For­eign fund’s fight with Sam­sung gal­va­nizes hedge fund share­hold­ers


Thou­sands of South Korean in­vestors are back­ing an Amer­i­can hedge fund’s bid to thwart a busi­ness com­bi­na­tion be­tween Sam­sung com­pa­nies that they ar­gue will only en­rich the coun­try’s wealth­i­est fam­ily.

At stake: Bil­lions of dol­lars for the Lee fam­ily that founded Sam­sung and South Korea’s im­age as a fair place for in­vestors, big and small.

Last month, Sam­sung an­nounced that its de facto hold­ing com­pany Cheil In­dus­tries, which op­er­ates fash­ion, cater­ing and theme park busi­nesses, will take over Sam­sung C&T, a builder of sky­scrapers and trader of goods.

But the takeover ra­tio, which gives a mere 0.35 share in the new en­tity for each C&T share, prompted El­liott As­so­ci­ates, the Amer­i­can hedge fund that is the third-largest in­vestor, to take le­gal ac­tion against the deal. The fund says the takeover is un­fair to C&T share­hold­ers be­cause it un­der­val­ues the com­pany.

De­spite the poor im­age of for­eign hedge funds in South Korea, many in­vestors here agree with El­liott.

The takeover “is far from be­ing fair or rea­son­able,” said Kim Gyeong-hwan, a 40-yearold den­tist in Seoul who owns about 40 mil­lion won (US$36,000) of shares in Sam­sung C&T. “El­liott’s ar­gu­ment is rea­son­able. Share­hold­ers are own­ers of the com­pany, not the head of the com­pany.”

Few buy Sam­sung’s ar­gu­ment that its plan for one com­pany in the em­pire to take over another will cre­ate busi­ness ben­e­fits. The deal is in­stead seen as cru­cial for the once-in-agen­er­a­tion lead­er­ship tran­si­tion un­der­way at Sam­sung, which has ac­cel­er­ated since pa­tri­arch Lee Kun-hee, 73, was hos­pi­tal­ized af­ter suf­fer­ing a heart at­tack in May last year.

His son and heir ap­par­ent Lee Jae-yong does not have a ma­jor share­hold­ing in Sam­sung Elec­tron­ics Co., the crown jewel in the Sam­sung em­pire. In­her­it­ing his fa­ther’s shares in Sam­sung Elec­tron­ics or his stakes in other key Sam­sung firms that have stakes in the con­sumer elec­tron­ics gi­ant would in­cur heavy in­her­i­tance taxes that could go over US$5 bil­lion.

But Lee, 47, is a ma­jor share­holder in Cheil thanks to shares he was ef­fec­tively gifted be­fore the com­pany went public. If Cheil takes over Sam­sung C&T, Lee will con­trol its 4.1 per­cent stake in Sam­sung Elec­tron­ics that would cost him US$7 bil­lion if he had to buy the shares on the mar­ket.

The groundswell of share­holder ac­tivism in sup­port of El­liott As­so­ci­ates is a de­par­ture from South Korea’s typ­i­cal hos­til­ity to for­eign funds and shows that weak cor­po­rate gov­er­nance, of­ten cited over­seas as a risk of in­vest­ing in Sam­sung and other fam­ily-con­trolled con­glom­er­ates, is get­ting grow­ing at­ten­tion in South Korea. Most of the coun­try’s big­gest com­pa­nies are pub­licly traded but the fam­i­lies who founded them one or two gen­er­a­tions ago re­tain dis­pro­por­tion­ate in­flu­ence, irk­ing other share­hold­ers who feel the busi­ness elite treats public com­pa­nies as their per­sonal prop­erty.

Sam­sung says the pro­posed takeover deal and ra­tio are le­gal. It says the ra­tio is based on Sam­sung C&T’s re­cent share price. It was near a five-year low be­fore the deal was an­nounced, a per­for­mance at odd with its ro­bust fi­nances.

Kim, the den­tist, is lead­ing ef­forts to en­sure that Sam­sung C&T man­age­ment, its board and other share­hold­ers hear their voices, in­clud­ing South Korea’s Na­tional Pen­sion Ser­vice, which has a 9.9-per­cent stake in C&T and has not ex­pressed its stance on the deal. More than 2,000 share­hold­ers in C&T have gath­ered at an online com­mu­nity, vow­ing to vote against the deal, while oth­ers sup­port­ing El­liott have writ­ten to the court that will hear the case.

El­liott’s ma­neu­ver­ing has tapped into dis­con­tent in South Korea with how reg­u­la­tors, the media, and the coun­try’s pen­sion ser­vice, are not stand­ing up for share­hold­ers.

“Ev­ery­one knows that the merger was an­nounced for suc­ces­sion and in­her­i­tance, not for the com­pany’s value or for share­hold­ers’ profit,” said Chae Yi-bae, an an­a­lyst at the Cen­ter for Good Cor­po­rate Gov­er­nance. “Now vice chair­man Lee Jae-yong has lost trust from mar­kets and from share­hold­ers.”


In this June 23 photo, Lee Jae-yong, vice chair­man of Sam­sung Elec­tron­ics Co., speaks dur­ing a press con­fer­ence at the com­pany’s head­quar­ters in Seoul.

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