Samsung's Family Feud - Business Week

Samsung's Family Feud

 

By Jun Yang on June 07, 2012, Business Week

 

 

 

 

 

 

During his long and controversial career, Samsung Electronics (005930) Chairman Lee Kun Hee has transformed his family’s dried fish and produce company into the world’s biggest maker of televisions and mobile phones, besting Sony (SNE) and Apple (AAPL) in the process. Now he must contend with rivals closer to home: his siblings. Billionaire Lee, 70 years old and South Korea’s wealthiest citizen, is facing down lawsuits filed by his older brother and sister. They hope to win a chunk of the stock that allows Lee to control the sprawling Samsung Group of companies, which logged $237 billion in sales last year.

 

Their late father, Lee Byung Chul, founded in 1938 what is today South Korea’s biggest business group, generating about 20 percent of that nation’s gross domestic product. Samsung controls more than 80 companies that make everything from armored vehicles and artillery guns for South Korea’s military to oil tankers and household appliances. The siblings’ demand that Lee Kun Hee hand over at least an $850 million stake in the group threatens to be a distraction at the worst possible moment. It also could complicate transition plans for Chairman Lee, whose son, Lee Jae Yong, has already been made chief operating officer of Samsung Electronics. (Update: on June 7 Samsung Electronics named Kwon Oh Hyun, head of its display and chip business, as chief executive officer. The younger Lee remains COO.) Chairman Lee “has grown Samsung to the point where Korea is called ‘Republic of Samsung,’” says Park Hyun Goon, author of Lee Kun Hee’s Agony, a book about Samsung succession published this year. “How would it make him feel if a share of that is taken away by his siblings or if his company goes down?”

 

 

 

 

 

 

The civil trial, which began on May 30, drags Lee back into a courtroom following a series of earlier legal run-ins. He was convicted along with other business leaders in 1996 of paying bribes to former Presidents Chun Doo Hwan and Roh Tae Woo to get favors and government contracts, although the businessmen claimed (unsuccessfully) that they were routine political donations. Lee received a pardon from then-President Kim Young Sam a year later.

 

Lee was again convicted in 2007, this time for tax evasion and breach of duty, in the wake of accusations by Kim Yong Chul, Samsung Group’s former top lawyer, that a slush fund was used to bribe government officials, prosecutors, and journalists. Prosecutors said that Lee evaded taxes on income by trading shares in Samsung units via hidden accounts held by other executives, and that he breached his fiduciary duty because he knew of illegal bond sales by two Samsung companies. As a result, in 2008, Lee quit as chairman of the Samsung group and the electronics unit. But he received another pardon in 2009 from current President Lee Myung Bak and reassumed his post running Samsung Electronics in 2010.
“Ironically, the biggest risk to Samsung’s corporate governance is Lee Kun Hee himself,” says Chae Yi Bai, a researcher at the Center for Good Corporate Governance in Seoul, a private institute monitoring Korean conglomerates. “The family dispute again highlights this inherent problem of Samsung.”

 

The feud became public in February when brother Lee Maeng Hee, 80, and sister Lee Sook Hee, 76, filed civil suits demanding some of the shares held in Samsung Life Insurance by their younger sibling. Due to Samsung’s convoluted ownership, whoever controls the insurance unit effectively controls Samsung Electronics, Asia’s biggest consumer electronics maker, as well.

 

The siblings contend that when their father’s assets were divided among his survivors after his death in 1987, Lee Kun Hee (already his father’s business heir apparent) kept them from getting their full share by concealing some of the founder’s assets in accounts held in others’ names. In April, Lee Maeng Hee issued a statement to local media through his law firm, saying, “Lee Kun Hee’s greed has caused the suit.” Their sister told TV Chosun in February that she joined the lawsuit because Samsung mistreated Lee Maeng Hee. Neither of the aggrieved siblings has any role in Samsung Group companies.

 

Chairman Lee denied the allegations in an uncharacteristically public way for the head of a chaebol, Korea’s family business conglomerates including Samsung and rivals LG Group (003550) and Hyundai Group. “I have no intention to give even a dime” to older brother Lee Maeng Hee, because inheritance matters had been settled at the time of his father’s death, Lee told local reporters in mid-April. He went even further a week later when he told reporters at Samsung headquarters that his older brother had been ostracized from the family because of disloyalty to their father, and that his sister had become a whiner after marrying into the rival Keumsung family that controls LG Group. He later apologized for speaking publicly about the dispute and said he would henceforth keep quiet.

 

 

 

“All these chaebol families try to maintain as much privacy as possible,” says Thomas Coyner, Seoul-based president of Soft Landing Consulting, a business advisory firm. “It’s remarkable that so much name-calling has been made in public. It shows that there’s a great amount of tension in the family.”

Chairman Lee holds 41.5 million shares, or about 21 percent, of Samsung Life, making him the largest shareholder. His elder brother wants 8.24 million of those shares, while his sister wants 2.23 million shares, valued at a combined $850 million, according to Yoon & Yang, the Seoul law firm representing them.

 

Photograph by STF/EPA/CorbisAction figures of Lee and Steve Jobs

 

Samsung Life is the linchpin of a complex web of cross-shareholdings that define control of Samsung Group. Samsung Life is the largest shareholder of Samsung Electronics after the electronics unit itself. Samsung Electronics is in turn the largest shareholder of the Samsung Card financial unit. If Chairman Lee lost the shares his siblings are suing for, he’d fall to No. 2 shareholder of the insurance unit after resort operator Samsung Everland.

That’s problematic. Under Korean law, Everland then would have to declare itself as the holding company of Samsung Life. Since financial or insurance companies within holding companies cannot control nonfinancial companies in Korea, Samsung Life would then have to sell shares in Samsung Electronics—something Chairman Lee would be loath to do. “This could be a big problem for their overall governance,” Chae says. To avoid a battle about the complex shareholding structure, Lee may opt to pay off his siblings in cash or other assets, Chae says.

The family turmoil comes as Samsung Electronics is enmeshed in a delicate dance with its biggest customer, Apple, an adversary in more than 30 patent and design lawsuits globally. “The risk of losing your edge during these times is real,” says Matt Walker, principal analyst at market researcher Ovum. “Companies that are driven by innovation, as Samsung should be, can’t afford much downtime to deal with this kind of turbulence.”

The bottom line: Samsung, which generates about 20 percent of South Korea’s GDP, is caught in a nasty battle among its founder’s heirs.

 

Yang is a reporter for Bloomberg News in Seoul.