Samsung SDI Co., a battery making unit of South Korea’s largest conglomerate Samsung Group, will have to dispose 4.04 million shares in its affiliate Samsung C&T Corp. within six months in connection with a controversial merger between Samsung C&T and Cheil Industries. Accordingly, Samsung Group’s cross-shareholding issue will once again at the front.
The Fair Trade Commission (FTC) ordered Samsung SDI on Feb. 26 to sell its remaining 4.04 million shares, or 2.1 percent, in Samsung C&T Corp. by Aug. 26 following stricter interpretation of the country’s antitrust regulations. The FTC considered Samsung SDI’s 9.04 million shares in Samsung C&T acquired through the merger between Samsung C&T and Cheil Industries in 2015 as a new structure of cross-shareholding.
Therefore, Samsung SDI will have to sell the remaining 4.04 million shares in Samsung C&T worth 541.7 billion won (US$506.12 million) under Friday’s closing price by the end of August, though it already disposed 7 million shares, or 2.6 percent, in Samsung C&T in 2016. In regard to the FTC’s decision, Samsung SDI said it would come up with the measures to sell the shares within the grace period regardless of legitimacy of the interpretation.
However, there are growing discontent inside Samsung. Some points out that the FTC is asking to reorganize the governance structure, like the adoption of a holding company system, but is blocking the way to simplify the governance structure at the same time.
Samsung SDI is now facing difficulties in how to sell Samsung C&T’s shares worth more than 500 billion won (US$467.38 million) in a short period of time. Currently, Samsung C&T’s largest shareholder has a 39.38 stake. So, there will be any problem with the governance structure even when Samsung SDI sells its 2.13 stake. However, Samsung C&T will need to see its share prices plunge when Samsung SDI’s stake is put on the market. Samsung will also not be able to sell the stake to its other subsidiaries in order to prevent this occurring. This is because it can create another cross-holding structure.
In addition, Samsung is caught between a rock and a hard place after FTC Chairman Kim Sang-jo put more pressure. Kim said the FTC would consider the introduction of stricter restrictions and regulations in the second half of the year when conglomerates come up with voluntary measures to reform the structure until a general meeting of stockholders at the end of March. It can include the issue of resolving a cross-shareholding structure.
Under the current circumstances, however, Samsung will not be able to improve the governance structure, including the conversion into a holding company, without doing something like the merger of Samsung C&T. Samsung’s governance is based on a cross-shareholding structure largely divided into three firms – Samsung Electronics Co., Samsung Life Insurance Co. and Samsung C&T. The circular structure is so strong that it will take trillions of won to resolve the cross-holding structure. For instance, when the FTC ask Samsung to resolve the cross-holding structure related to Samsung Electronics, it needs to sell a 9.62 stake owned by Samsung Life and Samsung Fire & Marine Insurance but the stake is worth 29 trillion won (US$27.1 billion) under the closing price on the 23rd. In order to address the cross-holding structure, the largest shareholders, including Vice Chairman Lee Jae-yong, need to purchase the stake but it is realistically impossible. When Samsung sells the stake in the market, Samsung Electronics’ largest shareholding stake will be lowered to as low as 10.5 percent.
An official from the business industry said, “Samsung Electronics’ recent plans to push ahead with the stock split and to include a foreigner and a female member on its board of directors are the best shareholder friendly policy they can come up with. When the government put pressure on the cross-holding issue, there are nothing much Samsung can do so Vice Chairman Lee and Samsung will be in trouble.”