As a Seoul District Court has ruled that the controversial merger of Samsung's two affiliated companies – Samsung C&T and Cheil Industries – in 2015 is valid, the appeal for Samsung Electronics Vice Chairman Lee Jae-yong is also expected to take a new turn. In particular, the argument that Vice Chairman Lee cause damage to the National Pension Service (NPS) to succeed the management rights seems no longer persuasive.
The investigative team of Special Prosecutor Park Young-soo claimed that Samsung needed to merge Samsung C&T and Cheil Industries as part of the group's succession plan for its heir Lee Jae-yong to cement his control of the business empire and asked the former Park Geun-hye administration to put pressure on the NPS to approve the merger. It also said the NPS suffered a loss of 133.8 billion won (US$118.09 million) after approving the merger, though it was aware of the fact that Samsung vastly undervalued Samsung C&T's share price.
There is a consensus that the latest ruling will have a limited direct impact on Lee’s trial on an appeal case, which is a criminal trial, as it was the ruling for a civil action. However, there will be an indirect impact because one of the links of special prosecutors’ core theories have weakened.
The Seoul Central District Court turned down the request from Ilsung Pharmaceutical Co., a former major stakeholder of Samsung C&T, to nullify the merger with Cheil Industries Inc. on October 19. The court said, "The merger ratio was calculated according to the Capital Market Act and no illegality was found during the merger process. There are no grounds on which to affirm that the merger ratio was unjust for shareholders, and even if it was so, it cannot be said that it was outstandingly unfair." In short, the court believes that the merger ratio was unfairly calculated.
Accordingly, special prosecutors’ argument that the NPS lost 133.8 billion (US$118.09 million) due to the merger approval is not persuasive any more. The accusation of the NPS’ losses played a crucial role in inflaming the public opinion for Samsung during the investigation. The court ruled that Samsung did not put pressure on the NPS to receive the merger approval at the first trial, but it was the part that Vice Chairman Lee felt resentment and heartbroken the most.
It is worth noticing that the court said the Samsung C&T merger was not only to succeed Vice Chairman Lee’s management rights. It said, “Even the merger was part of the group’s comprehensive plan to help Vice Chairman Lee to strengthen his control of the group, it was not the only purpose of the merger because it had rationality in management. The governance structure reform helps stabilize the management and it serves the interests of Samsung Group and its affiliates in a way.
This supports Samsung’s argument that the merger was pushed ahead to create synergy. Samsung said the merger has nothing to do with Vice Chairman Lee’s succession of management and it was needed in terms of management. On the other hand, special prosecutors think that the main purpose of the merger was to strengthen the leadership's control, not to create synergy.
Securities industry sources points out that Samsung C&T was able to wipe out huge losses in the construction sector as it was merged with Cheil Industries. They say that the losses had less impact on the company because its size got bigger.
In addition, the court said that there is no illegality in the process of the NPS deciding to be in favor of the merger. It said, “The NPS voted for the merger at the general shareholders’ meeting of the former Samsung C&T and it was flawless regardless of whether there are flaws in the internal decision making process. If there are losses due to such flaws, they should be solved with internal legal procedures at the NPS. There is not enough grounds that the investment committee’s vote for the merger had no malpractice, such as putting up a considerable amount of investment losses and damaging the shareholder value, considering various factors.”