Struggle Over Samsung Merger Holds Potential for Change

SEOUL — A bitter dispute over the proposed merger of two Samsung affiliates will come to a head Friday with a shareholder vote that could — whatever the result — force a shift in corporate governance practice among South Korea’s giant, family-run conglomerates.

In a country not known for investor activism, the campaign against the takeover of construction company Samsung C&T by affiliate Cheil Industries has been unusually loud and well organized. Spearheading opposition to the merger is the U.S. hedge fund Elliott Associates, which is the third-largest shareholder in C&T and has unsuccessfully moved the courts to block the deal on the grounds that it significantly undervalues the construction firm.

For Samsung’s founding Lee family, the takeover is key to consolidating its grip on the multi-headed conglomerate ahead of a generational power transfer.

The family-run corporations, or “chaebol,” which dominate the South Korean economy, are used to running their business their own way, with little interest in the concerns of minority shareholders.

But as companies like Samsung and LG have become global brands, they have attracted overseas investors with a strong sense of shareholder rights that is increasingly seeping into the domestic Korean investor culture.

More than 3,000 individual investors have created an online forum aimed at blocking the C&T takeover. Although their combined stake in C&T is less than 1%, the group’s mere existence is a sign of changing times.

The dawn of a new phase?

“What we’re witnessing here is a new phase in investor-corporate interaction in South Korea,” said Charles Lee, research director for North Asia with the Hong Kong-based Asian Corporate Governance Association (ACGA).

“There is an increasing awareness, even among domestic retail investors, that the way some chaebols behave toward minority shareholders can’t go on forever,” Lee told AFP.

Samsung C&T executives argue that the merger makes good business sense and will enhance shareholder value in the long-run, and insist that the details of the all-stock deal are in full compliance with relevant laws and regulations.

So far, the South Korean courts have agreed, but Elliott continues to argue that the merger is “unfair, unlawful and significantly damaging” to C&T shareholders’ interests.

The two sides have spent the weeks leading up to Friday’s vote locked in an intense campaign for shareholder support, with Samsung needing a two-thirds majority to get the merger approved.

On Monday, Samsung C&T took out an advertisement — titled “An earnest plea to shareholders” — that ran on the front page of nearly every major South Korean daily newspaper and urged support for the deal.

Elliot has also been active, garnering backing for its opposition stance from big-name institutional investors like pension giant APG Groep NV, Canada Pension Plan Investment Board and Aberdeen Asset Management.

In an e-mailed statement on Wednesday, Elliott urged all shareholders to “ensure their voices are heard and (they) are not railroaded into swapping their undervalued shares … This is your last chance to protect the value of your investment.”

A push for change from many directions

Hwang Sei-Woon, a researcher at the Korea Capital Market Institute in Seoul, said such disputes would become the norm unless South Korean chaebols worked to improve corporate transparency.

“An attack like this by a foreign hedge fund is not necessarily a negative thing if it leads to change,” Hwang said. “Regardless of the outcome of Friday’s vote, the whole affair should prompt Samsung to make its management style more transparent and to think more about shareholder interests.”

All eyes on Friday will be on the state-backed National Pension Service (NPS) – the biggest single shareholder in Samsung C&T, with a nearly 12% stake that could swing the final vote either way.

Last Friday, the NPS said it had reached a decision on how it would vote, but declined to reveal its intentions before the shareholders’ meeting.

“It’s a fine line the NPS has to walk, with probably a lot of pressure from both sides,” ACGA’s Lee said.

For Samsung’s founding family, the strategic priority is seen as consolidating its control of the group — run through a highly complex web of cross-holdings — while also minimizing the inheritance tax burden that will accompany the eventual transfer of power from ailing patriarch Lee Kun-Hee.

But Lee believes the next generation is also genuinely committed to improving transparency issues.

“It is trying to move in the right direction, even if it stumbles sometimes and isn’t always forward-looking enough to see what troubles may lie ahead,” Lee said. “It’s an evolving mentality that has been constrained by past practice, but it’s important to note that, compared to corporate governance practice in many other South Korean chaebols, Samsung is way, way ahead.”

by Giles Hewitt