Court: "Samsung Bio violates accounting standards, unfairly evaluates investment stocks"

Different from Criminal Case Verdicts Including Chairman Lee Jae-yong

The first-instance court in the administrative lawsuit filed by Samsung Biologics (Samsung Bio) explicitly stated that Samsung Bio's 2015 accounting treatment of the loss of control over Samsung Bioepis (Bioepis) violated accounting standards.

Incheon Songdo Samsung Biologics Plant 4 Exterior View [Photo by Samsung Biologics]

According to the legal community on the 19th, the Seoul Administrative Court Administrative Division 3 (Presiding Judge Choi Su-jin) ruled in favor of the plaintiff on the 14th in the cancellation lawsuit filed by Samsung Bio against the Securities and Futures Commission (SFC) regarding correction demands, but included this specific finding in its judgment.

The court stated, "Samsung Bio claimed that the change from sole control to joint control was made without any reasonable grounds mainly to avoid issues such as capital erosion, and treated the timing as December 31, 2015, thereby accounting for the loss of control over Bioepis. This is judged to be a violation of accounting standards, resulting in an improper fair value assessment of Bioepis investment stocks, which led to an overstatement of related assets and equity."

Samsung Bio argued that the call option became a substantive right following the domestic sales approval of Bioepis's major products and the preliminary approval in Europe in 2015, marking achievements in the biosimilar business, and that Samsung Bio lost control over Bioepis. As Biogen, Bioepis's joint venture partner, was increasingly likely to exercise the call option (stock purchase right), Samsung Bio contended that it shifted from sole control to joint control with Biogen.

However, the court did not accept this argument. The court judged that during the merger process of the former Samsung C&T, when Samsung Bio's call option had to be recognized as a liability, Samsung Bio discussed accounting treatments for loss of control to avoid capital erosion. In other words, the result of loss of control accounting was predetermined, and the cause was fabricated afterward.

The court noted that Samsung Bio initially considered Bioepis's NASDAQ listing as the main reason for loss of control, but when the NASDAQ listing failed, it alternatively claimed the 'positive opinion from the Committee for Medicinal Products for Human Use (CHMP) under the European Medicines Agency (EMA) on Bioepis's major drugs at the end of 2015.'

The court also pointed out that Samsung Bio arbitrarily created supporting documents to fix the loss of control timing as December 31, 2015. The court said, "Samsung Bio requested credit rating agencies to prepare evaluation letters stating that fair value assessment of the call option was impossible as of December 31, 2014, and even drafted the content of such evaluation letters themselves. Moreover, they requested that the date of the evaluation letter be backdated to December 31, 2014."

This differs from the ruling of the first-instance criminal court in the case involving Chairman Lee Jae-yong and others in February. At that time, the court, based on CHMP's sales approval recommendation, stated, "The call option became a substantive right from the 2015 fiscal year, so there was a fundamental change in corporate value according to Bioepis's performance," and "It cannot be acknowledged that Samsung Bio's finance team intentionally accounted for loss of control to avoid capital erosion."

Considering various evidence including this, the court concluded that Samsung Bio's accounting treatment of loss of control was reasonable, and therefore, allegations of accounting fraud could not be recognized.

Since the judgments in separate lawsuits may influence each other, it is expected that Samsung, the prosecution, and financial authorities will engage in new disputes over this judgment during the upcoming appeals process.

However, there is also an opinion that the first-instance acquittal of Chairman Lee was not solely based on Samsung Bio's accounting treatment process but was a comprehensive judgment on the validity of the control change itself, so it is unlikely that the two rulings will directly affect each other.

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