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Vice Chairman Lee Jae-yong

Two key links in the Samsung governing structure, Cheil Industries and Samsung C&T, are being merged and relaunched under the Samsung C&T name.

The move suggests Samsung is speeding the succession of group control under a new system, with Cheil Industries’ majority shareholder, third-generation leader and Samsung Electronics vice chairman Lee Jae-yong gaining a tighter grip over the group.

Cheil Industries and Samsung C&T each approved the merger at board of directors meetings on May 26, Samsung Group said. The merger ratio stands at 1-to-0.35, which Cheil Industries issuing new stocks for Samsung C&T shareholders as a method for merging the corporation. The companies are now set to hold a general shareholders’ meeting on July 17 before completing the merger on Sept. 1.

Lee Jae-yong, who previously owned 23.2% of Cheil Industries, will be left with a 16.5% share of the post-merger Samsung C&T. His sisters, Hotel Shilla CEO Lee Boo-jin and Cheil Industries executive vice president for apparel Lee Seo-hyun, will each own 5.5% of the company after the merger. Their father Lee Kun-hee’s shares of the two companies will become a 2.9% stake of the newly merged one. In total, members of the Lee family will own 30.4% of the new Samsung C&T.

With the merger, the group’s governance structure goes from a chain linking Cheil Industries, Samsung Life, Samsung Electronics, and Samsung C&T/Samsung SDI to a simple one tying together the newly merged Samsung C&T, Samsung Life/Samsung Electronics, and Samsung SDI. The post-merger Samsung C&T will own 4.1% of Samsung Electronics and 19.4% of Samsung Life, which owns its own 7.2% share of Samsung Electronics.

Lee‘s previous appointment to replace his father as chairman of the Samsung Foundation and the Samsung Life Public Welfare Foundation gave him those foundations’ shares of Samsung Life (6.9%) and Samsung Fire (3.1%), as well as more indirect control over Samsung Electronics (4.1%).

The process was set in motion with the acquisition of Cheil Industries’ fashion division by Samsung Everland (now Cheil Industries) in the second half of 2013 has since included the merger of Samsung SDI with Cheil Industries, the listing of Samsung SDS and Cheil Industries, and the sale of petrochemical and defense affiliates. With the latest mixture, the shape of the Samsung Group’s new governing structure becomes even clearer.

One potential scenario that has been repeatedly offered would involve the conversion of the Samsung Group to a holding company. As recently as late 2014, Samsung maintained that such a move would be too costly to make. Recently, it has made a subtle shift on the issue, claiming the group had “never officially talked about conversion to a holding company.”

“The issue of the conversion‘s costs could be solved easily by listing Samsung Display,” argued one securities company analyst.

“The question is Samsung’s level of commitment to the holding company idea,” the analyst added.

Also, while the merger may have simplified the current governing structure, the holding company transition could be an unavoidable step in building up control over the group‘s core component, Samsung Electronics. The most likely scenario is perhaps an equity spinoff dividing Samsung Electronics between Samsung Holdings (which receives investment from Samsung Electronics) and a project company, with an additional merger between Samsung Electronics Holdings and the new Samsung C&T to produce a holding company.

The question for many observers is what the role will be for Samsung SDS, which the Lee family owns a large share of. Possible scenarios include the purchase of additional shares, the sales of existing shares for gift tax payment, or a merger with Samsung Electronics to increase the family’s ownership of the latter.

“I suspect we’re going to see a lot of breaking off and reattaching of major affiliates before the end of the year,” predicted Kim Sang-jo, director of the institute Solidarity for Economic Reform.

“Rather than changing the governing structure for the sake of inheritance and the succession of power, they should be making a bold decision to answer the demands of Korean society,” Kim said.

By Lee Jeong-hoon, staff reporter

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