SEOUL -- Samsung is butting heads with a U.S. hedge fund over an internal merger, a sign of mounting pressure from activist shareholders amid an earnings decline and controversy over its hereditary leadership.
On June 19, court room 358 at the Seoul Central District Court saw a heated argument over a planned merger between Cheil Industries, Samsung's de facto holding company, and trading house and construction company Samsung C&T.
A representative from Elliott Management, a U.S. hedge fund with a more than 7% interest in Samsung C&T, argued that the proposed merger ratio was blatantly unfair. The merger is intended to facilitate succession within Samsung's founding family and offers no benefits to rank-and-file shareholders, the representative claimed.
Samsung met these accusations head-on, retorting that the ratio was calculated in compliance with the law and that Elliott's arguments were based on what-ifs and conjecture and lacked objective proof.
The fight started with the May 26 announcement of a reshuffle under which Cheil would absorb Samsung C&T, effective Sept. 1. Samsung C&T stakeholders would receive 0.35 share of Cheil for each of their shares. Elliott refused to accept the deal on those terms and filed an injunction seeking to block an extraordinary shareholders meeting scheduled for July 17.
Samsung claims it calculated the ratio based on share prices, in accordance with South Korean law. The company also defended the merger itself, saying it is aimed strictly at creating business synergy.
But Samsung C&T has three times Cheil's capitalization and holds shares in core group company Samsung Electronics. Its acquisition on such favorable terms by Cheil, which is controlled by Samsung's founding family, led Elliott to suspect the family is looking to use the move to tighten its grip on the group.
Other players are siding with Elliott. Two influential U.S. shareholder advisory firms, Institutional Shareholder Services and Glass Lewis & Co., released opinions advising against supporting the merger.
Lower growth, lower tolerance
Samsung has always had a complex structure. The group is linked in a circular investment structure, with each company holding stakes in another, starting with Cheil. The founding family's holdings are also convoluted. Samsung's management structure is opaque, allowing the family to steer the group without officially serving as directors.
Shareholders could overlook these structural issues when Samsung was enjoying uninterrupted growth, driven by Samsung Electronics, as one of the conglomerates supporting the South Korean economy. But that time has passed.
For one, Samsung's growth prospects are dimming. Samsung Electronics' preliminary earnings results for the April-June quarter, released Tuesday, showed consolidated operating profit down 4% on the year. This marks a seventh straight quarter of shrinking profits amid slowing smartphone sales. The decline in profitability is eating into the company's share price and leading to grumbling among shareholders.
Hereditary succession is another issue. The family patriarch and group head, Samsung Electronics Chairman Lee Kun-hee, was admitted to the hospital in May 2014. The group urgently needs to prepare to pass on his role to his oldest son, Vice Chairman Lee Jae-yong. But the eldest son's thin track record means his suitability to lead the corporate behemoth could be brought into question.
Seoul District Court denied Elliott's request to block the shareholders meeting, which will be held July 17 as planned. Although the merger proposal will be approved if two-thirds of the votes cast at the meeting are in favor, foreign investors hold roughly 33% of Samsung C&T's outstanding shares, leaving little leeway.
Samsung held a briefing for shareholders late last month, something it did not do when the merger plan was announced. It promised to boost its payout ratio, hinting at worries about shareholder pressure.