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Untangling the Financial Knot of the Samsung Group Almost Complete
Corporate Governance Reform
Untangling the Financial Knot of the Samsung Group Almost Complete
  • By Jack H. Park
  • February 27, 2015, 09:57
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Samsung Electronics’ 44-story headquarters building in Samsung Town, Seocho-gu, Seoul, South Korea. (Photo courtesy of Oskar Alexanderson/Wikimedia Commons)
Samsung Electronics’ 44-story headquarters building in Samsung Town, Seocho-gu, Seoul, South Korea. (Photo courtesy of Oskar Alexanderson/Wikimedia Commons)

 

Samsung Group has almost completed reorganizing its corporate governance, which is the first stage of structural changes in the group, along with the initial public offering of Cheil Industries in December last year. 

This year, Samsung C&T, the original holding company of the Samsung Group, is expected to become a core subsidiary to finish reorganization. It is becoming clear that the group will merge Cheil Industries and Samsung C&T in order to increase the power of the founder’s family and turn Samsung Electronics into a holding company. 

However, some suggest that the succession procedure may grind to a halt if legal problems, including the permissions of intermediate financial holding companies, become a sticking point. 

The business industry expects that Samsung C&T, which has been excluded from the reorganization, is highly likely to merge with Cheil Industries. 

When Cheil Industries merges with Samsung C&T, the influence of the founder’s family on Samsung Electronics will increase, because the family of Samsung Electronics Vice Chairman Lee Jae-yong holds more than 40 percent of Cheil Industries’ share, while Samsung C&T holds 3.51 percent of Samsung Electronics’ share. There has also been a rumor that Samsung SDS and Samsung Electronics will merge. The merger of the two companies will strengthen the control of the founder’s family since the share of SDS will transform into the share of Samsung Electronics. Samsung C&T holds 17.08 percent of Samsung SDS shares, and Vice Chairman Lee also holds 11.25 percent of them. 

The last scenario is to divide Samsung Electronics into a business company and a holding company. The family of Vice Chairman Lee and the merged subsidiary of Cheil Industries and Samsung C&T can control the business company through the holding company. 

In this case, the industry thinks that the family of the founder’s shareholding of Samsung Electronics can rise up to the 14 percent level. 

Together with the conversion of Samsung Electronics into a holding company, one can see the outline of the 3rd generation leaders who will succeed the company. This is a measure to secure the management rights of the 3rd generation over the several companies that each child of Lee Kun-hee, Vice Chairman Lee, Hotel Shilla CEO Lee Boo-jin, and Cheil Industries CEO Lee Seo-hyun, will own. As a part of the measure, the share of Cheil Industries transferred to Samsung Electronics after 15 years at the end of last year. The industry believes that the share of Hotel Shilla can also transfer to Samsung Electronics sooner or later. 

Also, the Samsung Group has almost finished solving the issue of cross-shareholding and strengthening the separation between financial and industrial capital, which had been pushed ahead by Chairman Lee Kun-hee before he was hospitalized. The number of cross-shareholding deals between subsidiaries reached nearly 50 the year before last. However, the figure decreased to 10 at the end of last year through IPOs, sales of minority shares, and mergers. 

Samsung plans to solve the issue of cross-shareholding completely by the end of this year. The governance structure of its financial subsidiaries also settled based on Samsung Life Insurance. When the group sells 37.5 percent of Samsung Card shares, which were held by Samsung Electronics, the separation between financial and industrial capital will be complete. 

However, this scenario is based upon the premise that the system of intermediate financial holding companies is introduced that would waive up to five years of selling financial subsidiaries to the holding companies according to the principle of the separation of financial and industrial capital. The revision of fair trade regulations to adopt intermediate financial holding companies is currently pending at the National Assembly. However, it is uncertain that the bill would pass since the opposition party is against it, saying that the bill would only ease the tax burden of the heads of conglomerates. 

Therefore, some expect that Vice Chairman Lee will inherit all his father’s shares and pay taxes of trillions of won if the system of intermediate financial holding companies cannot be introduced. An official from the financial investment industry said, “Other than the law revision issue, Samsung should consider how the public would think about the efforts of the family of the founder to reduce the tax burden. At the moment, it is possible for them to succeed the former governance structure and submit to enormous amounts of taxes.” 

Samsung Heavy Industries and Samsung Engineering are highly likely to make an attempt to merge together this year again after they failed to do so due to the resistance of the shareholders last year. An official familiar with inside affairs of the Samsung Group said, “Since the merger between the two companies is the measure to strengthen the competitiveness in the plant business, they are highly likely to push ahead with the merger again, regardless of the progress of the corporate governance reorganization.”