Samsung’s Corporate Governance
A report came out to predict that the Samsung Group will make it public to establish a financial holding company within two years and proceed its transformation into a holding company structure over three to five years, amid the business group speeding up the reorganization of its financial subsidiaries, as shown in Samsung Life’s purchase of all of equities in Samsung Card last month.
In addition to establishing a financial holding company centered on Samsung Life, the Samsung group will also set up a non-financial holding company centered on Samsung Electronics. Finally, when an intermediate financial holding company system is permitted, the Samsung Group will establish the final holding company that vertically connects the two holding companies.
The Solidarity for Economic Reform (SER) released the report titled “The Samsung Group’s Establishment of a Financial Holding Company: Analysis and Outlook” with the above-mentioned contents on February 10. The report was prepared by director Kim Sang-jo and research fellow Lee Eun-jeong at the organization.
The current corporate governance structure of the Samsung Group is that vice chairman Lee Jae-yong and his family control Samsung C&T and Samsung C&T are connected to two lines. One is the Samsung C&T-Samsung Life-Samsung Fire line (financial) while the other is Samsung C&T-Samsung Electronics-Samsung SDI line (non-financial)
The Samsung Group has been under fire as some people criticize that the group has been violating the principle of separation of financial capital from industrial one. They have insisted that Lee family controls Samsung Electronics, a major subsidiary of the group, with money of those who buy insurance policies of Samsung Life since Samsung Life has 7.54 percent stakes in Samsung Electronics (including special accounts). The report said that equity adjustment among Samsung financial subsidiaries has been considerably made and a holding company in the financial sector will be established within one or two years.
It is true that lately Samsung Life has steadily rearranged equities in the group’s financial subsidiaries through buying equities in Samsung Fire & Marine Insurance, Samsung Asset Management and Samsung Card. This move is designed for the establishment of a financial holding company with Samsung Life at its center and is considered to be a preparatory work for becoming a legal or practical holding company.
The report suggests two ways for the Samsung Group to establish a financial holding company in the first phase. The first plan is to divide Samsung C&T into a Samsung C&T Financial Holding Company with equities in Samsung Life Insurance and a Samsung C&T Business Company with the remaining equities for construction and engineering businesses. Then, vice chairman Lee and Samsung subsidiaries will hold 40.26% equities in the Samsung C&T Financial Holding Company and the Samsung C&T Business Company, respectively.
The second plan is to divide Samsung Life into Samsung Life Holding Company and Samsung Life business subsidiaries. The holding company will have equities in financial subsidiaries such as Samsung Life, Samsung Securities and Samsung Card.
In both cases, if a paid-in capital increase is made in a combined way of tender offer and investment in kind for Samsung Life shareholders, it will be unnecessary for the financial holding company to make additional investment in Samsung Life business subsidiaries.
Supposing that most minority shareholders do not take part in a tender offer for Samsung Life shares, at least 10.66 percent of chairman Lee Kun-hee’s equities will have to take part in the tender offer for the establishment of Samsung C&T Holding Company since 19.34 percent equities in Samsung Life which Samsung C&T holds belong to Samsung C&T Holding Company. On the contrary, in the case of the establishment of Samsung Life Financial Holding Company, the financial holding company will hold Samsung Life’s treasury shares (10.21 percent). Therefore, once Samsung C&T takes part in the tender offer, it will nearly meet the subsidiary share ownership requirement of 30 percent shares.
Both methods have an advantage of expanding the possible use of chairman Lee Gon-hee’s equities (20.76 percent) in Samsung Life. It has been said that vice chairman Lee Jae-yong’s inheritance tax will come from his equities in Samsung SDS. But the establishment of a financial holding company can make it possible to utilize chairman Lee Kun-hee’s equities in Samsung Life.
If chairman Lee Kun-hee’s equities in Samsung Life takes part in the tender offer to meet exactly 30 percent share of the subsidiary share ownership requirement, about ten percent of chairman Lee Kun-hee’s equities in Samsung Life can be used as funds available for the establishment of Samsung C&T Financial Holding Company, while most of chairman Lee Kun-hee’s equities in Samsung Life can be used as funds available for the establishment of Samsung Life Financial Holding Company.
Accordingly, Lee Jae-yong will be able to secure cash by selling off inherited shares of Samsung Life or shares of the financial holding company while taking a stable control over the financial sector through a cross-shareholding structure where Lee Jae-yong controls Samsung C&T, which controls a financial holding company. Finally, the financial holding company controls the financial subsidiaries.
“The Samsung Group’s current corporate governance structure is not sustainable,” the report analyzed. “In this respect, the group’s transformation into a financial holding company system is an inevitable process.” The report said that the group will apply for the approval of the establishment of a financial holding company in the first phase within one or two years.
After doing preparatory works such as rearranging the equities in financial and non-financial companies as long as possible, the group will apply for the approval and work on its transformation into a financial holding system with a grace period of five to seven years, the report predicted. In addition, the specific transformation appearance and the transformation period will hinge on economic, legal and political situations, the report forecast. During the process, the transformation will be affected by special situations including Lee Jae-yong’s sisters’ separation from the Samsung Group.
“The financial holding company will be under supervision of financial regulators, cutting off its line of support for non-financial subsidiaries,” director Kim Sang-jo said. “The transformation will be the starting point of controlling the risk of Samsung Group where financial and industrial capitals are linked together.”
”The point is to make the Samsung Group and Lee family have an attitude that meets the expectation of the Korean society and market. It will depend on how well the Korean society and market will respond,” Kim stressed.