Lee Jae-yong may lose control over Samsung Electronics if found guilty of accounting fraud

Posted on : 2021-02-24 16:49 KST Modified on : 2021-02-24 16:49 KST
Lee would be ineligible to exercise voting rights for his shares in Samsung Life if sentenced to one year in prison or a harsher penalty
Samsung Vice Chairman heads to the Seoul High Court for his trial on Jan. 18. (Kim Hye-yun, staff photographer)
Samsung Vice Chairman heads to the Seoul High Court for his trial on Jan. 18. (Kim Hye-yun, staff photographer)

Samsung Electronics Vice Chairman Lee Jae-yong’s fate at the company is unclear in the wake of a notification by the Ministry of Justice (MOJ) on Feb. 15 — but the judicial risks he faces are not limited to restrictions on his employment, analysts predict.

If convicted in a current trial concerning accounting fraud at Samsung Biologics, he would also face restrictions on his voting rights for shares in Samsung Life Insurance that he is poised to inherit from his late father Lee Kun-hee. With Samsung Life representing a key link in the group’s corporate governance structure, this difference is very likely to spark changes to the group’s overall framework.

Governance structure threat may go beyond employment restrictions

According to the Hankyoreh’s investigation on Feb. 22, Lee would be ineligible to exercise voting rights for anything beyond 10% of his shares in Samsung Life if sentenced to one year in prison or a harsher penalty in the Samsung Biologics accounting fraud case, which is currently in its first trial.

The Act on Corporate Governance of Financial Companies lists imprisonment or harsher penalties for violations of financial laws as grounds for disqualifying an individual from being a majority shareholder in a financial company.

Currently, Samsung Life’s majority shareholder (20.76%) is the late Lee Kun-hee, a portion of whose shares Lee Jae-yong is scheduled to inherit. If he inherits all of his father’s shares, he may decide to sell off the portion beyond 10%, for which he would not be able to exercise voting rights.

Samsung Life is a key link in the Samsung Group’s corporate governance structure. In terms of investment linkages, Samsung centers around a framework connecting Lee Jae-yong with Samsung C&T, Samsung Life and Samsung Electronics. In effect, his control over Samsung Electronics is exercised via the “intermediary” of Samsung Life.

Under the current system, the governance structure stands to undergo changes if Lee loses his eligibility to be a majority shareholder in Samsung Life. Specifically, Samsung Life’s current number two shareholder, Samsung C&T (19.34%), would become its majority shareholder.

The disqualification issue does not arise if Lee Kun-hee’s shares are inherited in full not by Lee Jae-yong, but by one or both of his sisters (Lee Boo-jin and Lee Seo-hyun) or his mother (Hong Ra-hee). But since that inheritance scenario would deal a major blow to Lee Jae-yong’s control over Samsung Electronics as a key affiliate within the group, business observers say it is unlikely to come to pass.

20th National Assembly gives Samsung breathing room

Thanks to a delay in National Assembly legislation, the dilemma confronting Lee Jae-yong has been pushed a bit farther down the road.

The Moon Jae-in administration has been pushing to amend the Act on Corporate Governance of Financial Companies as one of three “economic democratization” laws in the financial area. But after little progress was made under the 20th National Assembly, the legislation was presented almost as soon as the 21st convened.

The amendment would broaden grounds for disqualification from financial company majority shareholder status from violations of financial laws to also include violations of the Act on the Aggravated Punishment, etc. of Specific Economic Crimes.

Had the amendment been passed during the 20th National Assembly, Lee would have faced not only employment restrictions but also restrictions on voting rights for his Samsung Life shares (provisional) when he was handed a prison sentence last January in a case related to government influence-peddling.

“Due to other priority legislation such as the Internet-Only Banking Special Act, [the amendment] got sidelined under the 20th National Assembly, and it wasn’t actively discussed by the standing committee [National Policy Committee],” explained a senior official with the Financial Services Commission.

“Now that the administration has presented it again [before the 21st National Assembly], we plan to work toward its legislation actively,” the official added.

Jun Sung-in, a professor of economics at Hongik University, said Lee Jae-yong “would be able to exercise 10% voting rights even if his Capital Markets Act conviction is upheld, but it would be difficult for him to be involved in management because of the pressure from institutional investors and other shareholders.”

“In the long term, Samsung is going to revamp its corporate governance structure in a way that removes Samsung Life from the investment framework,” he predicted.

By Song Chae Kyung-hwa, staff writer

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

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