of the merger is to control Samsung firms under a vertically integrated management structure, not to bring profits back to shareholders.”
“Elliott can't accept the swap ratio given by Samsung Group. Samsung C&T's total assets reached 30 trillion won [US$27.3 billion], and it is one of the global leaders in the construction business. When looking at the main business portfolios of Cheil Industries, that firm generates income by selling services and products in fashion, leisure, food, and some others, which are all non-construction products,” said another lawyer at Nexus, adding, “If the 1:0.35 swap ratio is accepted from the shareholder meeting, then Samsung C&T shareholders will get only 20 percent of their real value. The result is that the Samsung owner's family will benefit most. The ratio should be changed.”
Samsung claimed that the proposed merger with Cheil Industries has been made in accordance with pertinent law, so the 1:0.35 stock swap ratio will not be changed. “The ratio is decided based on rules, so changing of it violates this,” said an attorney at Kim & Chang representing Samsung.
The local counsel added, “Samsung C&T valued itself based on its stock price, which is required by the local laws,” counterattacking Elliott’s claim that the deal is unfair because the terms of the takeover underestimated the value of Samsung C&T while inflating that of Cheil Industries.
“The proposed merger deal does not cause any damage to Samsung C&T, but is more beneficial to the company and its shareholders, as seen in the changes of the Samsung C&T stock price after the announcement of the merger,” he added, saying the company’s stock price surged by 15 percent the day after the announcement.
“Elliott wants to block the July 17 shareholder meeting about the deal. This doesn't make sense. A shareholder has the right to vote for the proposed deal,” the attorney said, adding, “Elliott's demand for dividends in kind is intended to crush Samsung C&T.” A dividend in kind is a stock dividend paid in company stockholdings instead of cash.
The court ruling is expected to be made around July 1, or at least no later than a shareholders meeting.
Industry sources said that Samsung and Elliott would ramp up their efforts to gain more shareholders to support their position ahead of the shareholder meeting slated for next month.
Currently, foreign investors are estimated to hold a combined 33.6 percent of Samsung C&T, and the share of local institutions such as the National Pension Service and other asset management companies is estimated at 20 percent. Samsung C&T and its affiliates are said to own a combined 19.95 percent.
In order to go ahead with the proposed merger, at least two-thirds of shareholders in attendance, and more than one-third of all shareholders, must approve the deal.
Given that about 70 percent of stocks' owners usually attend a shareholders meeting, Samsung needs support from shareholders representing at least a 47 percent stake. Elliott should gain support from shareholders representing 23 percent in order to stop the merger.
An industry source said local institutional investors are likely to support the merger, as they are also exposed to Cheil Industries, which means that they can profit should the merger deal go ahead, and such is the case with foreign investors, too.
However, another industry source said, “It is unclear whether foreign investors will really side with Samsung, and it is also hard for Samsung to meet demand raised by local institutions,” said a commenter.