Lee kun-hee embarked on a world tour in 1993 to take stock of Samsung, the company he inherited from his father. When he saw televisions and other electronics languishing on the shelves, he decided to reshape Samsung’s image. “Change everything except your wife and your children,” he told the employees. One thing that did not change, according to a statement from the International Center for Settlement of Investment Disputes (ICSID), is the close relationship between such chaebolfamily-run conglomerates that form the backbone of the South Korean economy, and of the government.
On June 20, the World Bank’s arbitration forum ruled that the South Korean government had left Elliott Investment Management, a US hedge fund, out of pocket by unlawfully interfering with a merger between two units of Samsung. The 2015 deal between Samsung C&T and Cheil Industries was seen as an attempt to ensure a smooth succession between Mr Lee and his son, Lee Jae-yong. Elliott, which owned a 7% stake in Samsung C&T, objected to the valuation of its shares and launched a proxy battle, which it lost after South Korea’s National Pension Service (NPS), which had stakes in both companies, supported the deal.
But in 2016, Moon Hyung-pyo, the health minister at the time of the merger and now head of the NPS, was indicted for pressuring the pension agency to approve the deal. This led to a series of investigations into corrupt dealings between Samsung and the government, which revealed that the younger Mr Lee had bribed then-president Park Geun-hye to support his succession. Mrs. Park was deposed; both ended up in prison (and both were subsequently pardoned).
Elliott filed suit with the ICSID in 2018, claiming the government’s actions violated the FTA with America and seeking $770 million in compensation. The government claimed Elliott’s hedging strategy, which involved buying Cheil swaps after the merger went through, meant it made a profit of $1.9 million. Despite the court’s ruling, Elliott says he was only awarded $108 million, including interest and legal fees.
Rather than quietly pay up, the Justice Department on June 27 asked the court to deduct from the amount owed an amount previously paid to Samsung’s Elliott in connection with the merger. Continuing to make a foreign investor’s life seem at odds with the spirit of the country’s capital market reforms, which are intended to attract investors and end the “Korean discount” that has plagued its businesses. Such interference – in other ongoing cases, the government has been accused of exerting undue influence over the business activities of foreign companies – partly explains the reduction.
The whole affair may also upset ordinary South Koreans. Aside from the strain on public coffers caused by the lawsuit, it’s a reminder that the original merger, by some estimates, reduced the value of the country’s pension fund by $300 million. Park Sang-in of Seoul National University says the drama highlights how “the relationship between the government and the chaebol will cost taxpayers money.”
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