Fair Trade Commission imposes 234.9 billion won fine on Samsung for unfair in-house meal support... Choijisung reported

"Unfair Support Led by Mijeonsil"... Largest Ever Fine for Unfair Support Standards
Viewed Samsung C&T Merger as 'Cash Cow', but Draws Line on Vice Chairman Lee Jae-yong's Succession Link and Owner's Involvement

Chairman Jo Sung-wook of the Korea Fair Trade Commission attended the 'Party-Government-Blue House Euljiro Livelihood Issues Meeting' held at the National Assembly on the 22nd and delivered a greeting./Photo by Yoon Dong-joo doso7@

[Sejong=Asia Economy Reporter Kwon Haeyoung] The Fair Trade Commission (FTC) has decided to impose corrective orders and a total fine of 234.9 billion KRW on four companies including Samsung Electronics and Samsung Welstory for allegedly awarding 100% of in-house meal supply contracts to an affiliated catering company and guaranteeing high profit margins. Samsung Electronics and former Samsung Future Strategy Office (FSO) chief Choi Jiseong will be referred to the prosecution. The FTC judged that Welstory was partially used as a 'cash cow' under the leadership of the FSO to raise funds for the merger with Samsung C&T, where Samsung Electronics Vice Chairman Lee Jae-yong is the largest shareholder, but it did not find any direct connection to Lee’s management succession or involvement by the family of the group’s head.

◆ "Welstory’s profit guarantee led by FSO"… Profit margin 15.5%, five times the competitor average＝ The FTC announced on the 24th that Samsung Electronics, Display, Electro-Mechanics, and SDI, four companies, have unfairly supported Welstory by awarding all in-house meal supply contracts to Welstory through non-competitive contracts from April 2013 to the 2nd of this month, enabling Welstory to maintain high profits consistently.

The fine of 234.9 billion KRW imposed this time is the largest ever for unfair support acts. The fine imposed on Samsung Electronics (101.2 billion KRW) is also the largest for a single company (Display 22.8 billion KRW, Electro-Mechanics 10.5 billion KRW, SDI 4.3 billion KRW, Welstory 96.1 billion KRW).

Yook Sung-kwon, director of the FTC’s Corporate Group Division, said, "This action is a strict sanction against acts where multiple affiliates provided excessive economic benefits over a long period by funneling work to companies with high ownership by the group head’s family," adding, "It is significant in that it detected and sanctioned covert support acts among affiliates that evaded regulations against private interests of the group head’s family."

According to the FTC, Samsung’s FSO instructed in October 2012 to devise a plan to secure optimal profits for Welstory. At that time, complaints about meal quality from Samsung Electronics employees surged, and Welstory’s direct profit margin sharply dropped from 22% to about 15% due to additional investment in food material costs. Then FSO chief Choi Jiseong received and finalized in February 2013 a contract structure change plan guaranteeing Welstory’s food material cost margin, payment of consignment fees, and automatic reflection of inflation and wage increases. This was also reported to Lee Boo-jin, then Everland Strategy President.

Eventually, starting with Samsung Electronics in April 2013, Display, SDI, and Electro-Mechanics signed non-competitive meal supply contracts with Welstory under this contract structure, which continues to this day. The four companies, including Samsung Electronics, attempted competitive bidding for cafeteria contracts, but the FSO reportedly halted it. As a result, Welstory achieved an average direct profit margin of 25.27% over the past nine years from the four companies including Samsung Electronics. The operating profit margin was 15.5%, five times the average profit margin (3.1%) of the top 11 competitors during the same period. Above all, based on stable profits, Welstory used a bidding strategy to lower operating profit margins by 3% for external business sites, leveraging this to expand market dominance, which the FTC judged to have undermined fair trade order.

[Image source=Yonhap News]

◆ "Funding channel for Samsung C&T merger"… Draws a line on involvement of group head family = The FTC viewed that under the leadership of then FSO chief Choi Jiseong, Samsung Electronics and three other companies unfairly supported Welstory and partially contributed to raising funds for the merger of parent company Cheil Industries (Everland) and the former Samsung C&T. Welstory, a 100% subsidiary of Everland where Vice Chairman Lee Jae-yong was the largest shareholder, used the profits it earned to cover the large-scale funding needs during the Samsung C&T merger process. Lee currently holds 18.13% of Samsung C&T shares, making him the largest shareholder.

Looking at the first quarterly report disclosed by Samsung C&T after the merger of former Samsung C&T and Cheil Industries, 74.76% of Samsung C&T’s total operating profit came from Welstory. In fact, when Samjong Accounting Corporation conducted a valuation before the merger of Samsung C&T and Cheil Industries, the value of the Welstory division was 2.8 trillion KRW, almost equal to the value of former Samsung C&T (3 trillion KRW).

Director Yook said, "Samsung C&T, where the group head family is the largest shareholder, received a significant portion of Welstory’s net income from 2015 to 2019 as dividends (totaling 275.8 billion KRW)," adding, "It appears that the profits Welstory earned through internal transactions were attributed to Samsung C&T in the form of dividends and used to cover large-scale funding needs such as share buybacks, exercising stock purchase rights, and expanding dividends to appease shareholder opposition."

The FTC judged that although the FSO used Welstory as a funding channel necessary for the Samsung C&T merger, there was no direct connection between this act and Vice Chairman Lee’s succession. It also found no involvement by the group head family. While emphasizing that Welstory was utilized for the Samsung C&T merger, which strengthened the group head family’s control within the group, the FTC reached a somewhat contradictory conclusion that there was no direct link to succession.

Director Yook said, "We will strengthen monitoring of covert unfair support acts among affiliates that evade regulations against private interests of the group head family and respond strictly when detected," adding, "This measure is expected to improve the competitive conditions for rival catering companies that were deprived of bidding opportunities and competed under unfavorable conditions, thereby promoting fair competition in the group meal market."

This content was produced with the assistance of AI translation services.