The founding family of Samsung is royalty in South Korea, and the country’s Supreme Court, it turns out, is not inclined to regicide. In late May it ruled that Everland, the privately held de facto holding company for the sprawling conglomerate, did nothing wrong when it sold convertible bonds in 1996 at a price prosecutors had contended was unreasonably low. As the bonds were sold for more than the face value attributed to them by the firm, the sale was legitimate, the court said, clearing Samsung’s ailing 67-year-old patriarch, Lee Kun-hee, of charges of breach of trust.
Everland’s bond sale ultimately had the effect of transferring control of the Samsung empire to Mr Lee’s only son, Lee Jae-yong. The other shareholders in Everland, many of whom were closely connected to the Lee family, and all of whom had the option of buying some of the bonds, politely declined. That allowed the younger Mr Lee and his sisters to buy them all.
The Lee family now owns 46% of Everland, which in turn owns 13.3% of Samsung Life, South Korea’s biggest life insurer. Samsung Life owns 7.2% of Samsung Electronics, the world’s biggest electronics company, which owns 35.3% of Samsung Card, the country’s biggest credit-card firm—which in turn owns 25.6% of Everland. The convoluted structure (see chart) helps to deter would-be raiders. Its confusing nature is the source of much criticism within South Korea, especially as other conglomerates such as LG Group have become more transparent. Samsung has promised to simplify things.
The Supreme Court’s ruling on Everland’s bond sale removed doubts about whether Lee Jae-yong would preside over the Samsung empire as his father once did. The chaebol, as South Koreans call their conglomerates, recorded sales of $174 billion in 2007, equivalent to 17% of the country’s GDP that year. Samsung, under Lee Kun-hee’s two-decade reign, focused on design, marketing, and research and development. A crucial element of its success was its ability to make decisions rapidly within a strict hierarchy.
The elder Mr Lee resigned last year from several jobs in the group after after being found guilty of tax evasion. But many South Koreans assume that he continues to exercise influence over the chaebol. Meanwhile his son has been travelling the world visiting Samsung offices and meeting with industry titans such as Sony’s Sir Howard Stringer and Nintendo’s Satoru Iwata. Other Samsung executives, including the chairman and the chief executive of Samsung Electronics, have accompanied the younger Mr Lee on his foreign travels.
An extrovert, unlike his reclusive father, the younger Mr Lee is referred to within the chaebol as “J.Y.”. He speaks English and Japanese, having studied at Keio and Harvard universities. But a former Samsung executive says that some senior managers are sniffy about his youth (he is 40) and the failure of an e-commerce venture he managed. At any rate, there is turmoil within the group: many senior executives departed earlier this year amid cost cuts.
There is more trouble coming. By April 2012, under a law that prohibits finance companies’ owning stakes of more than 5% in non-financial firms, Samsung Card will have to sell a 20.6% stake in Everland. Such a sale may trigger a restructuring that could generate big tax bills for Samsung and might threaten the Lee family’s control of the group. There is speculation that Samsung Electronics will become a holding company for the group’s manufacturing units and Samsung Life will control the group’s financial companies. The complicated share sales are just beginning.