"The Era of Lee Jae-yong"... Will Samsung Revise Its Long-Standing "Governance Structure"?

Weak Governance Structure... Chairman Lee's Stake Only 1.63%
Large-Scale Governance Restructuring Inevitable if 'Samsung Life Act' Passes
Possibility of Samsung C&T 'Spin-Off' Emerges

[Asia Economy Reporter Han Yeju] Will Samsung Group embark on a restructuring of its governance structure to mark the 'Lee Jae-yong era'?

The restructuring of Samsung Group's governance has been a long-standing issue. Unlike SK or LG, which have established holding company systems, Samsung Group continues to maintain a circular shareholding structure among its affiliates. The structure follows 'Chairman Lee Jae-yong and family → Samsung C&T → Samsung Life Insurance → Samsung Electronics,' where the controlling family, including Chairman Lee who is the largest shareholder of Samsung C&T with 17.97%, indirectly controls Samsung Life Insurance and Samsung Electronics through their 31% stake in Samsung C&T. Chairman Lee's direct stake in Samsung Electronics is only 1.63%. This is why there are calls for a full-scale shift to a holding company system to lay the foundation for the 'New Samsung' and solidify 'responsible management.'

According to the business community on the 1st, Samsung Group has attempted several times to restructure its governance since Chairman Lee took the helm, but these efforts failed. In November 2016, Samsung Electronics announced it would consider transitioning to a holding company, but the plan was completely withdrawn in April the following year. This was influenced by controversies such as Chairman Lee's trial over the political scandal, improper mergers of affiliates, and accounting fraud.

The '2nd Samsung Compliance Committee,' launched this year, also selected governance improvement as one of its top priorities. In its annual report published last August, the Compliance Committee stated, "The most significant interest related to Samsung is the improvement of governance," and added, "We will listen carefully to advice from external experts and opinions from internal members to propose reasonable solutions."

Chairman Lee solidified his control over Samsung C&T through the merger with Cheil Industries but is evaluated as having weak control over Samsung Electronics. Even including his family, executives, and special affiliates such as major Samsung subsidiaries, the stake amounts to only 20.8%. Due to this weak control, the risk of hostile mergers and acquisitions (M&A) by external forces is considered a vulnerability of Samsung Electronics, leading to widespread views that structural reform to strengthen control is necessary. A business insider said, "To strengthen Chairman Lee's control, Samsung C&T needs to acquire Samsung Electronics shares held by Samsung Life Insurance," adding, "It may not move immediately after the chairman's inauguration, but concerns about improving the fragile governance structure are inevitable."

The key issue is how to handle the shares held by Samsung Life Insurance, the largest shareholder of Samsung Electronics (8.51%, 581.6 million shares). This is because the amendment to the Insurance Business Act, commonly called the 'Samsung Life Insurance Act,' is pending in the National Assembly. The bill stipulates that the evaluation method for affiliates' shares held by insurance companies be based on market value and limits holdings to within 3% of total assets. If the bill passes, Samsung Life Insurance would have to sell a large portion of its Samsung Electronics shares worth over 20 trillion won, significantly weakening Chairman Lee's control over Samsung Electronics.

There is also the possibility of Samsung C&T acquiring Samsung Electronics shares in preparation for the Insurance Business Act amendment, but the burden has increased due to the revised three Fair Economy Acts. If Samsung C&T acquires Samsung Electronics shares, the holding ratio would exceed 50%, forcing a mandatory transition to a holding company. Previously, holding companies were required to own at least 20% of their subsidiaries' shares, but the law has changed, raising the mandatory shareholding ratio to 30%.

Some suggest the possibility of Samsung C&T transitioning to a holding company through a spin-off. This would split the business holding company, consisting of Samsung Electronics and others, and the financial holding company, consisting of Samsung Life Insurance and others. To hold more than 30% of Samsung Electronics shares, Samsung C&T faces the obstacle of large-scale fundraising. Samsung C&T currently holds only 5.01% of Samsung Electronics shares and needs to increase this by an additional 24.99%. Even combining the 8.51% held by Samsung Life Insurance, it still needs to secure 16.48%. The funds required to acquire 16.48% of Samsung Electronics, which has a market capitalization of about 335 trillion won, amount to approximately 55 trillion won.

Lee Seung-woong, a researcher at Ebest Investment & Securities, analyzed, "If Samsung transitions to a holding company system, the possibility of Samsung C&T's holding company transition through a spin-off seems high," adding, "During the spin-off process, Samsung C&T's treasury shares can be utilized, and it is efficient as it can simultaneously resolve the holding company transition and the issue of separation between finance and industry."

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