Killing Two Birds with one Stone
Samsung Electronics officially announced its transition to a holding company for the first time. The company will speed up a transfer of its management right to vice chairman Lee Jae-yong, who was appointed as a registered director last month and implement the reorganization of its governance structure on a full scale.
In addition, the holding company card can also have the effect of taking into consideration the interests of foreign investors and minority shareholders who have repeatedly demanded the reorganization of Samsung Electronics. “Samsung Electronics finally started to use the word ‘a holding company’” said some experts in the investment banking (IB) industry, observing Samsung Electronics’s move with keen interest.
For Samsung Electronics, a flagship company of the Samsung Electronics to switch to a holding company is the most realistic way to enabling the Samsung Group owner's family including vice chairman Lee to strengthen their hold on the group and to gain stable managerial control over the group.
If Samsung Electronics divides into a holding company and a business company through a split-up, vice chairman Lee will significantly increase his stake in the holding company of Samsung Electronics in the form of in-kind contribution to the holding company and receiving new shares. In the end, the Korean electronics giant will establish a governance structure that connects vice chairman Lee to related parties, Samsung Electronics’s holding company, Samsung Electronics’s business company and an electronics affiliate.
Currently, vice chairman Lee’s stake in Samsung Electronics is only 0.6%. Including shares of chairman Lee Kun-hee, specially related persons and affiliates, vice chairman Lee’s stake will rise to 18.2%. But foreign stock ownership hovers over 50.0%. The owner family including vice chairman Lee should raise their stake in order to maintain stable managerial control. There is a limit in the method of purchasing stocks of Samsung Electronics. Astronomical costs are required. It will need about 2.3 trillion won (US$2.07 billion) to secure 1% of Samsung Electronics (1,406,793 shares) based on the closing price on November 28.
However, if the company is divided into a holding company and an operation company through a split-up, it will be possible to increase a stake in the holding company by investing new shares of the operation company in the holding company through investment in kind and receiving new shares of the holding company. This means that a split-up of the company enables both the succession of management rights and the reorganization of corporate governance.
In the process where Samsung Electronics becomes a holding company, 13.3% of treasury stocks will act as a hidden card. Under the current law, treasury shares do not have voting rights, but when a company is separated through a split-up, the voting rights of its treasury stocks can survive.
The holding company will have a 13.3% stake in the operation company through 13.3% treasury stocks. In addition, since vice chairman Lee and the owner family make an contribution in kind to the holding company, the holding company's stake in the operation company will greatly swell. In some cases, the holding company can raise its stake in the operation company to 30%. Under the Fair Trade Act, the holding company can easily meet the ownership requirements of owing subsidiaries (20% for listed companies and 40% for unlisted companies).
If this scenario unfolds smoothly, one can expect a merger between the holding company of Samsung Electronics and Samsung C&T. “Currently, we are not considering merging Samsung Electronics’s holding company and Samsung C&T," said Samsung Electronics said in a conference call following the board meeting on November 29. However, analysis is strengthening that vice chairman Lee will complete the governance puzzle by merging Samsung C&T, 17.2% of its shares belongs to vice chairman Lee and Samsung Electronics’s holding company.
There is one thing that can stop Samsung Electronics from turning itself into a holding company. The current legislative environment is not friendly with Samsung Electronics in this aspect. Opposition parties including the Minjoo Party taking control of the National Assembly proposed an amendment to the “Monopoly Regulation and Fair Trade Act” which restricts owners of large corporations from using treasury stocks to strengthen their dominance and take over management rights. The amendment obliges companies of large groups to dump treasury shares in advance if they divide themselves to become holding companies. The amendment will make it impossible for a company to establish a holding company without cancelling its treasury stocks.
If the amendment comes into effect, it will virtually thwart Samsung Electronics’s plan for a split-up and restructuring of its governance structure. That is why Samsung Electronics has no choice but to speed up its transition to a holding company.