Reversing Merger Guideline
The Korea Fair Trade Commission (KFTC) determined on December 21 that Samsung SDI has to additionally sell its 4.04 million or so shares in Samsung C&T in order to do away with the circular equity investment caused by the merger between Samsung C&T and Cheil Industries.
This means the KFTC admitted that its past guidelines were wrong and overturned its decision in two years. Back in 2015, the KFTC told Samsung SDI to sell only five million out of 9.04 million shares for the same purpose based on its guidelines for preventing new circular equity investment related to merger, which were announced on December 24, 2015.
The recent determination of the KFTC has to do with the public demand for corporate governance structure reform that has soared since the launch of the Moon Jae-in administration as well as the fact that the KFTC changed its decision without sufficient explanation two years ago by reducing the number of the shares that should be sold from 10 million to five million. In this context, the KFTC is predicted to speed up its efforts for conglomerate reform from now on. The organization has to accept the criticism that it impaired the reliability of law enforcement and has to face litigation if Samsung files a suit.
According to the KFTC, Samsung SDI has to sell a total of 9,042,758 Samsung C&T shares with regard to the merger between Samsung C&T and Cheil Industries. This amount is equivalent to a shareholding of 4.7% for the period following the merger on September 2, 2015. Based on the KFTC’s determination, Samsung is required to sell 4,042,758 shares, which are equivalent to 2.11%, this time in addition to the five million shares it sold in February 2016. The former shares have a total market value of more than 500 billion won (US$450 million).
The KFTC, however, gave a grace period of six months and Samsung has only to sell the shares by the third quarter of next year at the latest. This is in view of the issues Samsung should deal with, such as market impacts and relations with minority shareholders.
What Effect on Governance Structure of Samsung?
Although Samsung SDI is required to conduct the additional sale due to the revision of the guidelines of the KFTC, the sale of shares is likely to have a rather limited impact on the governance structure of the Samsung Group as a whole.
At present, the majority shareholders including Samsung Electronics Vice Chairman Jay Y. Lee own more than 30% of Samsung C&T and, as such, the governance structure of the group is likely to remain intact even after the disposal of the 4,042,758 shares. Still, some experts point out that things are up in the air with issues affecting the governance structure, including the revision of the Insurance Business Act, having yet to be addressed.
According to the Financial Supervisory Service of South Korea, Samsung C&T represented 4.6% of Samsung Electronics, 19.3% of Samsung Life Insurance, 17.8% of Samsung SDS, 43.4% of Samsung Biologics and 7% of Samsung Engineering as of the end of the third quarter of this year. In other words, Samsung C&T is at the top of the governance structure of the Samsung Group with a large amount of shares in the group’s manufacturing and financial companies.
The group currently has a structure of circular equity investment in which Samsung SDI, Samsung C&T and Samsung Electronics are interconnected. Vice Chairman Jay Y. Lee is the largest shareholder in Samsung C&T with a shareholding of 17.08%. The ratio goes up to 39.08% when those of specially related persons like Samsung Electronics Chairman Lee Kun-hee, Hotel Shilla President Lee Bu-jin and Samsung C&T President Lee Seo-hyun are added.
Although Vice Chairman Jay Y. Lee has a shareholding of only 0.65% in Samsung Electronics, he is controlling Samsung Electronics, which is the core of the Samsung Group, as the largest shareholder in Samsung C&T that owns 4.61% of Samsung Electronics. The vice chairman’s influence is not shaken at all even if the new circular equity investment between Samsung SDI and Samsung C&T is cut based on the disposal of the shares.
However, things may become different after the revision of the Insurance Business Act or the implementation of the South Korean government’s integrated financial group supervision as a situation in which Samsung Life Insurance has to sell its 8.19% shares in Samsung Electronics may arise in that case. Each and every Samsung C&T share matters for Samsung to reduce any external pressure on Samsung Electronics.
“The Samsung Group is unlikely to be in a hurry to carry out the sale within itself since the disposal rarely affects its control,” the Korea Corporate Governance Service explained, adding, “The best option for Samsung is a block deal with a friendly party, but the progress may be slow in the absence of Chairman Lee Kun-hee.”
“Predictability of Business Significantly Impaired”
In the meantime, a local corporate executive criticized the KFTC by saying, “It doesn’t make sense at all that legally reviewed guidelines are so easily changed with the change of regime and companies cannot trust the government when such things happen.” Another one mentioned that the government has added to uncertainties, which is the biggest risk for those running enterprises. “The guidelines of the KFTC are a matter of legal interpretation and, if the decision made two years ago can be changed so easily, how can we say for sure it’s not going to be overturned yet again anytime in the future?”
Yet another one pointed out the KFTC’s recent decision seems to aim at Samsung in particular with similar circular equity investment found in multiple conglomerates such as Hyundai Motor Group and Lotte Group. He continued to say that the government targeting a certain group can be problematic.
Such a sensitive response is because of the impact of the circular equity investment issue, which can emerge often down the road in relation to business restructuring amid an economic recession, corporate succession, holding company structure adoption, etc. In fact, KFTC Chairman Kim Sang-jo met with the five largest conglomerates in South Korea last month and asked them to accelerate corporate governance structure reform.
In the meantime, Samsung SDI, showing signs of embarrassment, said that it would handle the matter through legal review. The entire Samsung Group including Samsung SDI has not said much about the matter so far. This seems to be because the matter is closely related to the trial of the Samsung Electronics vice chairman regarding his illegal solicitation during the merger between Samsung C&T and Cheil Industries. Besides, the KFTC overturned its determination immediately before the prosecutor’s sentencing recommendation scheduled for late this month, which means Samsung has every reason to be prudent.