Decision Reached in Samsung Share Case

The ruling Uri Party has agreed to take “separate measures” on Samsung Card and Samsung Life Insurance (SLI)’s shares in other Samsung affiliates that are held beyond legal limits.

The party decided that Samsung Card’s excess shares in Samsung Everland should be disposed of, while SLI’s surplus shares in Samsung Electronics should be recognized as legitimate.

At least within the government and the governing party, the measures led to an end of the four-month controversy over how to deal with Samsung Group’s financial affiliates.

More disputes are expected to follow, however, as the Grand National Party (GNP) opposes the government policy and it has not been clarified exactly how to dispose of those shares.

Ruling party accepts Cheong Wa Dae’s compromise-

In its policy committee meeting held under the presidency of Chairman Chung Se-gyun on November 24 at the National Assembly, the Uri Party decided on a party opinion on the revision draft of the “Act on the Structural Improvement of the Financial Industry,” which is also known as the “Financial Industry Act.”

The revised bill recognizes a financial institution’s shares in other affiliates that have been possessed since before May 1997, when the Financial Industry Act came into effect. Instead, it stipulates shares that have been acquired since the date should be disposed of if they surpass the legal limits of 5%.

According to the draft, the SLI will face limits on executing voting rights regarding its 5% surplus out of its 7.23% shares in Samsung Electronics, but the insurance company will not have to sell those shares. In contrast, Samsung Card will be obliged to dispose of its 5% surplus in its Samsung Everland shares (25.64%). The dominant view is that the timing of disposal will be “within five years” after the revised bill is enacted.

This is the same as what Cheong Wa Dae proposed last month as a measure to deal with possible share disposals.

The draft is a compromise between “collective disposal without exception” insisted on by Rep. Park Young-seon and other young lawmakers, and “limits on voting rights alone” suggested by the Ministry of Finance and Economy (MOFE). It is a desperate measure designed to realize the intent of reform policies on large enterprises as well as to lessen the burdens on businesses.

Nonetheless, Rep. Lee Sang-min and some other ruling party members of the Finance and Economy Committee (FEC) at the National Assembly are rejecting the party opinion, saying, “The bill should require only the limits on voting rights for both cases.” Also, the GNP is strongly resisting the bill, citing a possibility that it might prove unconstitutional. Against this backdrop, the bill is widely expected to face rough going in the legislation process.

“The Financial Industry Act itself is unprecedented in other countries,” said GNP lawmaker Lee Hye-hoon. “Through a debate on the legality of the bill, we will do our utmost to prevent the governing party’s opinion from being approved of in the standing committee.”

Possible impact on Samsung’s corporate governance-

If passed without amendment, the revised Financial Industry Act will somewhat loosen the Samsung Group’s link to circular cross-unit equity investment, which starts from Samsung Card, goes through Samsung Everland, Samsung Life Insurance and Samsung Electronics, and eventually ends up back at Samsung Card.

Samsung officials argue that reducing voting rights on its core affiliate Samsung Electronics by 2.23%, the bill will eventually put Samsung Group at risk of a merger and acquisition (M&A) attempt.

As of late September, Samsung Group Chairman Lee Geun-hee and other specially related parties possessed 17.72% of shares in Samsung Electronics, while foreign investors had 54.13% of the company’s shares.

Some say, however, that Samsung’s claim is a way to put pressure on the government and the ruling party, as it would be virtually impossible for Samsung Electronics’ 2,600 foreign shareholders altogether to join hands for a possible M&A.

The issue of how to dispose of Samsung Everland shares owned by Samsung Card is highly likely to fuel another controversy. Finding would-be buyers of Samsung Card’s 20.64% shares in Samsung Everland will not be an easy task. Furthermore, assessing the stock prices of Samsung Everland, an unlisted company, will be also difficult.

“Generating low profits, Samsung Everland does not provide dividends, so it will be very hard to find those who are willing to acquire the shares. However we set the prices for the shares, speculations on illegitimate supporting will definitely be followed,” said Samsung officials.

“Excess shares can be bought, little by little, by other Samsung affiliates or the Samsung Foundation of Culture (SFC). Price-setting will not be a problem as well, if done on the basis of the Act on Inheritance and Donation,” responded Chae Gyu-ha, the chief of the Corporate Group Department of the Fair Trade Commission (FTC).

Ki-Jeong Ko In-Jik Cho koh@donga.com cij1999@donga.com