Court rules against Samsung, finding C&T stock buyback price too low

Posted on : 2016-06-01 17:21 KST Modified on : 2019-10-19 20:29 KST
Unexpected victory for Ilsung Pharmaceuticals aligns with view that merger of Samsung C&T and Cheil Industries was unfair
Samsung Electronics Chairman Lee Kun-hee (left) and his son
Samsung Electronics Chairman Lee Kun-hee (left) and his son

After the general meeting of stockholders at Samsung C&T agreed to a merger with Cheil Industries in July 2015, Samsung Electronics Vice Chairman Lee Jae-yong, the presumed heir to the Samsung Group, was congratulated by an executive from the group’s Future Strategy Office.

“Should I really be congratulated about this?” was Lee’s worried response.

Lee’s worries have become reality. An appeals court has sided with Ilsung Pharmaceuticals, which held a 2.1% share in Samsung C&T before the merger, in a lawsuit against Samsung C&T. The court ruled that the stock buyback price that Samsung C&T offered Ilsung Pharmaceuticals when it objected to the merger was too low.

The court’s ruling comes as a shock for Samsung, which had thought its troubles were over after it managed to complete the merger despite opposition from Elliott Associates, a US-based hedge fund.

“The lower court had ruled against Ilsung Pharmaceuticals, so this ruling took us by surprise. Now it feels like this fire we put out has been reignited,” said a flustered source at Samsung.

Market insiders are describing Ilsung Pharmaceutical‘s unexpected victory over Samsung in the courts as a case of David beating Goliath.

Changes in major construction companies’ stock prices before Samsung C&T merger
Changes in major construction companies’ stock prices before Samsung C&T merger

“The courts have usually taken a conservative stance, but this was a rare example in which they aggressively used their discretionary power to endorse a complaint about the stock appraisal price,” said Kim Ju-yeong, an attorney with Hannuri Law.

“We’ll have to see how the Supreme Court rules, but this will probably have a big impact on similar cases in the future,” Kim predicted.

If the stock buyback price for Samsung C&T increases from the original price of 57,234 won (US$48.09) per share to the price of 66,602 won determined by the appeals court, Samsung C&T will owe Ilsung Pharmaceutical an additional sum of around 35 billion won (US$29.41 million).

But the total damage this will cause Samsung is expected to be even worse. The court’s ruling that the stock appraisal price did not adequately reflect the company’s value effectively confirms market suspicions that the swap ratio in the merger of Samsung C&T and Cheil Industries (1 to 0.35) and the merger itself were unfair. This only makes matters worse for the group, which is already dealing with investors‘ frustration with the sharp drop in stock prices at Samsung C&T following the merger.

Another challenge for the group is the court’s reference to suspicions that Samsung C&T‘s poor performance and falling stock price were deliberately engineered to produce a swap ratio that was advantageous to the family that owns the Samsung group.

“The family of Samsung Chairman Lee Kun-hee had a lower stake in pre-merger Samsung C&T and a higher stake in Cheil Industries. This means that a lower swap ratio for Samsung C&T was in the interest of Lee’s family,” the court observed.

As evidence, the court noted that the stock prices of other construction companies all rose as the housing market recovered just before the Samsung C&T board of directors agreed on the merger at the end of May 2015 while Samsung C&T‘s stock price was the only one to fall. The court also observed that the company had not increased the supply of new houses, nor had it won any major new contracts.

This gives ordinary stockholders reason to raise allegations about stock price manipulation.

The next question is how this will affect the transfer of power at Samsung to the third generation of the Lee family. The prevailing view in the market is that the primary objective of the Samsung C&T merger was to strengthen Lee Jae-yong’s control on the group. But the court’s ruling represents a serious challenge to the legitimacy of Lee’s attempts to do so.

On top of the scandals related to the illegal and unethical inheritance of wealth at Samsung (most infamously, the acquisition of convertible bonds at Samsung Everland for a cut-rate price in the late 1990s) and to funneling work to Samsung SDS in the 2000s, Lee now has a third blot on his record - the controversy over the unfair merger between Samsung C&T and Cheil Industries.

This also makes it harder for Samsung to move forward with the mergers of affiliates and holding company conversions that it had been planning as a way of strengthening Lee‘s hold on the group. Several approaches had been mooted in the market, including converting Samsung Electronics and Samsung Life Insurance into holding companies and splitting up Samsung C&T again and merging it with Samsung Electronics.

“Samsung insists that there are no problems since it obeyed the law, but the bare minimum of obeying the law isn’t enough. In order for Samsung to meet the expectations of the market and society, it needs to work a little harder to improve its ownership structure,” said Kim Sang-jo, director of Solidarity for Economic Reform.

If there is a silver lining for Samsung, it is that the ruling by the appeals court will not immediately apply to other investors who opposed the Samsung C&T merger. The higher stock buyback price will only be granted to stockholders like Ilsung Pharmaceuticals that opposed the merger and requested a stock buyback.

In addition, the ruling does not mean that Samsung C&T‘s swap ratio or the merger itself will be invalidated, at least for now. Another lawsuit filed by Ilsung Pharmaceuticals petitioning the courts to repeal the Samsung C&T merger is still pending.

Ordinary stockholders could sue Samsung C&T for damages for manipulating stock prices, but South Korea’s financial regulators would first have to demonstrate that illegal activity occurred.

By Kwak Jung-soo, business correspondent

Please direct questions or comments to [english@hani.co.kr]

 

 

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