Reform Hurdles

The ruling family of the Samsung Group.
The ruling family of the Samsung Group.

 

The revision of the Insurance Business Act and separation of banking and commerce are emerging as hot issues for the Samsung Group. The matters to be discussed sooner or later by the Fair Trade Commission and the National Assembly are expected to affect the group’s business succession and stock price, while its subsidiaries are showing greater share price fluctuations through listing and equity transactions.

The amendment to the Insurance Business Act, called the Samsung Life Insurance Act, is currently pending in the National Assembly to be put on the table in September.

According to the current law, an insurer’s marketable securities ownership in its major shareholder or subsidiary is limited to 3 percent of its total assets, with the acquisition price at the time of purchase being applied to the calculation. In contrast, the market price is applied in the revision bill instead of the acquisition price. Thus the stock holdings are significantly reduced. Samsung Life Insurance is the only one of the 24 life insurers in Korea where the percentage exceeds 3 percent. Once the bill is passed, Samsung Life Insurance has to sell its subsidiary shares worth 14 trillion won (US$13.7 billion), including Samsung Electronics shares, within five years.

This means that the influence of Chairman Lee Kun-hee on Samsung Electronics, who owns more than 20 percent of the equity of the insurance company, will be weakened. In this case, the Samsung Group’s cross shareholding structure covering Samsung Everland, Samsung Life Insurance, Samsung Electronics, and Samsung Card is likely to be shaken.

The obligatory introduction of an intermediate holding company for conglomerate governance reform, which is one of the Fair Trade Commission’s policy goals for this year, is expected to have some impact on Samsung as well. The measure prohibits investment between banking and non-banking subsidiaries to achieve banking-commerce separation.

It is said that the recent exchange between Samsung C&T shares and Samsung Life Insurance treasury shares by Samsung Life Insurance and Samsung Fire Insurance was to provide against the adoption of the measure. Last month, Samsung Life Insurance handed over its 4.79 percent shares in Samsung C&T to Samsung Fire Insurance and received 4 percent of Samsung Fire Insurance treasury shares. Samsung Life Insurance, which is the largest shareholder of the banking subsidiaries excluding Samsung Card, currently owns 14.98 percent of Samsung Fire Insurance, 11.14 percent of Samsung Securities, 100 percent of Samsung Asset Management, and 34.41 percent of Samsung Card.

Samsung Life Insurance has to acquire at least 30 percent of these subsidiaries’ shares if it is to become an intermediate holding company. Therefore, inter-subsidiary share exchange and purchases are likely to follow down the road. Samsung Life Insurance has to dispose of all of its 7.55 percent of its shares in Samsung Electronics, too.

In the meantime, a variety of changes are expected to follow within Samsung during the course of its business succession, since the largest shareholder’s family has a low share ratio. “Korea’s inheritance tax rate is as high as 50 percent, and more and more regulations are put into place on internal transactions and for the protection of minor shareholders’ rights,” said Kiwoom Securities Research Analyst Park Jung-sun, adding, “These are making it increasingly difficult for the descendants of major shareholders to secure business rights.”

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