hankyoreh

Samsung C&T Corporation (Hankyoreh archives)

Depending on the results of an investor-state dispute that US hedge fund Elliott Management has filed against the South Korean government, the companies and managers that were implicated in the problematic merger between Cheil Industries and Samsung C&T, including the management at Samsung BioLogics (Samsung Bio), could be sued by the government for as much as hundreds of billions of won in damages.

Sources at South Korea’s Ministry of Justice told the Hankyoreh on July 7 that Elliott Management had initiated an investor-state dispute in July 2018, claiming at least US$718 million in damages from the South Korean government for pressuring the National Pension Service (NPS) to support the merger of Cheil Industries and Samsung C&T. Even though Samsung C&T was far superior in terms of operating profit and capital to Cheil Industries, the NPS agreed to a manipulated merger ratio, causing Samsung C&T stockholders to suffer serious losses, the hedge fund claims.

Judicial rulings to date on the influence-peddling scandal give the South Korean government reason to be concerned about the outcome of Elliott’s lawsuit. Moon Hyung-pyo, former health minister, and Hong Wan-sun, former director of the pension fund’s operating division, were both convicted by district courts of exercising inappropriate influence on the pension fund during the merger, with their convictions upheld on the first appeal. There is also mounting evidence that ties the 2015 merger with allegations of accounting fraud at Samsung Bio, allegations that are currently being investigated by the public prosecutors.

The Supreme Court is expected to make the final ruling on the influence-peddling case as early as August, and if it finds that bribes were exchanged between the administration of former President Park Geun-hye and Samsung Electronics Vice Chairman Lee Jae-yong, it’s likely to further bolster Elliott’s case against the South Korean government.

“The Supreme Court’s ruling could have the effect of nailing down the facts in the investor-state dispute proceedings. There’s unlikely to be a more authoritative ruling than that, so the Supreme Court’s decision could speed up the outcome of Elliott’s lawsuit,” said a professor who is an expert on international dispute litigation.

If the South Korean government loses the lawsuit, it could respond in two ways. First, it could exercise its right to indemnity against complicit public servants under the State Compensation Act. This act empowers the central government and local governments to first pay damages to those who have been harmed by the illegal actions of the state and then to seek restitution from the public servants who were actually responsible for that illegal activity. The public servants in this case would be figures such as Park Geun-hye and Moon Hyung-pyo.

The South Korean government could also claim massive damages from private sector firms such as Samsung by demanding that the companies and businesspeople implicated in the merger of Samsung C&T and Cheil Industries foot the bill for a court-awarded government payout to Elliott. The people who would actually be on the hook for this could include Lee Jae-yong and the management of Samsung Bio.

If the lawsuit does go against the government, said Lee Hae-yeong, a professor of international relations at Hanshin University, “The state can claim damages against the companies in question. However, that would require demonstrating that those companies are in fact responsible.”

Even now, the South Korean government is litigating more than 17.1 billion won (US$14.48 million) of damages over engine defects in a Surion helicopter that made an emergency landing in North Jeolla Province in December 2015. The defendants in that case are Korea Aerospace Industries, which manufactured the helicopter, and Hanwha Aerospace, which developed the engine. In short, the definite identification of the guilty parties in the investigation into Samsung Bio would increase the likelihood of the government suing for damages.

Some South Korean NGOs also argue that the pension fund should file a damages lawsuit against Samsung because of losses occurred during the merger between Samsung C&T and Cheil Industries. That’s the argument advanced by People’s Solidarity for Participatory Democracy and other NGOs during a press conference on July 2. The NGOs said that the merger had caused between 334.3 and 603.3 billion won (US$ in losses for the pension fund.

By Lim Jae-woo, staff reporter

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