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Students look at their smartphones at the public relations hall at Samsung Electronics headquarters in Seoul’s Seocho district

Samsung Electronics has decided not to adopt a holding company system.

Given Samsung’s past push for the holding company plan as a way of improving its governance structure and tightening Vice Chairman Lee Jae-yong’s grip on the management reins, attention is now turning to the effects the decision will have on two pressing issues for Samsung: management succession and governance structure reorganization.

Samsung Electronics announced on Apr. 27 that its board of directors “has decided not to pursue the transition to a holding company.” In a “shareholder value enhancement plan” published on Nov. 29 after the US hedge fund Elliott first proposed the holding company transition idea in Oct. 2016, Samsung Electronics said it would spend six months examining the idea.

As reasons for abandoning the holding company plan, Samsung Electronics cited its conclusion that the move would not help in boosting competitiveness, along with the burden of Samsung financial affiliates selling off their Samsung Electronics equity and moves by politicians to step up regulations on holding companies. According to the Act on the Structural Improvement of the Financial Industry, chaebol financial companies can hold only up to 5% stock in affiliates per area. Financial affiliates like Samsung Life and Samsung Fire & Marine Insurance currently own an 8.9% share of Samsung Electronics, which exceeds the 5% cap but has been permitted because the stock was already in its possession. If Samsung Electronics had adopted a holding company system, the 8.9% share in it owned by Samsung financial affiliates would have been regarded as newly acquired, and the affiliates would have had to dispose of the 3.9% difference above 5%. The Insurance Business Act also bars Samsung Life from owning affiliate stock in excess of 3% of its 200 trillion won (US$176.9 billion) in total assets, or 6 trillion won (US$5.3 billion). The acquisition value of Samsung affiliate stock currently owned by Samsung Life, including its 7.9% share of Samsung Electronics, is in the mid-5 trillion won range. If Samsung Electronics had gone over to a holding company system, the value of Samsung Life’s share in Samsung Electronics would have risen to 9 trillion won (US$8 billion), meaning that around 3 trillion won would have to be sold off, Samsung Electronics estimated.

Also influencing the decision were pledges made by presidential candidates Moon Jae-in from the Minjoo Party and Ahn Cheol-soo from the People’s Party, who said they would crack down on chaebol using treasury stock to strengthen their ruling family’s governance grip during the holding company transition process. In its announcement on Apr. 27, Samsung Electronics said it planned to continue with its current purchase and retirement of 9.3 trillion won (US$8.2 billion) in treasury stock, while retiring all of the 13.3% in treasury stock (market value 40 trillion won, or US$35.4 billion) it currently owns.

“We have decided to retire our treasury stock in the interest of boosting shareholder value in consideration of a stable financial situation,” Samsung Electronics said.

The decision may be connected to Lee Jae-yong’s current trial. During the trial, Samsung has claimed that the 2015 merger of Samsung C&T and Cheil Industries was a decision made by CEOs at different affiliates to achieve a synergy effect, and was unrelated to the transfer of management rights. Analysts said Samsung Electronics’s decision to abandon the holding company plan was made to head off possible interpretation of the Samsung C&T measure as actually being intended for the management authority transfer - contrary to Samsung’s claims.

“It looks like [Samsung Electronics] decided it couldn’t go ahead with the holding company transition at a time when Lee Jae-yong is in court denying bribe offering charges by saying the Samsung C&T merger was pursued because of its synergy effect,” said an analyst at one major securities company, speaking on condition of anonymity.

But opinions are divided on whether Samsung Electronics’s holding company plans have been mothballed for good. The company itself asked observers to see the plans’ abandonment as “permanent, not temporary” and said the decision had been “reported to Vice Chairman Lee Jae-yong beforehand.” But many experts noted that the governance structure linking the ruling Lee family in turn to Samsung C&T, Samsung Life, and Samsung Electronics will be difficult to sustain, and predicted the Samsung Electronics holding company issue had only temporarily disappeared from view. Samsung’s 18.45% share of Samsung Electronics is not large, and the Lee family’s share of that is just 4.91%, including Lee Jae-yong’s 0.6%. For this reason, it has relied on the 7.9% stake owned by Samsung Life - a situation that has become more and more difficult over time.

The group Solidarity for Economic Reform predicted, “Once the integrated financial oversight system Moon Jae-in and Ahn Cheol-soo have both pledged to institute is in effect, affiliate shares owned by Samsung Life won’t be recognized as capital, and it will become harder for them continue owning shares of Samsung Electronics.” It’s a situation where Samsung urgently needs an alternative approach to govern Samsung Electronics without relying on Samsung Life.

“The question of when Samsung begins pursuing the holding company idea again is going to depend on the outcome of Lee Jae-yong’s trial, when he returns to management, and the chaebol policies of the next administration,” predicted Hansung University professor Kim Sang-jo.

By Kwack Jung-soo, business correspondent

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